Thursday, November 29, 2018

HUD: Suspensions, Debarments, LDPs

We were asked to complete a form by one of our investors. One of the questions asks us if our company and/or principals were ever denied, suspended, or debarred by HUD. What do these HUD actions imply?

Although some people believe the Department of Housing and Urban Development (HUD) can only force mortgagees and lenders to indemnify or reimburse FHA for insurance claims paid on mortgages that are found not to meet HUD guidelines, HUD has vastly more authorities to ensure enforcement. To be sure, in October 2010 HUD proposed regulations to strengthen and expand its ability to compel indemnification and reimbursement. [75 FR 62335] But HUD has many more enforcement authorities.

With respect to your specific inquiry, HUD can suspend, debar, or issue a Limited Denial of Participation (LDP) to participants in HUD programs. [24 CFR, Part 2424] These sanctions are typically meted out for fraud or other serious misconduct.

Suspensions and debarments operate throughout the government; that is, if one agency suspends or debars, the person or entity is debarred from doing business with the entire federal government. HUD does provide an appeal opportunity. [See 24 CFR, Part 24; 24 CFR, Part 26] In my view, one should not navigate this process without the assistance of legal counsel, supported by a firm such as ours to handle the due diligence.

The nomenclature of the terms “suspend” and “debar” mean precisely what they imply. If a person or entity is suspended, they are barred from doing business with the government for a specified period of time, ranging upwards of one year, sometimes longer. If a person or entity is debarred, they are prohibited from doing business with the government for what is a normally a set period, usually in effect much longer than a suspension.

Unlike suspensions and debarments, LDPs are unique to HUD. There are specific rules governing LDPs. [See 24 CFR, Part 2424, Subpart J] LDPs are issued for the same types of misconduct as suspensions and debarments, but, as implied in the term itself, these are more limited in impact. An LDP does not bar participation in the programs of other federal agencies. Furthermore, LDPs are usually limited to specific HUD programs and/or specific HUD field offices. Most of the time, LDPs are issued for one year or less.

Persons or entities receiving an LDP, suspension or debarment can appeal within HUD and have an on-the-record hearing before a HUD Administrative Law Judge. [24 CFR, Part 2424.1130] It is also possible to appeal to the federal courts. The appeal process, though, should be conducted with support of legal counsel in conjunction with a firm like Lenders Compliance Group to handle the due diligence.

Managing Director
Lenders Compliance Group

Wednesday, November 21, 2018

Collecting a Debt: Inconvenient Contact

We tried to collect a debt and our regulator notified us of a complaint for contacting the debtor at an “inconvenient” time. That is his word, not ours. This seems very arbitrary! We really do not know how to figure this out. What time is considered an inconvenient time?

The applicable regulations are much less arbitrary than you think! With respect to an inconvenient time, the consumer is required to provide prior consent or a court needs to authorize such contact, in the absence of which there is a clear mandate that a debt collector may not contact the consumer on any date, at any time, or in any place, if the debt collector knows or should know that such time, date or place is inconvenient.

What constitutes actually knowing the acceptable time, date or place to contact the debtor?

Courts will generally find such actual knowledge pertains if the consumer informs the debt collector, even casually or informally, that a particular time or place of contact is inconvenient. This is supported by the purpose of the Fair Debt Collection Practices Act (FDCPA), which has a primary goal of protecting unsophisticated consumers who are not expected to assert their rights. Moreover, courts will often impose a burden of reasonable injury on the debt collector to determine what times or places are inconvenient.

Please note, the term “consumer” includes the consumer’s spouse, parent (if the consumer is a minor), guardian, executor, or administrator. [15 USC § 1692c(d)]

The statutory language sets forth the timeframe for unusual and inconvenient hours: between 9:00PM and 8:00AM. [15 USC § 1692c(a)(1)]

It is worth noting that the Federal Trade Commission (FTC) takes the position that contacting the debtor on Sundays is not presumptively unusual or inconvenient.

However, contact with certain types of employees at their places of employment may be viewed by courts and the FTC as inherently inconvenient. For instance, it is prohibited to contact a nurse or a doctor working at a hospital, or a waiter at the restaurant where he or she works. Be cautious in this regard, since it is easy to fall into a grey area!

Contact with a consumer may be unusual or inconvenient for a variety of reasons other than those described herein, and, whatever the view, be especially careful to determine if the debt collector knows or should know that such a time, date or place is inconvenient.

Jonathan Foxx
Managing Director
Lenders Compliance Group

Thursday, November 15, 2018

Escrow Account Transfers

We recently went through a risk assessment in our servicing division. The risk assessment was done by a risk management firm like yours. There was a defect found in the way we transfer the escrow account from our servicing to a new servicer. I don’t know how we missed it, but now we expect to face a regulatory audit. What are the basic requirements for the escrow account if our loan servicing is transferred to a new servicer?

I would be remiss if I didn’t begin this response with a plug for own risk assessment reviews. There really is no firm like Lenders Compliance Group in the country, a pioneer in risk management, with the widest range of knowledge and expertise, and the widest range of cost-effective, compliance-related services. Check us out!

There is not much detail to go on in your inquiry. The question itself is broad. But I think several requirements are fundamentally mandated to comply with applicable regulations for escrow account transfers. Here are a few “IFs” to keep in mind.

