Validity of Consumer Bureau at Stake in Legal Challenge

A law firm sued by the U.S. Consumer Financial Protection Bureau over its treatment of struggling homeowners may be the first to contest the validity of Richard Cordray’s status as the agency’s director after a federal court’s ruling on presidential appointees.

Gary Kurtz, a lawyer representing the Gordon Law Firm of Los Angeles, said he sent a letter to the bureau Jan. 29 asking for a negotiated settlement of the six-month-old case in light of a federal court ruling that invalidated so-called recess appointments similar to Cordray’s.

“I want to give them an opportunity to resolve this without court intervention,” Kurtz said in a telephone interview. “Resolving this informally would preferable.”

Absent a settlement with Gordon, the bureau risks a court challenge that could become a test case for its authority in the wake of recess-appointment ruling. In its July 17 complaint, the CFPB said Gordon took up-front fees to help homeowners facing foreclosure, then did “little or nothing” for them.

Moira Vahey,a CFPB spokeswoman, said the agency “is moving forward with the case as planned.”

The CFPB, created by the 2010 Dodd-Frank Act that overhauled U.S. oversight of financial services, is intended to protect consumers from abusive practices. Covering banks like JPMorgan Chase & Co. and non-bank firms such as payday lenders and debt collectors, the agency has also created a system for resolving consumer complaints.

Dodd-Frank Timeline

Dodd-Frank created a timeline for the bureau to assume its powers, giving it authority over banks with assets of more than $10 billion on July 21, 2011. The law permitted its other powers, such as supervision of non-banks, upon the confirmation of its director by the Senate.

Gordon’s demand for a settlement stems from a Jan. 25 decision by the U.S. Court of Appeals in Washington that President Barack Obama’s use of a procedure known as a recess appointment to install three officials at the National Labor Relations Board on Jan. 4, 2012, was unconstitutional.

Since Cordray was made head of CFPB on that same day by the same process, a company affected by the CFPB could use the legal principle in that case to try to upend Cordray’s appointment and roll back his actions. On Jan. 24, Obama renominated Cordray for the full five-year term as head of CFPB.

Careful Consultation

Since the Jan. 25 court decision lawyers for companies in the financial services industry have pondered how to handle inquiries from CFPB supervisors, who examine books of banks and non-bank firms on a daily basis. For now, many lawyers are advising companies to treat CFPB examiners as though nothing has changed, said Richard Gottlieb, an attorney with Dykema Gosset PLLC in Chicago.

“Nobody should try to simply ignore the CFPB when they come in,” Gottlieb said in an interview. “The issue is going to get resolved before too long, and it won’t take a year to resolve it.”

Senator Tim Johnson, the South Dakota Democrat who heads the Banking Committee, said the case would be appealed. A better approach, he said, would be to confirm Cordray.

“The courts are going to have to decide this matter, and I expect that the administration will appeal the D.C. Circuit decision,” Johnson said in an e-mail. “However, it shouldn’t have had to come to this. The Senate should confirm Richard Cordray without delay.”

GAO Request

Senator Mike Johanns, a Nebraska Republican, called on Cordray to resign in a Jan. 25 letter in the wake of the court decision. Johanns also asked the Government Accountability Office in a letter the same day to determine how the decision would affect CFPB.

Johanns and Senator Lamar Alexander, a Tennessee Republican, said they have introduced legislation that would bar the use of any money to carry out consumer bureau actions requiring approval by a confirmed director.

“If they won’t take down their ‘Open for Business’ sign and put up one that says ‘Help Wanted,’ then the Senate will,” Alexander said today in a written statement.

The legislation, which would also affect the NLRB, may face a difficult road to passage by the Democratic-controlled Senate or be enacted by Obama, who signed the bill that created the bureau and appointed Cordray as director.

Antagonizing Regulators

Gottlieb said the court ruling hasn’t changed the relationship of supervised companies with the CFPB. They don’t want to antagonize their regulator, and CFPB doesn’t want to force the issue. CFPB supervisors have informally declared “business as usual,” Gottlieb said.

“No one wants to be in court,” he said. “The CFPB doesn’t want to force anyone into court.”

Chance Gordon, owner of the Gordon Law Firm, is willing to go to court if necessary, his lawyer Kurtz said. Gordon wants the court to unfreeze his assets and obtain compensation for the fact that a court-appointed receiver effectively shut down his business, according to Kurtz.

“We’re not looking for a lot,” Kurtz said.

Ronald Rubin, a former enforcement lawyer with the consumer bureau, said that settling the case on unfavorable terms “would send a very harmful message of weakness” to defendants in other CFPB cases. Also, the delay created by such a settlement may not achieve much.

“The only way a delaying strategy makes sense for the CFPB is if they expect the NLRB decision to be reversed, or they expect a director to be confirmed before the courts can rule on the validity of Richard Cordray’s recess appointment,” Rubin, a partner with Hunton & Williams LLP in Washington, said in an e-mail. “Otherwise, it’s only a matter of time before another CFPB defendant has their day in court.”

FTC Rule

The CFPB charged Gordon’s firm violated the Mortgage Assistance Relief Services rule, which was issued by the Federal Trade Commission in 2010 and subsequently taken over by the CFPB. The rule bans businesses from collecting fees until homeowners have acceptable written offers of a loan modification from their lenders.

Gordon’s firm, according to the CFPB’s July 17 complaint, sought to evade this prohibition since at least early 2010 by selling documents that aim to detail a lender’s misdeeds, and then offering free legal services to obtain a loan modification.

Up-Front Fees

In this case, the CFPB alleges that Gordon violated federal regulations against collecting up-front fees in exchange for promises to obtain mortgage modification for homeowners who couldn’t afford their payments. His firm encouraged people to stop paying their loans in order to hire his firm, leading some customers to lose their homes.

On Jan. 25, the CFPB filed with the court in the Gordon case a proposed settlement with Abraham Michael Pessar, who is also a defendant in the case, and two of Pessar’s companies.

In his own court filings, Gordon has defended his business, arguing that he achieved mortgage modifications for about 80 percent of the clients. He argues that he created “custom legal products as the CEO of a legal publishing company,” while providing free legal services.

“I have not been violating any law as it relates to collecting an upfront fee from distressed homeowners,” Gordon wrote in a July 27 court filing.

The alleged crime belongs to a category that the FTC has called “last dollar frauds” because they hit people who have little ready cash, and are desperate. These kinds of scams “take dollars out of people’s pockets when they are most vulnerable,” Cordray said on July 26, without mentioning the case by name.

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