CFPB Settles Enforcement Action with Georgia Law Firm: Continued Oversight over the Practice of Law Expected
The two year legal battle between the Consumer Financial Protection Bureau ("CFPB") and the Law Firm of Frederick J. Hanna ("Hanna") came to a possible resolution when both sides filed a joint motion for a Stipulated Judgment and Order ("Order"). The case was before the United States District Court in the Northern District of Georgia. The Hanna firm's primary practice was debt collection and filed lawsuits on behalf of their clients who included banks and debt purchasers. While law firms have been no strangers to enforcement actions by the Bureau, the case was the first action by the Bureau against a law firm that did not represent a consumer, thus testing the limits of the practice of law exclusion found in section 12 USC § 5517(e)(1)&(2) of the Dodd Frank Act. The CFPB alleged that the Hanna firm violated the Fair Debt Collection Practices Act (FDCPA) as well as the Consumer Financial Protection Act (CFPA).
A settlement seemed inevitable when Hanna lost two recent key motions. First, the Court denied Hanna's motion to dismiss the CFPS's complaint this past July. See CFSRC Update, July 15, 2015. The Court's opinion was troubling due to its very broad interpretation of the Dodd-Frank Act. The Court found that the CFPB was well within its authority to regulate the practice of law as long as the lawyer's interest was adverse to the consumer. Hanna sought an interlocutory appeal to the 11th Circuit which denied last month as well.
The CFPB's complaint against Hanna sought unspecified damages and penalties as well as injunctive relief against the firm, including the potential shutdown of law firm operations, as well as restitution and disgorgement. In the joint motion and proposed Order, Hanna will agree to pay a civil penalty of $3.1 million dollars to the CFPB and the law firm will remain in operation. Hanna admitted no liability and both sides admitted that remaining issues of law were not otherwise adjudicated. Nonetheless, the CFPB is already making public statements that by their efforts they have halted illegal debt collection activities. No Court to date has determined that Hanna engaged in any such activities.
Much like the litigation requirements found in the Consent Orders entered upon Portfolio Recovery Associates (PRA) and Encore Capital Group (Encore) this past September, the current proposed Order will require Hanna: (1) to show that for every lawsuit filed going forward "Account-Level" documentation from the client was reviewed and (2) to confirm "based upon methods and means proven to be historically reliable and accurate" that the statute of limitations has not run, venue is proper, and the consumer has not filed bankruptcy. Further, Hanna is prohibited from presenting any affidavit to any Court unless the affiant (Hanna's client) has personal knowledge of the truth or accuracy of the character, amount and legal status of the debt, that the documentation relates to the consumer being sued, that the affidavit was properly notarized, and that the affiant reviewed the Account-Level Documentation prior to making the affidavit. Finally, the above mentioned requirements apply equally to those law firms employed as local counsel, nationwide, even though those firms were not named as parties in the CFPB's action. It is also important to note that there was no evidence that Hanna or its clients failed to employ any of these procedures. In fact industry trade representatives and their respective members have stated publically that these processes have been in place for the past five (5) years.
The impact of this Order will be significant for both attorneys who practice in debt collection as well as the clients they represent, especially if those clients are debt buyers. The CFPB's disdain for the debt buying industry is no secret and those attorneys general who work closely with the Bureau are adopting this strategy in full force. Last week, the Massachusetts Attorney General filed a Hanna-type action against a well-regarded law firm in the state. The first allegation of the complaint stated, " Since 2011, the [firm] has filed in excess of 100,000 lawsuits against Massachusetts residents and recovered in excess of $110 million dollars, acting primarily at the behest of national, publically traded corporate debt buyers". Like the Hanna case, the AG complaint pointed to no specific evidence of harm to any consumer or that any of the lawsuits in general were improper, invalid or that any attorney was sanctioned by the court for any inappropriate conduct.
In the world of debt collection, the attorney-client relationship has now become a crowded three-party system with the CFPB in the middle. The Order and the ones proceeding it conflict with the basic tenants of the Rules of Professional Conduct which provides that a lawyer is an advocate who "zealously asserts the client's position under the rules of the adversary system". A lawyer cannot effectively represent any client if an element of distrust exists. The current order creates such an environment. This is the danger of allowing a federal agency into a relationship that is primarily governed by the judicial branch. As was predicted by Judge Anthony Kennedy in his dissent in Jerman v.Carlisle, ___U.S.___ (2010)
[A]ttorneys can be punished for advocacy reasonably deemed to be in compliance with the law or even required by it. This distorts the legal process. Henceforth, creditors' attorneys of the highest ethical standing are encouraged to adopt a debtor-friendly interpretation of every question, lest the attorneys themselves incur personal financial risk.
Jerman looked at the mistake of law defense by attorneys under the FDCPA. Kennedy stressed that the statutory interpretation adopted by the Court will " interject an attorney's personal financial interests into the professional and ethical dynamics of the attorney-client relationship".
Attorneys are now going to think twice before engaging in the representation of a creditor client, especially a debt buyer client. That the CFPB has now implemented such a risk assessment scheme should be concerning to all attorneys, not just those who practice debt collection law. Potential harm to consumers will not magically disappear by the mandates issued by the Bureau in this proposed Order. The harm here is the barrier to effective attorney representation and access to the courts, regardless of whether you are a bank or an individual. That is hardly consumer protection.
Clark Hill's Consumer Financial Services Regulatory & Compliance Group is a national leader in the field of consumer financial services law, providing strategic legal counsel to clients in all areas of consumer finance. We provide counsel, consultation and litigation services to financial institutions, law firms and debt buyers throughout the country. Our group can help you navigate this rapidly evolving regulatory environment. Our exceptional team of lawyers and government and regulatory advisors has extensive experience in-and an in-depth understanding of the laws and regulations governing consumer financial products and services. We can assist you in developing and implementing compliance programs, as well as defending consumer litigation and regulatory enforcement actions.
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Window on Washington - June 14, 2021, Vol. 5, Issue 24
Outlook for This Week in the Nation’s Capital