Unfair Debt Collection Practices

QUESTION

We were examined by our state banking department and they accused us of violations in the way we attempted to collect a debt. Our internal counsel seems to not have been aware of all the possible ways we could violate the collection of debt. This is very frustrating, as we try our best to avoid such accusations, especially since it can also affect our reputation. So, we ask, what are the prohibited practices associated with the collection of a debt?

ANSWER

This an instance where comprehensive policies and procedures should be ratified prior to collection of debts. The Fair Debt Collection Practices Act (FDCPA) has had an “unfair practices” section promulgated since 1977. In my view, there really is no excuse for not knowing a section of the FDCPA that is forty years old. [15 USC § 1692f. Section effective upon the expiration of six months after Sept. 20, 1977, see section 819 of Pub. L. 90–321, as added by Pub. L. 95–109, set out as a note under section 1692 of this title.]

Let’s start with the basic rule that protects the consumer against unfair practices: A debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt.

The legal and regulatory risks to financial institutions involved in debt collecting are considerable. Courts have long placed extreme caution on handling interactions with consumers in connection with the collection of a debt. For instance, in Midland v Johnson, the court “recogniz[ed] the ‘abundant evidence of the use of abusive, deceptive, and unfair debt collection practices [which] contribute to the number of personal bankruptcies’”. [Midland Funding, LLC v. Johnson, No. 16-348, US, 5.15.17] Another court specifically noted the purpose of the FDCPA is “to eliminate abusive debt collection practices”. [Hoo-Chong v. CitiMortgage, Inc., 15-CV-4051(JS)(AKT), EDNY 3.31.17]

Here's a broad, but viable working definition of “debt,” for the sake of identifying the basis of a policy document that accords with the FDCPA. Debt is “any obligation to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes.” [Harper v. MFR’s Trust Co, Civil No. PJM 10-00593, D. MD. 2.285.11; also see In Re Westberry, 215 F.3d 589, 6th Cir. 2000]

The following conduct is a violation of the unfair practices section of the FDCPA:

   1.The collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.

   2.The acceptance by a debt collector from any person of a check or other payment instrument postdated by more than five days unless such person is notified in writing of the debt collector’s intent to deposit such check or instrument not more than ten nor less than three business days prior to such deposit.

   3.The solicitation by a debt collector of any post- dated check or other postdated payment instrument for the purpose of threatening or instituting criminal prosecution.

   4.Depositing or threatening to deposit any postdated check or other postdated payment instrument prior to the date on such check or instrument.

   5.Causing charges to be made to any person for communications by concealment of the true purpose of the communication. Such charges include, but are not limited to, collect telephone calls and telegram fees.

   6.Taking or threatening to take any nonjudicial action to effect dispossession or disablement of property if –

a.There is no present right to possession of the property claimed as collateral through an enforceable security interest;

b.there is no present intention to take possession of the property; or

c.the property is exempt by law from such dispossession or disablement.

   7.Communicating with a consumer regarding a debt by postcard.

   8.Using any language or symbol, other than the debt collector’s address, on any envelope when communicating with a consumer by use of the mails or by telegram, except that a debt collector may use his business name if such name does not indicate that he is in the debt collection business. [15 USC § 1692f]

Obviously, non-abusive collection methods are means other than misrepresentation or other abusive debt collection practices that are available for the effective collection of debts. But it is critical to know those non-abusive collection methods!

Jonathan Foxx

Managing Director

Lenders Compliance Group

Construction-Permanent Loan – Disclosing Increase in Payment

QUESTION

With respect to a construction-permanent loan, with respect to the Loan Estimate and Closing Disclosure, under “Loan Terms”, with respect to the monthly principal and interest payment, how should a creditor respond to the statement “Can this amount increase after closing"? 

ANSWER

If, during the construction period, interest is payable only on the amount advanced for the time it is outstanding, the creditor should disclose “YES” in response to the question “Can this amount increase after closing?”  

Discussion

Effective October 10, 2017, the Bureau adopted Amendment to Federal Mortgage Disclosure Requirements Under the Truth in Lending Act (the “Final Rule”).  [82 Fed Reg 37656]   A creditor may use the methods set forth in Regulation Z, Appendix D to estimate interest and make disclosures for construction loans if the actual schedule of advances is not known.   

The proposed rule initially addressed the “Can this amount increase after closing” disclosure in the context of a separately disclosed fixed rate construction loan. In the Section by Section analysis, the Bureau acknowledges that using those methods for the calculation of the periodic payments in a fixed-rate construction loan results in interest-only periodic payments that are equal in amount. 

