CFPB Announces Consent Order for Mortgage Servicing Violations

The Consumer Financial Protection Bureau (CFPB) recently announced that it has entered into a consent order with Fay Servicing, LLC (Fay) to settle alleged mortgage servicing violations. A copy of the consent order can be found here. As is typical for CFPB enforcement activity in the mortgage servicing space, the focus of this consent order is alleged misconduct in connection with loss mitigation procedures and foreclosure protections.

According to the consent order, Fay did not send timely loss mitigation acknowledgement notices and loss mitigation evaluation notices. The loss mitigation acknowledgement notice must generally be sent within five days after receipt of a loss mitigation application, and either confirm that the application is complete or detail the additional information or documents required. The loss mitigation evaluation notice must generally be sent within 30 days of receiving a complete loss mitigation application and detail the determination of which options, if any, will be offered.

In some instances, the CFPB claims that Fay proceeded with certain foreclosure steps while the borrower was subject to foreclosure protections under Regulation X. Those protections generally apply to a borrower who has submitted a complete loss mitigation application by certain points in the foreclosure process, and continue while the application is evaluated and resolved pursuant to Regulation X.

The consent order further states that there was a mistaken understanding that the loss mitigation requirements under Regulation X only applied to retention options (e.g., loan modification or repayment plan), and not to non-retention options (e.g., short sale or deed in lieu). Finally, the CFPB asserted that Fay’s loss mitigation policies and procedures were lacking, and did not enable its personnel to engage in compliant practices.

Fay is required to pay restitution to consumers of up to $1.15 million, and to facilitate loss mitigation for those accounts that were the subject of the alleged misconduct. Further, the consent order requires an extensive set of measures intended to ensure compliance going forward.

This enforcement action highlights again the importance of technical compliance with the loss mitigation procedures under Regulation X. Since the servicing rules became effective in 2014, the CFPB has consistently signaled its prioritization of these requirements.

-Reid F. Herlihy 


Defaulted Debt Buyer Does Not Collect Debts “Due Another” Under FDCPA, SCOTUS Rules

The U.S. Supreme Court has unanimously ruled that a purchaser of defaulted debt did not qualify as a debt collector under the Fair Debt Collection Practices Act (FDCPA) because it did not collect debts "due another", but instead collected debts that it had purchased and owned.

The decision in Henson v. Santander Consumer USA Inc., the first Supreme Court opinion written by Justice Gorsuch, involved Santander Consumer USA’s efforts to collect on auto loans that it had purchased after the petitioners had defaulted. The petitioners contended that Santander was a debt collector under the FDCPA based on the portion of the statutory definition of a "debt collector" that includes a person that "regularly collects or attempts to collect…debts owed or due…another."

Relying primarily upon the statutory text, the Court affirmed the Fourth Circuit ruling that a debt buyer can collect debts that were in default when purchased without triggering the FDCPA definition of "debt collector." The Court concluded that the statutory language did not appear to "suggest that we should care how a debt owner came to be a debt owner—whether the owner originated the debt or came by it only through a later purchase." According to the Court, "[a]ll that matters is whether the target of the lawsuit regularly seeks to collect debts for its own account or does so for 'another.' And given that, it would seem a debt purchaser like Santander may indeed collect debts for its own account without triggering the statutory definition in dispute…."

The Court rejected the petitioners' grammatical argument that the words "debts owed" mean debts that were previously owed or due another and does not refer to present debt relationships, and their inferential argument that the statute's "debt collector" definition necessarily includes anyone who regularly collects debts acquired after default. Observing that "from the beginning [public policy] is the field on which [the petitioners] seem most eager to pitch battle," the Court turned last to the petitioners' policy-based argument. The Court dismissed as "quite a lot of speculation" their policy argument that, had Congress contemplated the "advent" of the debt-buying industry, it would have found that "no other result [than treating debt buyers as debt collectors] would be consistent with the overarching congressional goal of deterring untoward debt collection practices." In doing so, the Court observed that "the parties and their amici manage to present many and colorable [policy] arguments both ways…, a fact that suggests to us for certain but one thing: that these are matters for Congress, not this Court, to resolve."

In addition to defining a "debt collector" to include persons who regularly collect debts owed or due another, the FDCPA contains an alternative definition of a "debt collector" that, subject to various exceptions, covers persons engaged "in any business the principal purpose of which is the collection of any debts." Although the parties had "briefly allude[d]" to this alternative definition, the Court did not address it because "the parties haven’t much litigated that alternative definition and in granting certiorari we didn’t agree to address it either." The Court also declined to address another issue not presented by the certiorari petition, namely whether a company may qualify as a "debt collector" if it "regularly acts as a third party collection agent for debts owed to others." As a result, debt buyers should consult with counsel regarding Henson's impact on their operations.

