The Consumer Financial Protection Bureau’s Reg. O—Mortgage Assistance Relief Services (12 CFR Part 1015) cannot be applied to attorneys who are performing services that are part of the licensed practice of law, a federal district court judge has decided. The regulation’s exemptions for attorneys are too narrow because they would permit the CFPB to regulate the practice of law, which the Dodd-Frank Act placed beyond the bureau’s authority. The judge also deferred ruling on the validity of the regulation as a whole until the CFPB and the defending attorneys can offer arguments on the effects of partial invalidity (CFPB v. The Mortgage Law Group, LLC, Jan. 14, 2016, Crabb, B.).
The CFPB essentially inherited Reg O, often referred to as the “MARS Rule,” from the Federal Trade Commission. The Dodd-Frank Act also explicitly denies the bureau the ability to exercise authority over an attorney’s activities that are part of the practice of law in a state in which the attorney is licensed (12 U.S.C. §5517(e)). When the CFPB brought an enforcement suit against two law firms and four individual attorneys, the interaction between the bureau’s authority to regulate mortgage assistance services and the Dodd-Frank Act’s protection of the practice of law came into play.
MARS Rule and exemptions. The CFPB claims that The Mortgage Law Group, LLP, Consumer First Legal Group, LLC, and four associated attorneys violated the MARS Rule by misrepresenting their services, omitting required disclosures, and collecting prohibited advance fees. The Mortgage Law Group is in bankruptcy, but the remaining firm and the four attorneys are contesting the bureau’s claims.
The firm and attorneys would be exempt from the misrepresentation and disclosure rules if:
- the services were rendered as part of the practice of law;
- the attorneys were licensed to practice in the state where the consumer lived or the home was located; and
- the attorney complied with all state laws and rules that covered his conduct (12 CFR 1015.7(a)).
Rule exceeded CFPB authority. There was no real question about the CFPB’s ability to regulate the activities of attorneys outside of the practice of law, the judge said. That was within the bureau’s statutory authority. The question was whether the limited effect of the regulation’s exemptions meant the bureau was impermissibly regulating the activities of attorneys who were practicing law.
The judge also noted that, since the question was one of whether the bureau had exceeded its authority in adopting a regulation, the analysis was governed by Chevron U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). If the Dodd-Frank Act was clear, the law was to be applied. If the act was ambiguous, the regulation would stand if it was a reasonable interpretation of the act.
The Dodd-Frank Act generally prohibits the CFPB from regulating attorneys when they are practicing law, the judge said, and that prohibition would include trust account activities. However, there is a difference between deciding whether an attorney is practicing law and deciding whether he is complying with state laws—after all, an attorney can provide legal services in ways that violate state laws.
The MARS Rule provisions that conditions exemptions on the attorney’s compliance with state laws thus are too restrictive, the judge decided. The CFPB rule could restrict exemptions to attorneys who were offering servicing as part of the practice of law, but not to attorneys who were in compliance with state laws.
The CFPB’s contrary argument would mean that the bureau was prohibited from regulating attorneys engaged in the practice of law but was able to create an exemption “that swallows the general prohibition.” The Dodd-Frank Act intended to deny the bureau the ability to regulate the practice of law without regard to whether the practice was being carried out legally.
Even if the act was ambiguous, the MARS Rule was an arbitrary and capricious interpretation, the judge continued. There was nothing in the authority of either the FTC or the CFPB that indicated Congress intended the agencies to take on the role of enforcing state laws on the professional conduct of attorneys, which is what the rule would require.
For more information about the CFPB's authority, subscribe to the Banking and Finance Law Daily.
