MADISON, Wis. (Legal Newsline) - The owners of two law firms offering debt relief services may be held liable by the Consumer Financial Protection Bureau for allegedly violating federal consumer protection laws, a Wisconsin federal judge recently ruled.
Judge Barbara B. Crabb of the U.S. District Court for the Western District of Wisconsin also concluded that the defendants misrepresented their services and collected advance fees in violation of Regulation O.
Regulation O, under the Consumer Financial Protection Act of 2010, prohibits a mortgage assistance relief service provider from requesting or receiving payment of any fee or other consideration until the consumer has executed a written agreement between the consumer and the consumer’s dwelling loan holder or servicer “incorporating the offer of mortgage assistance relief that the provider obtained from the consumer’s dwelling loan holder or servicer.”
The CFPB, an independent agency of the federal government responsible for consumer protection in the financial sector, filed its lawsuit against the now-defunct The Mortgage Legal Group LLP and Consumer First Legal Group LLC and attorneys Thomas G. Macey, Jeffrey J. Aleman, Jason E. Searns and Harold E. Stafford in 2014.
The bureau alleged that while providing mortgage relief services to more than 6,000 consumers in 39 states, the defendants made misrepresentations about their services, failed to make certain disclosures required under the CFPA and impermissibly collected advance fees.
The CFPB also argued Macey, Aleman, Searns and Stafford -- all attorneys with a background in consumer law, according to the federal court -- should be held liable because they either participated directly in the illegal acts or had the authority to control the actions of the corporate defendants.
The defendants argued their debt relief services were offered as part of their law firms, making them exempt from the bureau’s authority.
Crabb, in her 54-page opinion, granted, in part, the CFPB’s motion for summary judgment.
The judge found that both the initial and monthly retainer fees charged by the firms qualify as advance fees.
She also found, among other things, that Macey, Aleman and Searns may be held individually liable. Stafford not so much.
Stafford, who oversaw all operations of Consumer First Legal Group and made all the decisions for it between January and July 2012, sold most of his ownership interest in the company in July 2012. His role in the company decreased significantly, Crabb explained.
“As defendants point out, a more complete review of Stafford’s deposition testimony shows that although he maintained contact with the company after he sold the majority of his shares to Macey and Aleman, he was not involved in or informed of the company’s day-to-day activities,” the judge wrote.
In addition to Stafford’s individual liability, Crabb denied the CFPB’s motion with respect to: whether the companies’ welcome letter failed to make the required disclosure; whether television and internet ads placed by third parties on behalf of the companies contained misrepresentations; whether the companies’ welcome letters misrepresented the amount of time it would take to obtain a loan modification.
Those, and other issues, will be resolved at trial, Crabb said in her order.
The trial is “likely” to take place in October or November, the judge noted.
If found liable at trial, the defendants will be liable for all revenue received -- which includes the amount of advance fees collected from their clients minus any refunds made. The Mortgage Law Group received total net revenues in the amount of $18,331,737; Consumer First Legal Group received $2,992,296.
According to the federal court’s ruling, Macey and Aleman worked together at the law firm Legal Helpers PC in Chicago in the 1990s. They later operated Legal Helpers Debt Resolution LLC. Searns joined Legal Helpers Debt Resolution in 2009. Stafford worked with several national consumer law firms before meeting the other defendants in 2012.
In early 2011, Macey, Searns and Aleman formed The Mortgage Law Group. The parties, the court noted, dispute whether the mortgage assistance relief services arm of Legal Helpers Debt Resolution became The Mortgage Law Group.
The Mortgage Law Group offered and provided mortgage assistance relief and financial advisory services, including assisting consumers with modifying the terms of an extension of credit. It ceased operations sometime in November 2013. In March or April 2014, it filed a voluntary Chapter 7 bankruptcy petition.
Meanwhile, in January 2012, Stafford formed Consumer First Legal Group with hopes it would become a nationwide law firm providing mortgage-related legal services to consumers.
Later in 2012, Stafford met Aleman, who proposed that he and Macey buy a majority interest in the company. So, in July 2012, Macey purchased a 78 percent interest in the company, while Aleman purchased a 17 percent interest. Stafford retained a 5 percent interest. Aleman took over the day-to-day management of the company.
By July 2013, Consumer First Legal Group ceased operations and did not have any clients.
Earlier this month, the CFPB filed a motion for clarification and partial reconsideration of Crabb’s order, in particular taking issue with the judge’s ruling on Stafford’s liability.
The defendants’ brief in opposition to the motion is due Sept. 6; the bureau’s brief in reply is due Sept. 16, according to the case docket.
From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.