In another recent defeat for the CFPB, a California federal district court refused to award restitution sought by the CFPB in its lawsuit filed in May 2015 against two related companies offering a biweekly mortgage payment program and their individual owner.  The CFPB’s complaint alleged that the defendants engaged in abusive and deceptive acts or practices in violation of the CFPA UDAAP prohibition by making false representations regarding the costs of the payment program and the savings consumers could achieve through the program.  (Earlier this month, a Minnesota federal district court dismissed the CFPB’s Regulation E claims in a lawsuit targeting a bank’s overdraft protection program.  Last month, a federal district court in Atlanta sanctioned the CFPB for its conduct in connection with the defendants’ depositions of CFPB witnesses by striking four counts from the CFPB’s complaint, resulting in the dismissal from the case of the defendants who sought the sanctions.)

In an opinion and order issued following a seven-day bench trial, the California federal district court found that the CFPB had shown that some, but not all, of the marketing statements made by the biweekly mortgage payment companies were false or misleading and constituted deceptive practices that violated the CFPA’s UDAAP prohibition.  The CFPB had asked the court to order nearly $74 million in restitution, representing the revenue earned by the companies (less refunds) from the setup fee charged by the companies to all consumers who participated in the program during the relevant time period.  The court noted that the CFPB’s rationale for selecting refund of the setup fee as an appropriate remedy was that, in the CFPB’s view, “the setup fee effectively represents the purchase price of the financial services product, which consumers were misled into purchasing–even assuming the setup fee itself was adequately disclosed.”  To the extent restitution was not paid, the CFPB sought disgorgement from the companies’ owner of approximately $33 million, representing shareholder distributions he received during the relevant period.

The court concluded that the CFPB had failed to show that restitution of all customers’ setup fees was appropriate.  According to the court, the CFPB had not proved that “defendants engaged in the type of fraud commonly connoted by the well-worn phrase ‘snake oil salesmen.’  [The CFPB has] not shown, and could not show, that the [payment program] never provides a benefit to consumers, or that no fully-informed consumer would ever elect to participate in the program.”  The court also observed that the CFPB had not shown that the setup fee itself was not adequately disclosed, some of the statements found to constitute misrepresentations or omissions did not apply to all customers, and the only misrepresentation affecting all customers was literally true.  Because no restitution was awarded, the court also did not order disgorgement from the companies’ owner.

While the court did award the CFPB approximately $7.9 in civil money penalties, it rejected the CFPB’s request for an award against each defendant and imposed only a single penalty for which the defendants would be jointly and severally liable.  The penalty amount was based on the CFPB’s request for the CFPA’s maximum first tier penalty of $5,000 per day for the relevant period.  Although it noted that the CFPB may have “only sought first tier penalties because it believed the restitutionary award would be large,” the court determined that nevertheless “under all the circumstances that penalty figure is appropriate.”

The court also noted that because there was evidence showing that the defendants “took affirmative steps such as training, quality control, and seeking legal counsel, in an effort to stay on the right side of the line,” the imposition of a penalty at the higher tiers for reckless or knowing violations was not warranted.  It is notable that the penalty was computed using the time period, rather than on a “per violation” basis, which we have encountered in our interactions with the CFPB.  The Dodd-Frank Act, of course, refers to the time period of the violation, but the CFPB has frequently taken the position that what the statute really means is “per violation per day.”  In this instance, however, the CFPB appears to have hewed more closely to the statutory language.

It is also notable that in this case the CFPB limited the start of the “look back” period for restitution and civil money penalties to July 21, 2011 (the Dodd-Frank Act “designated transfer date”), thereby tacitly conceding no retroactive application of the CFPA.  However, it has been our experience that during settlement negotiations, the CFPB will often seek redress for alleged violations that occurred before the designated transfer date.