CFPB Springs Into Action

After a quiet first year in operation, the Consumer Financial Protection Bureau is starting to make some noise.

When the new watchdog on the block opened its doors for business last year, pay-day lenders, credit card providers, and other non-bank financial companies knew they would be centered in the CFPB's crosshairs, but with its second enforcement action the agency is sending a signal that its interests go beyond consumer lenders.

The CFPB's latest maneuver has surprised many not just because it has targeted a law firm, but because of the tactics it used to pursue the case. The agency filed a civil enforcement action in federal court against the Gordon Law Firm before notifying the firm and secured a temporary restraining order that included freezing the assets of the law firm.

“The CFPB has definitely come out with guns blazing, demonstrating that they are planning to use their enforcement powers aggressively to try and carry out their mission,” says Michael Mallow, a partner with law firm Loeb & Loeb and chair of the firm's consumer protection defense department.

The action has also reignited a debate over the agency's mission and its powers, which some have assailed as too broad and too great. The CFPB's powers are “breathtaking,” says Richard Eckman, a partner in the law firm Pepper Hamilton and chair of the firm's financial services practice group. And, he says, “this is just the beginning.”

The CFPB complaint, discreetly filed under seal in the U.S. District Court for the Central District of California, accuses The Gordon Law Firm and its owner, Chance Gordon, of engaging in a mortgage relief scam by falsely promising mortgage-relief services in exchange for an advance fee ranging from $2,500 to $4,500. The complaint further alleges that the firm falsely advertised that it was affiliated with a government entity to gain the trust of consumers.

“In reality, defendants do little or nothing to assist consumers,” the complaint stated. “Rather, defendants direct consumers to avoid interactions with their lender and to stop making their mortgage payments.” Along with a permanent injunction, the CFPB is seeking refunds, restitution, and disgorgement.

The manner in which the CFPB launched the enforcement action against The Gordon Law Firm further shows it is not afraid to flex its enforcement muscles. Specifically, the CFPB secured a temporary restraining order against the firm, including an asset freeze and the appointment of a receiver to manage the business while the CFPB moves forward with the case—all without ever notifying the defendant.  “This action allows us to prevent further harm to consumers and lawfully gather additional evidence and data as the case moves forward,” CFPB Assistant Enforcement Director Kent Markus said in a statement.

Such measures bring into the spotlight just a few of the often-overlooked enforcement arrows the CFPB has in its quiver. What the CFPB essentially did was take “probably the most aggressive strategy that is available to them,” says Mallow.

On the same day that the CFPB filed the enforcement action against Gordon, it secured a $210 million agreement with Capital One Financial to settle charges that the credit card company used deceptive marketing practices to get customers to buy costly add-on services, such as payment protection and credit monitoring. 

“The CFPB has definitely come out with guns blazing, demonstrating that they are planning to use their enforcement powers aggressively to try and carry out their mission.”

—Michael Mallow,

Partner,

Loeb & Loeb

In its annual report to Congress on Aug. 2, the CFPB signaled that it would pursue whatever cases it considered relevant to its mission and use stealth to pursue them if needed. “Investigations currently underway span the full breadth of the Bureau's enforcement jurisdiction. Ongoing investigations will not generally be made public by the Bureau until a public enforcement action is filed.” 

Translation: “Any of the non-bank markets that are focused on providing services to consumers that are experiencing financial distress are under a lot of scrutiny,” says Jonathan Pompan, of counsel at the law firm Venable.

Still, he says, the measures used against Gordon are not likely typical of the way that the CFPB will pursue most future cases. “That type of an approach would presumably only occur in the most extreme circumstances as viewed by the CFPB,” says Pompan. “This is not necessarily the approach they will always take.” Typically, the CFPB will launch an investigation that precedes the initiation of a lawsuit, he says.

CFPB Scope

The CFPB's latest enforcement action provides crucial insight into just how wide a spectrum the CFPB's powers span. “The number of companies that are subject to the CFPB's jurisdiction is extremely broad and probably significantly broader than most companies understand,” says Mallow.

The CFPB made it pretty clear from the start that debt collectors, mortgage companies, and credit reporting companies that directly provide financial products and services to consumers would fall under its jurisdiction. Less clear, however, has been the level of liability that those who provide ancillary services to consumers—such as credit reports, advice, and protection—would face.

THE COMPLAINT

Below is an excerpt from the complaint in CFPB v. Chance Edward Gordon, et al:

Since at least early 2010, Gordon (including the Gordon Entities), Gordon Law Firm, Pessar, Division One Investment and Processing Division (collectively “Defendants”) have engaged in an ongoing, unlawful mortgage relief scheme that preys on fmancially distressed homeowners nationwide by falsely promising a loan modification in exchange for an advance fee. Defendants attract distressed homeowners via websites, mailers, and phone calls, deceptively promising substantial relief from unaffordable mortgages and foreclosures. Defendants promise a substantial reduction in the homeowners' mortgage payments in exchange for an advance fee ranging from $2,500 to $4,500. Rather than helping homeowners modify their mortgage loans or avoid foreclosure, Defendants dupe distressed homeowners into paying thousands of dollars based on false promises and misrepresentations. Indeed, Defendants provide little, if any, meaningful assistance to modify homeowners' mortgage loans or prevent foreclosure.

