April 18, 2014

Debt Relief Industry Under the Spotlight as the CFPB Continues to Target What it Alleges are Loan Modification Scams

What will 2013 bring by way of the Consumer Financial Protection Act of 2010, which is Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Title X)? If the Consumer Financial Protection Bureau’s (CFPB or Bureau), recent activity against loan modification “scams” for unfair and deceptive conduct is a gauge, much more enforcement litigation is on its way.  This GT Alert provides an overview of the recent federal lawsuits against the debt relief industry. These agency lawsuits show that the CFPB plans an aggressive posture in pursing litigation.

The Lawsuits

In September 2012, the CFPB sued Chance Edward Gordon, the Gordon Law Firm and others,(Gordon action) in the Central District of California related to loan modification services.  The Gordon action is covered by a prior GT Observer Alert.  On December 3, 2012, the CFPB brought another actionin the Central District of California against providers of loan modification services.  In both instances, the CFPB called the services “mortgage loan modification scams” that “prey on consumers.”3  Moreover, consistent with the CFPB’s reputation for cooperating with other regulators, the Bureau brought this latest against Najia Jalan, Richard K. Nelson and National Legal Help Center, (Jalan action) following a referral from the Office of Special Inspector General for the Troubled Asset Relief Program (SIGTARP) and the U.S. Treasury’s Office of Financial Stability, both of which coordinated closely with the CFPB throughout the investigation.4

Similar to the Gordon action filed in September 2012,the Jalan action was filed along with an  ex parteapplication for temporary injunctive relief and a request  to have the file temporarily sealed.   And the similarities do not stop there. The targets of this latest enforcement action were alleged to be providing loan modification and foreclosure relief services that were unfair or deceptive under Sections 1031 and 1036 of Title X  as well as the CFPB’s  Regulation O, formerly known as the Mortgage Assistance Relief Services Rule. The actions also both concern allegations of illegally charged upfront feesunder the guise of a “forensic audit” or “securitization report,” a failed attempt to circumvent the law by claiming to provide legal representation, deceptive claims suggesting affiliation with government agencies or programs, misrepresentations concerning their ability to secure modifications and directives to consumers to stop paying their mortgages or contacting their lenders. Neither of the actions, however, allege abusive conduct under Sections 1031 and 1036 of Dodd-Frank.

The Complaint in the Jalan action details the business activities which allegedly violated Title X and Regulation O, including marketing of services via the internet, telephone solicitations, direct mailings and spam emails utilized by the Defendants.  It is further alleged that the direct mailings contained numerous false or deceptive statements, including statements that the mailings were sent “at the direction of the federal government,” or with a listing of the Office of the Comptroller of the Currency in the header, or stated that the borrower has been “approved for $10,000 in Grant Assistance.”7

The defendants in the Jalan action agreed to the filing of a joint motion for a "Stipulated Preliminary Injunction with Asset Freeze, Appointment of Receiver, and Other Equitable Relief," which was entered by the Court on December 14, 2012. In contrast, no such stipulation was reached in the Gordon action, which has been more contentious.  And the Gordon action Temporary Receiver filed, on January 4, 2013, a Notice of Motion and Motion for Order: 1) Approving Temporary Receiver’s Final Report; 2) Approving and Authorizing Payment of Fees and Expenses of Temporary Receiver and Its Professionals Incurred from Inception of the Receivership Through Closing of the Estate; 3) For Discharge and Release of Temporary Receiver from Liability and Exoneration of its Bond; and 4) For Related Relief.  This matter is set to be heard on March 4, 2013.    

Also worthy of note is the action brought by the CFPB along with five  states in December 2012 against a debt relief service that focused on payday loan customers in the Southern District of Florida related to the defendants marketing and sale of their debt-relief services.The issue there being the request or receipt of payment for debt-relief services, before “renegotiating, settling, reducing or otherwise altering the terms of at least one of the consumer’s debts.”  Within a week of its filing the action was resolved and a Stipulated Final Judgment and Order was entered.   

Make no mistake about it, all of these cases arose from a deliberate focus by the CFPB on the loan modification and debt-relief industries. These actions, along with the strong words from the past few weeks speak of a Bureau that is ready and eager to focus on what it believes are “bad” actors in the year ahead.   

