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Could the CFPB’s first filed enforcement action result in a challenge to Director Cordray’s appointment?

Posted in CFPB Enforcement

The CFPB has filed its first enforcement action.  It did so in a sealed complaint filed on July 18 in federal court in California against a law firm that offered mortgage assistance relief services to consumers.  The complaint alleges that the law firm and various individuals and companies duped consumers by falsely promising loan modifications in exchange for advance fees and, in reality, did little or nothing to help consumers.   

The defendants are charged with violations of the Consumer Financial Protection Act of 2010 (CFPA) (meaning Title X of Dodd-Frank) and Regulation O, the Mortgage Assistance Relief Services Rule.  (Dodd-Frank transferred authority for Reg O from the FTC to the CFPB. However, the FTC retains its authority to enforce Reg O and, in fact, filed an action in Illinois federal court on July 23 in Federal Trade Commission v. Freedom Companies Marketing, Inc. alleging violations of Reg O. )  

The CFPB’s complaint alleges that the false and misleading representations made by the defendants constitute “deceptive” acts or practices prohibited by the CFPA and that the defendants’ violations of Reg O are per se “unfair, deceptive or abusive” acts or practices prohibited by the CFPA.   The relief sought by the CFPB includes injunctive relief and the refund of monies paid by consumers. It has been reported that, at the CFPB’s request, the district court judge has frozen the assets of the law firm’s partners and appointed a temporary receiver for the firm. 

Since there is little doubt that many consumers have been harmed by mortgage modification scams, we applaud the CFPB for using its enforcement authority in a way that can clearly benefit consumers.  Of course, the defendants have every right to vigorously defend themselves and we take no position on the merits of the CFPB’s charges.  Indeed, as part of their defense, one of the arguments the defendants might be considering is a challenge to President Obama’s recess appointment of Director Cordray.  Under the CFPA, it was necessary for the CFPB to have a director before it could exercise its authority to enforce the CFPA’s prohibition of  ”unfair, deceptive or abusive” acts or practices or Reg O (which by its terms only applies to non-banks subject to FTC jurisdiction).