While Henson is a welcome development, debt buyers should remain mindful of state debt collection laws that incorporate FDCPA requirements. A number of states have amended their debt collection laws to cover debt buyers, with Colorado a recent example. It is also unclear how the Consumer Financial Protection Bureau (CFPB) will respond to Henson in connection with its debt collection rulemaking. The CFPB plans to conduct two such rulemakings—one for "debt collectors" subject to the FDCPA and the other for first-party debt collection.

Henson is also a welcome development for mortgage servicers, particularly entities that purchase and service whole loan portfolios that include some mix of loans in default. However, we note that this holding does not specifically address coverage of the acquisition of servicing rights or a subservicing arrangement.

-Alan S. Kaplinsky, Peter N. Cubita, John L. Culhane, Jr., Stefanie H. Jackman, and Christopher J. Willis


Financial Institution Agencies Provide Guidance to Help Alleviate Appraiser Shortage

The federal banking agencies, together with the National Credit Union Administration (the Agencies), issued an Interagency Advisory on the Availability of Appraisers that is intended to help address the real estate appraiser shortages being experienced by lending institutions.

 
Pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), the Agencies require the institutions they regulate to obtain a real estate appraisal from a state licensed or certified appraiser in any federally related transaction, unless an exemption applies. For most loans on single family homes, a licensed appraiser may perform the appraisal, with a certified appraiser being needed for more complex or expensive single-family transactions, and for multi-family and commercial transactions.

In connection with the banking agencies’ review of regulations under the Economic Growth and Regulatory Paperwork Reduction Act, industry members raised concerns about the timeliness of obtaining appraisals, and attributed the delays mainly to a shortage of state licensed or certified appraisers, particularly in rural areas. Concerns over obtaining appraisals on a timely basis have been raised by the mortgage industry in general. To address the timeliness issue, the Agencies discuss two options in the Advisory—temporary practice permits and temporary waivers.

The Agencies note that FIRREA provides that a state agency responsible for licensing or certifying appraisers must recognize the license or certification of an appraiser from another state on a temporary basis for federally related transactions. Thus, subject to any applicable state law limitations, licensed or certified appraisers could apply for a temporary practice permit in a state in which they are not currently licensed or certified to help alleviate a shortage of licensed or certified appraisers in the other state. Institutions that sell mortgage loans should check with investors and other interested parties regarding their policies for using an appraiser operating under a temporary practice permit.

The Agencies also note that FIRREA authorizes the Appraisal Subcommittee of the FFIEC, with FFIEC approval, to temporarily waive requirements in a specific geographic area to obtain an appraisal from a licensed or certified appraiser in connection with federally related transactions. Requests for such a waiver may be submitted to the Appraisal Subcommittee by a state appraiser licensing or certifying agency, a federal bank regulatory agency, a regulated financial institution or credit union, or other persons or institutions with a demonstrable interest in appraiser regulation. Regardless of who submits a request for a temporary waiver, if the waiver is granted it will apply to all regulated institutions with regard to federally related transactions in the specific geographic area. The Appraisal Subcommittee could terminate a temporary waiver before the scheduled expiration date should it determine that the appraiser shortage had abated.

A temporary waiver would apply only to the requirement that an appraisal be performed by a state licensed or certified appraiser. All other requirements under FIRREA would still apply, such as the need for the appraisal to conform with general accepted appraisal standards as evidenced by the Uniform Standards for Professional Appraisal Practice (unless principles of safe and sound banking require compliance with stricter standards), and that the appraisal be written and contain sufficient information and analysis to support the institution’s decision to engage in the transaction.

Even if a temporary waiver for a given geographic area is granted, institutions that intend to make loans in the area and sell the loans should check with investors and other interested parties regarding the ability to rely on the waiver.

-Richard J. Andreano, Jr.


D.C. Circuit Publishes Transcript of PHH v. CFPB Oral Arguments

On June 6, 2017, the D.C. Circuit published the 85-page transcript of the May 24, 2017, oral arguments in PHH v. CFPB, which we blogged about.

-Theodore R. Flo


West Virginia Supreme Court Sides with Debt Collector

The West Virginia Supreme Court recently ruled in favor of a debt collector in an action alleging a violation of West Virginia’s Consumer Credit and Protection Act. In its June 12 decision, the court held that call volume, absent evidence of some other abusive conduct or intent to harass or oppress, is insufficient to prove that the debt collector violated the Act.

The facts of the case were undisputed. The defendant, Valentine & Kebartas, Inc. (V&K), is a third party debt collector that purchased the plaintiff’s debt. While the plaintiff disputed the debt with the original creditor, he did not dispute it with V&K. V&K called the plaintiff a total of 250 times over six months, all of the calls occurred after 8:00 a.m. and before 9:00 p.m. Specifically, V&K called the plaintiff 22 times between March 10 and 26, 2012, 17 times between March 26 and 28, 2012, and 211 times between March 29 and November 17, 2012. V&K did not leave any messages. The plaintiff never answered any of the calls, did not keep a record of them, and did not contact V&K in any manner to dispute the debt. 