The preamble of the proposed rule explained that “although the actual interest-only payments will increase over the term of the construction financing as the amounts advanced increase, because the methods provided by appendix D to estimate interest may be used to make disclosures, a technically correct and compliant answer to “Can this amount increase after closing?” is “NO.” 

The periodic payments for fixed-rate construction financing, as calculated under appendix D, do not increase but are equal.” The Bureau discussed creditor’s concerns over providing a “NO” answer as the disclosure may not reflect the actual increase in payments that will occur during the construction financing.  

Thus, the Bureau initially proposed adopting a comment to Appendix D which gave the creditor an option of answering “YES”, although a technically correct answer is “NO” and stated that the “proposed comment is consistent with informal guidance provided by the Bureau”.

Ultimately, the Bureau declined to adopt the proposed rule giving the creditor an option to answer either “YES” or “NO” to the question “Can this amount increase after closing?”. Rather, the Final Rule only permits a disclosure of “YES” in response to the question “Can this amount increase after closing?” in instances where there will be an increase in the periodic payment when the amounts or timing of advances is unknown at or before consummation and the Appendix D assumption that applies if interest is payable only on the amount advanced for the time it is outstanding is used to calculate the periodic payment.  The Bureau noted that this change addresses the concern that the disclosure should reflect the fact that the payments actually increase over the term of the construction financing, even though the amount of such increase is not known at or before consummation. 

With respect to separate disclosures for fixed rate construction loans, the Bureau stated that during the optional compliance period before October 1, 2018, a creditor may continue to disclose “NO” based on the informal guidance by the Bureau discussed above.

In an effort to provide further clarify and simplify the disclosures and their implementation, the Bureau stated that the scope of the new comments to Appendix D, is not limited to circumstances when separate disclosures are provided for fixed rate construction financing as they were in the proposed rule. 

The Bureau stated, “as a practical matter, if “YES” is the answer to “Can this amount increase after closing?” when separate disclosures are provided for either fixed-rate or adjustable-rate construction financing, “YES” will necessarily be the answer when a combined disclosure for that financing is provided.  This is generally the result whenever a combined disclosure is used because the interest-only payment of the construction financing increases to the principle and interest payment of the permanent financing. Comment app. D-7.v therefore applies to both separate construction disclosures and combined construction-permanent disclosures because, in either case, the § 1026.37(b)(6) disclosures would reflect the construction phase during which there may be an increase in the periodic payment.”

[Emphasis added.]

For Section by Section analysis, see 82 Fed. Reg. 37758-37760. The Amendment to Appendix D-7 is set forth below.

Amendment to Appendix D-7

iv. Increase in periodic payment. If the amounts or timing of advances is unknown at or before consummation and the appendix D assumption that applies if interest is payable only on the amount advanced for the time it is outstanding is used to calculate the periodic payment: 

A. A creditor discloses “YES” as the answer to “Can this amount increase after closing?” pursuant to § 1026.37(b)(6)(iii) whether the creditor provides separate construction disclosures or combined construction-permanent disclosures, even though calculation of the construction financing periodic payments using the assumptions in appendix D produces interest-only periodic payments that are equal in amount.

B. A creditor that discloses “YES” as the answer to “Can this amount increase after closing?” pursuant to § 1026.37(b)(6)(iii) may use months or years for the § 1026.37(b)(6)(iii) disclosures, consistent with comment 37(b)(6)-1.  For example, for a 10-month construction loan, the first § 1026.37(b)(6)(iii) disclosure bullet may disclose, “Adjusts every mo. starting in mo. 1” and the second § 1026.37(b)(6)(iii) disclosure bullet may disclose, “Can go as high as $[insert maximum possible periodic principal and interest payment] in year 1”.  The calculation of the maximum possible periodic principal and interest payment disclosed is based on the maximum principal balance that could be outstanding during the construction phase.  As part of the “First Change/Amount” disclosure in the “Adjustable Payment (AP) Table” pursuant to § 1026.37(i)(5)(i), the creditor may omit and leave blank the amount or range corresponding to the first periodic principal and interest payment that may change.  In such cases, the creditor must still disclose the timing of the first change, which is the number of the earliest possible payment (e.g., 1st payment) that may change under the terms of the legal obligation.  

