United States District Court, W.D. Wisconsin
OPINION AND ORDER
BARBARA B. CRABB District Judge
Plaintiff Consumer Finance Protection Bureau contends that defendants Thomas G. Macey, Jeffrey J. Aleman, Jason E. Searns, Harold E. Stafford, The Mortgage Legal Group, LLP and Consumer First Legal Group, LLC violated various provisions of the Consumer Financial Protection Act of 2010 and 12 C.F.R. part 215 (commonly known as Regulation O) in providing mortgage relief services to more than 6, 000 consumers in 39 states. Because defendant The Mortgage Law Group has not filed an answer to the complaint or taken any other action in its defense, unless otherwise specified I will use the term “defendants” in this opinion to refer only to defendants Consumer First Legal Group, Macey, Aleman, Searns and Stafford. Earlier in these proceedings, the parties filed cross motions for summary judgment in which they disputed in part whether Regulation O is invalid as applied to attorneys and whether defendants qualified for the exemption for attorneys in both Regulation O and the Consumer Financial Protection Act. Dkt. ##83 and 96.
In an order dated January 14, 2016, I considered the parties’ cross motions for summary judgment and determined that (1) plaintiff exceeded its rulemaking authority in promulgating 12 C.F.R. § 1015.7(a)(3) and (b), which required attorneys seeking an exemption under the regulation to comply with certain state laws and regulations; and (2) defendants have the burden of proving that they qualify for the attorney exemption in the Consumer Protection Act and any remaining exemption in Regulation O. Dkt. #144. In addition, I asked the parties to provide supplemental briefing on the following issues: (1) what effect, if any, the partial invalidation of the attorney exemption has on the exemption or the regulation as a whole; and (2) whether the Consumer Financial Protection Act and Regulation O apply to defendants’ conduct in this case. Id. I instructed defendants to identify the applicable state legal standards and support with admissible evidence their contention that they offered or provided mortgage assistance relief services as part of, or incidental to, the practice of law in each state in which they provided such services. Id. I denied the parties’ motions for summary judgment with respect to all other issues without prejudice to the parties raising those issues after the court determined whether Regulation O remains valid in whole or in part and whether defendants qualify for the attorney exemption under the Consumer Protection Act and possibly Regulation O. Id.
Having reviewed the supplemental briefing submitted by the parties, I conclude that the remaining provisions of Regulation O and its exemption for attorneys are valid and that there is a genuine dispute of material fact with respect to whether defendants qualify for the statutory and regulatory exemptions. Because plaintiff initially moved for summary judgment with respect to defendants’ violations of Regulation O and the Consumer Protection Act, the liability of the individual defendants and available remedies, dkt. #83, I will allow plaintiff to renew its motion with respect to those issues if it wishes to do so. Similarly, I will give defendants the opportunity to renew their motion for summary judgment with respect to the individual liability of defendants Macey and Stafford. Dkt. #96. The parties shall have until May 6, 2016, to inform the court whether they wish to renew their motions for summary judgment on these remaining issues. Although the summary judgment motions have been fully briefed, the parties should inform the court about any modifications or supplemental briefing that may be necessary in light of the court’s rulings on the validity of Regulation O and the applicability of the attorney exemptions.
In early 2011, defendants Thomas Macey, Jason Searns and Jeffrey Aleman formed defendant The Mortgage Law Group, LLP, a Nevada limited liability partnership with its principal place of business in Chicago, Illinois. 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 by approximately November 2013.
In July 2012, Macey and Aleman purchased defendant Harold Stafford’s 95 percent interest in defendant Consumer First Legal Group, LLC, a Wisconsin limited liability company with its principal places of business in Madison, Wisconsin and Chicago, Illinois. The company offered and provided mortgage assistance relief and financial advisory services to consumers. By July 2013, Consumer First Legal Group ceased operations and did not have any clients.
Defendants The Mortgage Law Group and Consumer First Legal Group employed a few attorneys and several non-attorneys at their headquarters. To serve consumers in different states, both companies sought affiliations with local attorneys through what defendants refer to as “Class B” memberships or partnerships. Many local attorneys signed a “Member Addendum for Class B Member” (for The Mortgage Law Group) or a “Class B Member Agreement” (for Consumer First Law Group), which stated that the attorney’s relationship with the company was governed by the company’s “operating” or “LLC” agreement and the membership agreement or addendum. E.g., dkt. #168, exh. B-J. (Examples of The Mortgage Law Group’s operating agreement or and Consumer First Legal Groups’s LLC agreement are included in the record. Dkt. #101, exhs. ##3 and 16; dkt. #168, exhs. B and I.) The member agreement also stated that the attorneys would confirm that they were in good standing to practice law in their home state and would provide a variety of legal-related services to the company’s clients in exchange for “distributions” and other benefits. E.g., dkt. #168 at exh. B at ¶¶ 2-4 and 9 and exh. I at ¶¶ 1-2 and 9(d). The distributions generally included a flat fee of $40 for each file the member attorney reviewed and approved. E.g., dkt. #168, exh. B at p. 9. Although the companies did not have Class B members in a few states, defendants say that they worked with attorneys licensed in those states on a “local counsel” or “of counsel” basis.
Non-legal staff at the companies’ headquarters performed intake interviews and gathered financial information from prospective clients. After the client signed a retainer agreement, non-legal staff prepared a loan modification package that was reviewed by an attorney at company headquarters. The local attorney in the state in which the client resided reviewed the package a second time for accuracy and completeness before the companies sent the package to the client’s lender. (The parties dispute how much additional involvement local attorneys had in providing services to consumers and whether that involvement was legally necessary.)
A. Validity of Regulation O
As promulgated, the exemption for attorneys in Regulation O read as follows:
(a) An attorney is exempt from this part, with the exception of § 1015.5, if the attorney:
(1) Provides mortgage assistance relief services as part of the practice of law;
(2) Is licensed to practice law in the state in which the consumer for whom the attorney is providing mortgage assistance relief services resides or in ...