If lawyers thought they’d escape scrutiny by the Consumer Financial Protection Bureau — think again.
The agency has filed more lawsuits against lawyers than almost any other group, according to an analysis by The National Law Journal, bringing six suits against legal services providers. Only the banking industry — also the subject of six suits by the CFPB — was equally stung.
In addition, the agency has asserted that debt-collection lawyers are subject to its direct supervision, including on-site examination of books and records.
When the consumer agency opened its doors in July 2011, banks, mortgage companies and other lenders braced for lawsuits — and loudly complained about the new agency’s powers. But lawyers were quiet, seemingly unaware that they, too, could find themselves in the CFPB’s cross hairs.
It didn’t take long for the consumer agency to tip its hand. The CFPB’s first enforcement action was against the Gordon Law Firm in Los Angeles and its founder Chance Gordon in July 2012. Since then, suits against lawyers and law firm support-service providers have been a major part of the CFPB’s docket.
What makes the actions so surprising is that the Dodd-Frank Act that created the agency specifically exempts lawyers from CFPB oversight. Section 1027 of the act states that the agency “may not exercise any supervisory or enforcement authority with respect to an activity engaged in by an attorney as part of the practice of law.”
DEFINING SCOPE OF AUTHORITY
A CFPB spokesman in an email acknowledged that limitation, but said that “nothing prevents the bureau from exercising its authority with respect to a consumer financial product or service offered or that is provided outside of the scope of an attorney-client relationship.” For example, a lawyer who is collecting a debt does not have an attorney-client relationship with the person who owes the money. “Lawyers who operate in a lawful manner have nothing to fear from the CFPB,” the agency spokesman said. The CFPB has worked with the Department of Justice, the Treasury Department and the State Bar of California in bringing actions against lawyers.
In some ways, the suits — primarily directed at small firms allegedly charging illegal up-front fees for debt relief services — are easy pickings for the agency. “They follow closely what we’ve seen state attorneys general doing for years,” said Ballard Spahr partner Christopher Willis, who represents financial services companies facing government investigations. “They’re relatively simple cases.”
The cases lack the headline-grabbing power of those against financial giants such as JPMorgan Chase Bank and Discover Bank, which have netted the CFPB hundreds of millions of dollars in settlements. But those cases “take a lot of investment of time and resources,” Willis said, and pit CFPB lawyers against corporations that “have the resources and know-how to defend themselves.”
The cases against lawyers, however, generally don’t require lengthy investigations and may involve conduct “viewed as very damaging to consumers, so-called ‘last dollar frauds,’ ” he said, in which desperate people are allegedly cheated out of what little money they have left.
“These wolves in sheep’s clothing take money from consumers who are already struggling to pay their bills, falsely promising them help while really making their problems worse,” CFPB Director Richard Cordray said in May when the agency sued two lawyers, Michael Levitis and Mission Settlement Agency in New York, and New Jersey lawyer Michael Lupolover and Premier Consulting Group.
Levitis also faces mail and wire fraud charges brought by the New York U.S. attorney’s office. The CFPB’s case, filed in U.S. District Court for the Southern District of New York, is stayed pending the criminal case against Levitis.
Lupolover allegedly violated the Telemarketing Sales Rule by charging up-front fees for debt relief services, collecting $111,809, according to the CFPB complaint.
In an interview, Lupolover said he was blindsided by the suit. “It would have been more prudent to first issue a civil investigative demand than to file a lawsuit without any prior communication with my office,” he said. “The suit is frivolous. I’ve always abided by the Telemarketing Sales Rule and the fee restrictions that come from it.”
Other legal service providers are also fighting back. To date, none of the cases involving lawyers has settled. By comparison, every CFPB case against a bank was simultaneously filed and settled.
The most public battle is being waged by Morgan Drexen Inc., which provides back-office support for law firms offering debt relief services.
Represented by Venable partner Randall Miller, the California-based company pre-emptively sued the CFPB in July, alleging that the agency’s structure violates the Constitution’s separation of powers. Soon after, the CFPB sued Morgan Drexen, alleging that it charged illegal up-front fees for debt relief services and deceived consumers. The case is now pending in U.S. District Court for the Central District of California.
To Miller, the fact that the CFPB is going after the legal industry is a sign that the agency has too much power. “The regulation of the practice of law is traditionally a state bar function,” he said. The CFPB is “overstepping its boundaries.”
The Gordon Law Firm is trying another tactic, arguing that its case should be tossed because when it was filed, CFPB director Cordray was serving under a recess appointment.
In June, U.S. District Judge Percy Anderson of the Central District of Cali­fornia ordered Gordon to pay $11.4 million. The case is now on appeal before the U.S. Court of Appeals for the Ninth Circuit, where Gordon is represented by Christopher Darden, best known for prosecuting O.J. Simpson. Darden did not respond to a request for comment.
The CFPB’s most recent case against lawyers was filed on Oct. 24 against Borders & Borders, a six-lawyer firm in Louisville charged with paying illegal real estate kickbacks.
T. Morgan Ward Jr., a partner at Stites & Harbison who represents the firm, said the CFPB rushed to sue rather than wait for a pending ruling from the U.S. Court of Appeals for the Sixth Circuit on the constitutionality of the rule it is trying to enforce. “It is frustrating,” he said.
Jenna Greene can be contacted at firstname.lastname@example.org.