C. When separate construction disclosures or the combined construction-permanent disclosures are provided for adjustable-rate construction financing, a creditor provides the § 1026.37(b)(6)(iii) disclosures reflecting changes that are due to changes in the interest rate and changes that are due to changes in the total amount advanced.  Such a creditor discloses “YES” as the answer to “Can this amount increase after closing?” pursuant  to § 1026.37(b)(6), because the initial periodic payment may increase based upon an increase in the interest rate in addition to a change based on the total amount advanced.  Such a creditor also discloses a reference to the adjustable payment table required by § 1026.37(i), disclosed as provided in comment app. D7.iv.B, because that disclosure reflects both a change due to a change in the total amount advanced, which is a change to the periodic principal and interest payment that is not based on an adjustment to the interest rate, as well as the fact that there are interest-only payments.  Such a creditor also includes a reference to the adjustable interest rate table required by § 1026.37(j) because that disclosure reflects a change due to a change in the interest rate.

Joyce Wilkins Pollison, Esq.

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Advertisements – Concerns about Charitable Donations

QUESTION

What is our mortgage company’s compliance policy on offering a “lender credit” to a group of individuals?

Can we use fliers like the one I saw a real estate broker hand out at a recent parent-teacher night?

The flier said: 

“Attention fellow parents and faculty: Are you looking to buy or sell your next home? Please allow me to offer my real estate services on your next home adventure. Like you, I feel our children’s education is vitally important to our society. If you purchase or sell a home with me I will donate $300 back to our classrooms!”

ANSWER

There are at least two major areas of compliance concern that arise in a mortgage context from this type of marketing activity: (1) Fair Lending; and (2) RESPA.  I will address each of these issues in order.              

1.       FAIR LENDING

In a mortgage context, the flier in question would offer a significant inducement to a limited subset of the general population (“teachers” and “fellow parents”) based on criteria largely unrelated to the prospective borrower’s financial qualifications to obtain the loans. That means that some people are excluded from the offer. Whether the persons excluded are members of a protected class is not immediately apparent from the face of the ad, because the categories identified do not inherently exclude such class members. However, as a practical matter, by excluding from the offer non-teachers and people without children, such a program could easily have a “disparate impact” on one or more protected classes of prospective borrowers. This could result in a violation of one or more fair lending statutes.[1]  

As explained by Jonathan Foxx, Managing Director of Lenders Compliance Group, at pages 8-9 of his article entitled Advertising Compliance: Getting Ready for the Banking Examination published in the June 2016 edition of National Mortgage Professional Magazine:

“Advertisements are a minefield of potential fair lending violations. …Importantly, an allegation of a fair lending violation does not require any showing that the treatment was motivated by prejudice or a conscious intention to discriminate against a person beyond the difference in treatment itself. …When a company applies a racially or otherwise neutral policy or practice equally to all credit applicants, but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis, the policy or practice is described as having a Disparate Impact. The fact that a policy or practice creates a disparity on a prohibited basis is not alone proof of a violation. According to the interagency examination procedures set forth by Federal Financial Institutions Council (FFIEC), ‘when an examiner finds that a lender’s policy or practice has a disparate impact, the next step is to seek to determine whether the policy or practice is justified by business necessity. The justification must be manifest and may not be hypothetical or speculative. … Even if a policy or practice that has a disparate impact on a prohibited basis can be justified by business necessity, it still may be found to be in violation if an alternative policy or practice could serve the same purpose with less discriminatory effect. …”

Based on the information given, it is not possible to say with certainty whether a donation program similar to that described in the flier would actually constitute a fair lending violation. However, any time you extend inducements to only a subset of the population based on criteria other than their financial qualifications---even if the exclusionary criteria is not overtly directed at a protected class and even if it has a laudable charitable purpose---there is an increased risk of disparate impact on such a protected class and, hence, a potential fair lending violation.  

2.       RESPA

The “lender credit” offered in the flier described is directed at “Fellow Parents and Faculty” and promises that “If you purchase or sell a home with me I will donate $300 back to our classrooms.” This offer could constitute a violation of Section 8 of the Real Estate Settlement Procedures Act (RESPA), which reads in pertinent part:

“No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”

There are three elements to an illegal kickback under RESPA: (1) a “thing of value,” (2) an “agreement or understanding,” and (3) a “referral” of a real estate settlement service [2] (mortgage origination is a “settlement service”).  If any of these three essential elements is missing, the activity is not illegal under RESPA. Here, however, a donation of $300 “back to our classrooms” is clearly a “thing of value,” at least for the teachers and parents of the children whose classrooms would receive the donation.

On its face, the donation is offered to the persons who actually “purchase or sell a home with [the broker].” That supports an argument that the offer is only a type of “lender credit.” However, the funds are going to other parties in addition to the borrower --- “our classrooms” --- as the result of which the parents and teachers of children in those classrooms presumably benefit. The flier is apparently distributed to those same persons, such that there is a built-in inducement for them to “refer” other persons to the broker in order to increase the donations to “their” classrooms, thus satisfying the second and third requirements of Section 8.  For these kinds of “donation” arrangements to work under RESPA Section 8, the beneficiary of the donation should not also be the person from whom referral of business is sought, no matter how salutary the charitable purpose of the donation.  