The plaintiff sued, alleging that the volume of calls was intended to harass or oppress him in violation of West Virginia Code § 46A-2-125(d). After a bench trial, the circuit court found in favor of the plaintiff, concluding that the increase in calls between March 26 and 28, 2012 could not serve any legitimate purpose, and therefore, the only reasonable conclusion was that V&K intended to harass or oppress the plaintiff. The circuit court awarded the plaintiff $75,000 in damages.

On appeal, the West Virginia Supreme Court reversed. The version of West Virginia Code § 46A-2-125(d) in effect at the time of the trial prohibited “[c]ausing the telephone to ring or engaging any person in telephone conversation repeatedly or continuously, or at unusual times or at times known to be inconvenient, with the intent to annoy, abuse, oppress, or threaten any person at the called number.” Looking to federal cases interpreting the nearly identical provision of the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692d(5), the Supreme Court agreed with a line of cases holding that, in the absence of other evidence of abusive conduct, the volume of unanswered calls is insufficient to establish a FDCPA claim against a debt collector. 

In addition, the Supreme Court rebuked the circuit court for assuming that V&K had no legitimate basis for increasing the call volume and for holding that the plaintiff’s silence and failure to answer calls was sufficient to give notice to V&K that the plaintiff did not wished to be called anymore. The court explained that these assumptions improperly relieved the plaintiff of his burden of proof at trial.

The decision is an unexpected and positive development in light of West Virginia’s historically aggressive approach to regulating and limiting debt collection activity. However, it may be of limited effect because the Supreme Court’s decision was based on the prior version of the Consumer Credit and Protection Act. The Act was amended in 2015, and the Supreme Court specifically declined to consider the amendment since it was not in effect as of the trial date. 

The current version of the Act replaces the general prohibition against “repeated[] or continuous[]” calls with a more specific threshold of 30 calls or 10 telephone conversations per week, or calls made at unusual or inconvenient times. However, the amendment also preserved the language specifying that calls that exceed the defined thresholds violate the Act when they are made “with intent to annoy, abuse, oppress or threaten.” As a resultĀ­, although plaintiffs will likely argue that the Supreme Court’s decision only applies to conduct occurring prior to the 2015 amendment, the preservation of the intent clause may allow defendants to invoke this decision in cases concerning more recent calls.

-Alan S. Kaplinsky, Christopher J. Willis, John L. Culhane, Jr., Stefanie H. Jackman, and Sarah T. Reise


DID YOU KNOW?

Colorado Revises MLO Exemption

Colorado has revised an exemption from mortgage loan originator licensure. More specifically, an individual who acts as a mortgage loan originator, without compensation or gain to the mortgage loan originator, in providing loan financing for not more than three residential mortgage loans in any 12-month period to a family member of the individual, is exempt from licensure. For purposes of this exemption only, “compensation or gain” excludes any interest paid under the loan financing provided. Previously, the exemption was more limited, exempting a parent who acts as a loan originator in providing loan financing to his or her child.

These provisions are effective on August 9, 2017.

Connecticut Adds Lead Generator License

On January 1, 2018, Connecticut will require that a person acting as a lead generator obtains a license, unless exempt. A lead generator means “a person who, for or with the expectation of compensation or gain, [s]ells, assigns or otherwise transfers one or more leads for a residential mortgage loan; generates or augments one or more leads for another person; or directs a consumer to another person for a residential mortgage loan by performing marketing services, including, but not limited to, online marketing, direct response advertising, or telemarketing.” A “lead” includes any information identifying a potential consumer of a residential mortgage loan.

The following will be exempt from licensing:

  • Any bank, out-of-state bank, Connecticut credit union, federal credit union, or out-of-state credit union, provided such bank or credit union is federally insured;
  • Any wholly owned subsidiary of any such bank or credit union;
  • Any operating subsidiary where each owner of such operating subsidiary is wholly owned by the same such bank or credit union;
  • Any person licensed as a mortgage lender, mortgage correspondent lender or mortgage broker in this state, provided such exemption shall not be effective during any period in which the license of such person is suspended;
  • A consumer reporting agency, as defined in Section 603 (f) of the Fair Credit Reporting Act, 15 USC 1681a, as amended from time to time; and
  • An employee of a person licensed as a lead generator or exempt from licensure as a lead generator, while engaged in lead generator activities on behalf of such person.

Provisions regarding application, renewal, notification, recordkeeping, and disclosure requirements for lead generators have also been added.

Maine Amends Consumer Credit Code Provisions

Maine has expanded the scope of its Consumer Credit Code to include mortgage loan servicers. A “mortgage loan servicer” means a person or organization that undertakes direct collection of payments from or enforcement of rights against debtors arising from a supervised loan secured by a dwelling. As such, a “supervised lender” means a person authorized to make or take assignments of or to service supervised loans.

These provisions are effective on September 19, 2017 (or 90 days following adjournment of the current legislative session).

- Wendy T. Novotne


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