The Connecticut Attorney General’s office is stretching its Dodd-Frank muscles, applying a new provision of the federal reform bill for the first time in an attempt to put a stop to an alleged mortgage modification scam aimed at distressed homeowners.

The case, being brought jointly by the Connecticut and Florida attorneys general, involves several associated companies, primarily Connecticut-based Resolution Law Group and Florida-based Berger Law Group (RLG/BLG Enterprises). Operating under those names, the suit alleges, the firms promised foreclosed homeowners they could receive compensation from their lender, either in the form of cash or a mortgage modification – but only if they paid thousands in up-front fees to join so-called “mass-joinder” lawsuits against their mortgage lenders or servicers. RLG/BLG is alleged to have squeezed millions in fees since 2011 from already strapped homeowners, while offering them nothing in return.

“Consumers who responded to the deceptive marketing efforts we allege in this lawsuit were typically having difficulty making their monthly mortgage payments and were lured in by false promises of help and relief,” said Connecticut Attorney General George Jepsen in a statement. “To convince consumers to pay a large up-front fee and additional monthly fees, the defendants promised that the ‘mass-joinder’ lawsuits would induce banks to give them mortgage modifications, help them avoid foreclosure, reduce their interest rates and loan balances, and entitle them to monetary compensation – when, in fact, they did little or nothing to assist with mortgage problems – and often exacerbated the consumers’ financial issues.”

Breaking New Ground

The states have already won a temporary restraining order, freezing RLG/BLG’s accounts and putting a halt to their practice. But the case will break new legal ground, as state regulators test new authorities given to them by the Dodd-Frank statute. Under Section 1042 of the Dodd-Frank law, a state regulator or attorney general is authorized to bring a civil case for violations of Dodd-Frank’s prohibitions on unfair, deceptive or abusive acts or practices.

Several state AGs have filed such suits seeking to test out their new powers, including Illinois, New York and Mississippi. The Florida/Connecticut case, however, is the first to go after a scam involving so-called “mass-joinder” suits themselves.

“It’s not the first, but it’s certainly among the first lawsuits of its type,” Alan S. Kaplinsky, lead attorney for the consumer law practice at Ballard Spahr and co-founder of the CFPB Monitor blog.

By using the federal statute as their basis for prosecuting, regulators may be able expand the scope of the issues subject to scrutiny, increasing the amount of fines or penalties should the suit be successful.

“Under Florida or Connecticut law, there’s no authority to prosecute somebody for an abusive act or practice –  both Florida and Connecticut have UDAP statutes, [which] deal with unfairness and deception. But neither of them deal with abusiveness,” explained Kaplinsky.

The Dodd-Frank law also gives new scope to other state regulators to enforce similar claims –  while the Connecticut case is being brought by the Attorney General’s Office, earlier this year the New York Department of Financial Services used the same provision of the law to bring a case against a sub-prime auto lender. Previously, most state regulators hadn’t had the power to bring such claims to court unless they persuaded their AG to act on their behalf; now they can do it on their own.

It remains to be seen, as these cases work their way through the courts, whether state regulators who apply Dodd-Frank’s new powers to their case will be able to swing as heavy a hammer as the Consumer Financial Protection Bureau itself – while the law explicitly lays out quite stiff penalties and fines the CFPB is entitled to demand in such cases, it’s not clear whether state attorneys general will be entitled to the same fees in a successful case, Kaplinsky said.

That makes these case worth watching even for every lender. “It’s a powerful new tool for states to use … [and] companies which are perfectly legitimate, and aren’t trying to perpetrate any kind of scam, have got to worry about it,” said Kaplinsky.

Email: csullivan@thewarrengroup.com