As part of the scheme, Defendants gain consumers' confidence by misrepresenting affiliation with government entities in direct mail solicitations sent to consumers. For example, one solicitation Defendants sent states at the top of the solicitation in large, capitalized font “NOTICE OF HUD RIGHTS.” Defendants also make or have made representations on the telephone in the initial sales pitch to consumers that Defendants are the government, are affiliated with the government, or that they are “sponsored” by a government grant.

During the initial calls and interactions with homeowners, Defendants promise homeowners substantial reductions in homeowners' mortgage payments and interest rates in exchange for an upfront fee. To entice homeowners into this arrangement, Defendants represent to consumers that the firm has successfully obtained a large number of modifications in the past and are one of the best firms at obtaining loan modifications.

Defendants typically require consumers to sign paperwork indicating that the consumer's upfiont payment is for Defendants' “Pre-Litigation Monetary Claims Program” (“Pre-Litigation Program”). Defendants' Pre-Litigation Program purportedly provides the homeowner with a detailed legal analysis of illegal conduct engaged in by their particular lender, often called a “forensic audit.”

At the same time, Defendants purport to provide loan modification services for free under the guise of pro bono legal services. Defendants, however, tell consumers that failure to make a payment will result in an inability to process the consumer's paperwork and to submit the documents, including the loan modification documents that are purportedly prepared pro bono, to the lender.

Defendants' bifurcated business model involving a fee-based “forensic audit” and pro bono “legal services” is specifically designed to avoid the mandates of laws such as MARS and Regulation O that prohibit advance fees and deception by mortgage relief operations like those run by Defendants.

In reality, Defendants do little or nothing to assist consumers. Rather, Defendants direct consumers to avoid interactions with their lender and to stop making their mortgage payments. While Defendants fail to take any meaningful action, many consumers enter foreclosure or lose their properties.

In numerous instances, constuners who paid Defendants' fee have suffered significant economic injury, including foreclosure and the loss of their properties …

Source: Consumer Financial Protection Bureau.

“The real focus of the CFPB's jurisdiction is not on the who but the what,” says Michael Thurman, a partner with law firm Loeb & Loeb. If the activity at issue is subject to CFPB jurisdiction, then anyone that touches that activity also likely falls under CFPB jurisdiction, he says.

In its latest action, for example, the CFPB targeted not just The Gordon Law Firm and its owner, but also its affiliates. This includes Gordon's business partner, Abraham Pessar, and his two companies, Division One Investment and Loan and Processing Division.

In the Capital One case, the CFPB alleged that the credit card company failed to supervise the products that its third parties were selling to customers, Eckman says. The overall lesson for other companies that enlist the help of third parties is that the CFPB will be expecting a lot more oversight, he says.

Banks and non-bank financial service providers “need to be able to demonstrate their compliance with consumer protection laws,” says Pompan. One way to do that is by having clearly written policies and procedures and a mechanism in place to ensure they're being implemented and followed, he says.

Such policies and procedures should address issues such as “supervising service providers to make sure that they are complying with consumer financial laws,” says Thurman. The CFPB expects companies to have contracts with those third parties to define the terms and allow for the termination of the relationship if the service provider is not complying, he says.

Consumer Complaints

In its annual report, the CFPB also indicated that consumer complaints will be a significant driver of CFPB investigations. “They're going to go after firms where there are lots of complaints,” says Eckman.

The Lawyers' Committee for Civil Rights Under Law—a broad coalition of local, state, and federal agencies that investigates and pursues mortgage-fraud schemes—estimates those complaints to be in the thousands. According to the national Loan Modification Scam Database, managed by the Lawyers' Committee, more than 24,000 scam complaints have been reported since its launch in March 2010.

Still, the database represents only a small fraction of the actual number of scams taking place, with hundreds of new reports being submitted each month, the Lawyers' Committee estimates. Regarding The Gordon Law Firm alone, the database contains no fewer than 60 complaints.

Thurman says companies that want to avoid becoming enforcement targets “need to be focusing in on what kinds of complaints are being made about them and their products, and they need to address those complaints and demonstrate that they are as concerned as the regulators.”

“This is one of those situations where perception is reality, and companies need to take heed about what they're learning from their customer base,” agrees Mallow.

Companies should also ensure that they're monitoring complaints and adjusting policies and procedures as necessary to try to minimize them, says Thurman, “because once the agency sends you the investigative demand or launches an enforcement action, it's already too late.”