A recent decision from a U.S. district court in the Northern District of Georgia, CFPB v. Frederick J. Hanna & Associates, P.C., et al., allowed the Consumer Financial Protection Bureau (CFPB) to proceed with an enforcement action largely focused on how a law firm prosecuted consumer collection cases in Georgia state courts.
The decision concerns a lawsuit filed by the CFPB alleging that Hanna’s lawyers are not “meaningfully involved” in the collection lawsuits they file for their creditor clients. To put it another way, the CFPB contends Hanna’s lawyers violated consumer protection law because they are not diligently lawyering against consumers.
Created from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB is an independent bureau within the Federal Reserve System. It is charged with regulating, supervising, and taking enforcement actions against banks, mortgage lenders, and other providers of consumer financial services products.
The Hanna law firm moved to dismiss the complaint arguing the CFPB had no authority to dictate how a law firm can conduct state court litigation.
Gutting Dodd-Frank’s Practice of Law Exclusion
The court found the authority for the CFPB to regulate how an attorney files and prosecutes a lawsuit in Title X of the Dodd-Frank Act. Title X contains an exemption for the practice of law:
Except as provided under paragraph (2), the CFPB may not exercise any supervisory or enforcement authority with respect to an activity engaged in by an attorney as part of the practice of law under the laws of a State in which the attorney is licensed to practice law.
There are two strangely worded exceptions under the referenced “paragraph (2).” It is the second exception to the exemption that allows the CFPB to regulate attorneys – at least that’s what the court found. The exception covers “the offering or provision of a consumer financial product or service . . . that is otherwise offered or provided by the attorney in question with respect to any consumer who is not receiving legal advice or services from the attorney in connection with such financial product or service.”
Still, it would seem that an attorney representing a creditor in a lawsuit against a debtor would not have “offered or provided” a financial product or service. But that is exactly what the CFPB believes and so did the court. The decision allows the federal executive branch to regulate the practice of law, because an attorney suing a debtor to collect a consumer debt is deemed to be providing the debtor with a financial product or service.
Not Limited to Debt Collection Attorneys
The decision is so broad in its reading of the practice of law exception that it can be construed to allow CFPB regulation over every attorney engaged to represent lenders in a consumer credit matter. It can be used by the CFPB to take enforcement actions against law firms practicing debt collection or foreclosure law or representing lenders in loan transactions.
Of immediate concern to all attorneys, the decision places no boundaries on the CFPB’s regulation of attorney professional conduct. It makes no distinction between an attorney who handles one loan closing for a bank and one who files hundreds of debt collection cases a week.
Since the CFPB’s action largely addressed the Hanna law firm’s litigation efforts made on behalf of its clients, the decision suggests there are no limits to the CFPB’s power to take action against attorneys, even where the basis for its enforcement is how attorneys practice law.
Cracking the “Cornerstone of Any Democratic Society”
The American Bar Association has opposed efforts allowing attorney regulation by executive agencies in the past. These efforts have included opposition to mandatory accrual accounting for law firms, federal agency policies that erode or undermine the attorney-client privilege and work-product doctrine, and “gatekeeper” regulations that would subject lawyers to anti-money laundering compliance. As a matter of policy, “the ABA opposes federal legislation or rules that would undermine traditional state court regulation of lawyers, interfere with the confidential attorney-client relationship, or otherwise impose excessive new federal regulations on lawyers engaged in the practice of law.” (www.americanbar.org/advocacy/governmental_legislative_work/priorities_policy/independence_of_the_legal_profession.html)
The CFPB’s efforts in the Hanna matter are squarely focused on how a law firm practices law. The bureau’s complaint alleges Hanna attorneys violated the Dodd-Frank Act by filing lawsuits before adequately reviewing their files or without having sufficient documentation.
In opposing similar efforts in the past, the ABA has stated that “regulation independent from the executive branch of the state” is a “cornerstone of any democratic society . . . and also necessary for the sound administration of justice.” (www.ccbe.eu/fileadmin/user_upload/NTCdocument/CCBE_and_ABA_letter_1_1325686329.pdf)
In 2012, the Committee on Consumer Financial Services of the Business Law Section noted in comments on the bureau’s rule “Defining Larger Participants in Certain Consumer Financial Products and Services Markets,” that the CFPB appeared to be sidestepping Congress’ intent in crafting an exemption that intended to prohibit the bureau’s regulation of the practice of law. (http://consumerfsblog.com/wp-content/uploads/2016/01/CL230000-otherlinks_files-proposed_rule.pdf)
Hanna Threatens to Undermine Lawyer Independence
The Hanna enforcement action is a clear signal that the CFPB intends to impose federal, executive branch regulation on the state court practices of attorneys. This dual regulation poses serious concerns for the U.S. legal system.
