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Thursday, July 3, 2014

Third-Party Loss Mitigation

QUESTION
We are concerned about loss mitigation procedures by third parties. Does the Fair Debt Collection Practices Act (FDCPA) apply to such loss mitigation efforts?

ANSWER
An entity engaged in loss mitigation on behalf of a creditor is subject to the requirements set forth in the FDCPA, unless otherwise specifically excluded.

Consider the types of activities that form the features of debt collection, such as structuring payment plans, receiving payments from a consumer, and forwarding consumer payments to the creditor. In effect, these activities are covered by the FDCPA. Therefore, an entity whose activities include loss mitigation would come within the FDCPA’s regulatory guidelines. The precise regulation states that an entity, in its normal course of business, would be covered by the FDCPA if it “regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” [15 USC § 1692a(6) (2006)]

An interesting feature of the third-party settlement service is that the act of receiving the consumer’s payment would be dispositive, with respect to including or excluding the entity from the FDCPA’s mandates. If a third-party entity does not receive payments from the consumer in the course of its loss mitigation procedures, the entity would be excluded. Furthermore, the FDCPA excludes nonprofit third-party settlement, debt management, and debt collection services if they actually do receive payments from the consumer. The FDCPA expressly excludes “any nonprofit organization which, at the request of consumers, performs bona fide consumer credit counseling and assists consumers in the liquidation of their debts by receiving payments from such consumers and distributing such amounts to creditors.” [15 USC § 1692a(6)(E) (2006)]

Jonathan Foxx
President & Managing Director
Lenders Compliance Group