The Gloves are Off

The gloves are off and the loan modification services industry is undoubtedly under scrutiny. The Special Inspector General for SIGTARP, Christy Romero, was recently quoted as saying, “[I]t is absolutely unacceptable for unscrupulous con artist to take advantage of our nation’s housing crisis by targeting homeowners looking for help from TARP’s Home Affordable Modification Program.”  CFPB Director, Richard Cordray, had equally stern words for alleged “scams” warning that, “[W]e are taking on schemes that prey on consumers who are struggling to pay their mortgages or facing foreclosure, … We are especially concerned with those who misrepresent government programs or websites to divert distressed homeowners from needed assistance.”  

These statements make one wonder, “what lies ahead?”   

1 See GT Alert, Key Take-Aways from the CFPB's First Court Action.

Consumer Financial Protection Bureau v. Naji Jalan, et. al., United States District Court Central District of California, Case No. 8:12-2088-AG-AN.

3 See Press Releases, Consumer Financial Protection Bureau halts alleged nationwide mortgage loan modification scams, dated December 11, 2012. consumer-financial-protection-bureau-haltsmortgage-loan-modification-scam"> consumer-financial-protection-bureau-haltsmortgage-loan-modification-scam.

4 See FNs 2 & 3. 

5 See GT Alert, Key Take-Aways from the CFPB's First Court Action.

6 The same week that the action against Jalan and others was unsealed, the CFPB filed another action related to allegedly illegal upfront fees in the United States District Court Southern District of Florida, Case No. 1:12-cv-24410. See GT Alert, The CFPB Strikes Again, This Time in Court Against a Payday Lender.

7 See the Complaint for Permanent Injunction and Other Relief in Consumer Financial Protection Bureau v. Naji Jalan, et. al., United States District Court Central District of  California, Case No. 8:12-2088-AG-AN.

8 See Consumer Financial Protection Bureau; State of Hawaii, ex. rel. Bruce B. Kim; State of New Mexico, ex rel. Gary K. King, State of North Carolina, ex. rel. Roy Cooper, State of North Dakota, ex rel. Wayne Stenehjem; and State of Wisconsin, ex. rel. J.B. Van Hollen, Plaintiffs v. Payday Loan Deb Solution Incl, a Florida corporation and Sanjeet Parvani, president of Payday Loan Debt Solution, Incl, Defendants, U.S. District Court, Southern District of Florida, Case No. 1:12-cv-24410-Martinez-McAliley.   

9 See discussion in GT Alert, The CFPB Strikes Again, This Time in Court Against a Payday Lender.

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About the Author


Laureen Galeoto is a bet the company trial attorney with broad experience in commercial litigation. Laureen has represented a vast array of businesses and industries, as well as government in litigation and investigations. Her representations have included securities class actions, Florida Attorney General and other government investigations, product liability defense, medical device defense, business tort claims, unfair and deceptive practice claims, consumer fraud, defamation defense, civil rights claims and related immunity issues, employment related claims, accounting fraud...


About the Author


Bob’s legal career spans more than 30 years, where he has worked and advised at the highest levels of leadership in the banking sector, in private legal practice and inside a government sponsored enterprise (GSE). As general counsel of Freddie Mac, Bob played a pivotal role during the financial crisis and recovery directing Freddie Mac’s legal strategy through the conservatorship, investigations, enforcement actions and litigation.  Bob has advised clients on financial institutions regulation, examination, compliance and supervision matters.  He is experienced helping...


Gil Rudolph is co-chair of the National Financial Institutions Practice. His practice focuses on the representation of  finance companies, mortgage lenders and servicers, banks, title insurance companies and other consumer financial service providers in regulatory and litigation matters. Gil also represents various alternative financial service providers including payday lenders, check cashers, pawn and auto title lenders. Gil additionally represents various participants in the credit, debit, and stored value card issuance and processing industries.


About the Author


Scott Sheehan is a business lawyer with a national practice in banking and financial institutions, and consumer and commercial financial services.  He is known for his issue advocacy and development of legal strategies for the banking and consumer finance sector, and co-authors the Texas Usury Law Handbook by West Publishing. He focuses his practice on legal and public policy issues and innovative solutions,  including new product development, legal compliance, litigation, and issue advocacy in judicial, legislative, administrative, and arbitration proceedings.  Scott...


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