Through this enforcement action the CFPB expressly seeks to determine the quantum of professional judgment an attorney should exercise and how the attorney should conduct litigation. The CFPB may impose requirements on the resources a lawyer should devote to consumer credit litigation, what data and documents she should have in her possession before undertaking litigation, and what claims may be asserted.
And that is just the beginning of the CFPB’s scrutiny of lawyers.
As a self-described “cop” it advocates for consumer interests. Already possessing the power to subpoena and issue Civil Investigative Demands (CID), allowing the CFPB to regulate attorney professional conduct also means that clients of those attorneys would lose the protection of the confidentiality of information they provide to their lawyers.
“Confidentiality of Information” under Rule 1.6 of the Model Rules of Professional Conduct safeguards “information relating to the representation of a client unless the client gives informed consent.” It is far broader than attorney-client privilege or the work-product doctrine. There are limitations, such as requiring that information be revealed “to comply with other law or a court order.”
The Hanna decision may be interpreted by the CFPB to fall within the “other law” exception. The CFPB can avoid assertions of attorney-client privilege by simply demanding information from attorneys through a CID that the client never sees. Since it can regulate attorney professional conduct it can instruct attorneys (under its newfound regulatory control) not to reveal the CID to the client, and obtain the confidential information without the client ever catching on.
Hanna Settlement Demonstrates Erosion of Lawyer Independence
In December, the Hanna law firm and the CFPB agreed to the entry of a judgment, settling the dispute. (http://files.consumerfinance.gov/f/201512_cfpb_proposed-stipulated-final-judgment-and-order-hanna-frederick-j-hanna.pdf)
The consent judgment largely defines how the Hanna law firm can engage in debt collection litigation on behalf of its clients. It details the information the lawyers must review, the documents and information they must possess and the content and form of affidavits.
The consent judgment also requires the Hanna law firm to annually report to the CFPB, “in detail the manner and form” in which the Hanna law firm has complied with the judgment. The “detail of the manner and form” of how the Hanna law firm conducts its debt collection litigation presumably would include work-product, privileged, and confidential information. It is unclear whether such a consent judgment between an attorney and the CFPB allows the release of confidential client information under the “court order” exception of Model Rule 1.6.
Regulatory Efforts Have Broader Implications
The CFPB’s original complaint against the Hanna law firm alleged that it had improperly filed some 350,000 lawsuits over a four-year period. (http://files.consumerfinance.gov/f/201407_cfpb_complaint_hanna.pdf) The CFPB also alleged these lawsuits resulted in judgments or settlements.
Despite these allegations, the consent judgment does not contain any provision vacating any judgment or voiding any settlement obtained by Hanna on behalf of its clients. Each remains conclusively lawful, effective, and enforceable. The result is contrary to the CFPB’s basis for its actions in the first place.
Setting a new precedent for federal regulation of attorney conduct, the Hanna decision and consent judgment will likely empower the CFPB to make its own rules governing attorney-client confidentiality, what constitutes a meritorious claim or what an attorney must do when a consumer demands return of funds held in trust for its creditor clients.
These are troubling questions. If Hanna is adopted and remains unchallenged, attorneys will have little guidance on how they should proceed in consumer credit litigation. But of greater concern is that Hanna, if it stands, paves the way for federal, executive branch control over how all lawyers can represent their clients.
Lawyers who practice debt collection have few advocates both inside and outside the profession. As a result, they already face personal liability for simply representing a consumer creditor. There are many who do not believe the CFPB’s regulation of debt collection lawyers poses a problem.
They are wrong.
Once lawyers lose their independence from executive branch regulation, it may very well mean that other harms to health, safety, or welfare, of a far greater threat than debt, should likewise open the door to federal, executive regulation of attorney conduct in other practices.
Harms may be transitory or even politically motivated. But if the collection of a debt can form the basis for the loss of attorney independence from federal, executive control, it will not take much to erode the same bedrock of our legal system in the face of far greater concerns.
Once lawyers lose their independence from executive branch regulation, there may be no going back.