Adoption of a charitable donation-type marketing program modeled on the realtor ad described carries increased legal and regulatory risk. It is theoretically possible to mitigate, but not entirely eliminate those risks. In the end, whether to go forward with such a program, given those risks, is a business judgment decision for management.    

Michael Pfeifer

Director/Legal & Regulatory Compliance

Lenders Compliance Group 

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[1] These statutes include: The Fair Housing Act (FHA) 42 USC 3601 et seq.; Equal Credit Opportunity Act (ECOA) 15 USC 1691 et seq; CFPB Supervision and Examination Manual, Ver. 2, Part II(C), Equal Credit Opportunity Act; Home Mortgage Disclosure Act (HMDA) 12 USC 2801 et seq.

[2] A settlement service includes any service provided in connection with a prospective or actual real estate settlement. (12 C.F.R. §1024.2(b).) The making of a mortgage loan is a “settlement service” (Ibid.)

Exemption from Periodic Statements

QUESTION

We are mortgage servicers and are considering having your Servicers Compliance Group conduct an audit of our policies and procedures. It is our understanding that the CFPB has revised the bankruptcy exemption to exempt a mortgage loan from the periodic statement requirements. Could you let us know when this exemption goes into effect? Also, exactly what does this exemption cover?

ANSWER

Thank you for considering our compliance support services for mortgage servicing!

As a general proposition, when there is a bankruptcy declared by a mortgage borrower, certain unique requirements are immediately mandated on the part of mortgage servicers. This is because, upon the filing of a bankruptcy petition, all collection efforts by a creditor are automatically stayed.

Most servicers recognized that Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA), and the Fair Debt Collection Practices Act (FDCPA) actually requires servicers to engage in certain communications with borrowers, even if the borrower is in bankruptcy, and despite the argument that some of these communications might appear to relate to debt collection. So, obviously, only a broad response can be provided here.

In specific reply to your question, in October 2016 the Consumer Financial Protection Bureau (CFPB) revised the bankruptcy exemption, with the compliance effective of April 19, 2018. The revised rule exempts a mortgage loan from the periodic statement requirements if any consumer on the loan is a debtor in bankruptcy under Title 11 of the U.S. Code or has discharged liability for the mortgage loan (pursuant to 11 U.S.C. § 717, 1141, 1228, or 1328).

With respect to any consumer on the mortgage loan, the exemption applies where:

(1) the consumer requests in writing that the servicer cease providing a periodic statement or coupon book;

(2) the consumer’s bankruptcy plan provides that the consumer will surrender the dwelling securing the mortgage loan, provides for the avoidance of the lien securing the mortgage loan, or otherwise does not provide for, as applicable, the payment of pre-bankruptcy arrearage or the maintenance of payments due;

(3) a court enters an order in the bankruptcy case providing for the avoidance of the lien securing the mortgage loan, lifting the automatic stay regarding the dwelling that secures the loan, or requiring the servicer to cease providing a periodic statement or coupon book; or

(4) the consumer files with the court overseeing the bankruptcy case a statement of intention to surrender the dwelling securing the mortgage loan and a consumer has not made any partial or periodic payment on the mortgage loan after commencement of the bankruptcy case.

It should be noted that the exemption ceases if the consumer affirms personal liability for the loan or any consumer on the loan requests in writing that the servicer provide a periodic statement or coupon book, unless a court enters an order in the bankruptcy case requiring the servicer to cease providing a periodic statement or coupon book.

Under the revised exemption, during the time any consumer on a mortgage loan is a debtor in bankruptcy or if the consumer has discharged personal liability for the mortgage loan (pursuant to 11 U.S.C. § 727, 1141, 1228, or 1328), a servicer must provide a modified periodic statement. The modified statement may omit the normally required information regarding late fees, length of delinquency, risks of delinquency, and delinquent account history, and need not show the amount due more prominently than other disclosures.

When the loan ceases to be subject to discharge, the debtor exits bankruptcy, or the bankruptcy exemption no longer applies, a servicer then transitions to providing the normal periodic statement. The periodic statement must include a statement identifying the consumer’s status as a debtor in bankruptcy or the discharged status of the loan, and a statement that the periodic statement is for information purposes only.

Jonathan Foxx

Managing Director

Lenders Compliance Group