Where loan servicing transfer is concerned, the transferor servicer must submit a short year annual escrow account statement to the borrower within sixty days after the effective date of the servicing transfer. [24 CFR § 3500.17(i)(4)]


The transferee servicer changes the monthly payment amount,
o it must provide the borrower with an initial escrow statement within sixty days of the date of the servicing transfer.

The transferee servicer provides an initial escrow account statement upon the transfer of servicing,
o the transferee servicer must use the effective date of the transfer of servicing to establish the new escrow account computation year.

The transferee servicer retains the monthly escrow payment used by the transferor servicer,
o the transferee servicer may continue to use the escrow account computation year established by the transferor servicer, or may use a short-year annual escrow account statement to establish a new escrow account computation year.

The transferee servicer must treat any surplus, shortage or deficiency in the escrow account pursuant to the standard rules for surpluses, shortages and deficiencies. [24 CFR § 3500.17(e)]

Managing Director
Lenders Compliance Group

Thursday, November 8, 2018

Payment Shock Notices

During a banking examination, the examiner said we should consider issuing a payment shock notice. We do not believe there is a requirement to issue such a notice. Although it was only a suggestion, we are a concerned that our regulator will frown on our not providing this notice. What is a payment shock notice? And, is a payment shock notice a regulatory requirement?

A payment shock notice is a voluntary notice that a lender or servicer may provide to a borrower to alert the borrower to the potential for a substantial increase in property taxes for a home. A typical example involves a newly constructed home, where the property taxes for the first year may be based on the unimproved value or only partially on the improved value. This situation can result in a substantial increase in the property taxes once the taxes are fully based on the improved value.

Consider this notice a Best Practice!

HUD actually took a position on this subject twenty years ago. In deciding to adopt a Best Practice approach to allow a payment shock notice – but not mandate the notice – HUD stated:

“The Department intends this final rule to encourage more originators and servicers to adopt practices that will ensure that consumers are informed of the payment shock problem and given the opportunity to avoid it. These practices include:
  • Notifying borrowers in advance and providing an opportunity to make voluntary payments ahead of the schedule to avoid payment shock. The Department encourages servicers to use the recommended format published today to notify borrowers of this potential problem when the originator or servicer, in applying sound business judgment, believes that payment shock is like to occur. 
  • Offering consumers extended repayment plans, even beyond those required under RESPA, to make up substantial shortages associated with payment shock." [63 FR 3214, 3233, 3237-3238 (1998)]
So, this is in line with a Best Practice procedure, which is good for the lender, servicer, and consumer in the long run. I believe that it is appropriate to provide a payment shock notice when a lender or servicer anticipates a substantial increase in the bills paid out of the escrow or impound account after the first year. By the way, the payment shock notice can be delivered with or separate from an initial escrow account statement. [63 FR 3214, 3237-3238 (1998)]

Think of this notice as a Best Practice that is common and customary, which I would guess is why the examiner recommended it to you. By issuing the payment shock notice, you are advising the borrower of the potential for a substantial increase in bills paid out of the escrow or impound account because of property taxes (or another applicable item) after the first year. This procedure then gives the borrower a chance to voluntarily make higher payments into the account during the first year to offset the payment shock.

Jonathan Foxx
Managing Director
Lenders Compliance Group

Thursday, November 1, 2018

Leaving “Direct-to-Voicemail” Messages

I am the compliance officer of a bank. Our servicing department recently came across a way to leave so-called “back-door” voicemails. I had never heard of this term and and my research turned up very little to go on. Apparently, it has something to do with being able to leave voicemails without ringing the consumer’s phone. It seems deceptive to me. What is “back-door” voicemail” and is it covered by a regulatory rule?

The place to start your research would be the Telephone Consumer Protection Act (TCPA), which prohibits any person within the United States from “mak[ing] any call…using any automatic telephone dialing system or an artificial or prerecorded voice…to a telephone number assigned to a paging service, cellular telephone service…or any service for which the called party is charged for the call.” [47 USC § 227(b)(1)(A)(iii)]

Your question seems to be describing “direct-to-voicemail” messages. If so, yours is a timely inquiry, since, in a case of first impression, a federal district court in Michigan recently considered whether the term “call,” as used by the TCPA, includes direct-to-voicemail messages - that is, voicemail messages delivered within the electronic space without being announced by an audible ring. [Saunders v. Dyck O’Neal, Inc., 2018 U.S. Dist., W.D. Michigan, July 16, 2018]

Briefly, the Federal Home Loan Mortgage Corporation (FHLMC) assigned Dyck O’Neal, Inc. its interest in an outstanding debt owed by Karen Saunders. Dyck O’Neal attempted to collect the debt by leaving about thirty automated voicemail messages on Saunders’ phone over a twelve-month period. Each time, Saunders received a notification on her phone that she had a new voicemail.

Dyck O’Neal had contracted with a company named VoApp, a third-party vendor, to deliver the voicemails. This vendor’s technology reaches the target’s voicemail through a so-called “back-door” in that, rather than calling the target’s phone number and waiting to leave a message on the target’s voicemail, VoApp’s technology calls a phone number assigned to the voicemail service provider’s enhanced service platform (i.e., the voicemail computer or server), not the target’s phone number. By routing the message through the server, VoApp was able to deliver a message to the server space associated with the target Ms. Saunders, and then she received a notification that she had received a new voicemail message without ever having received a traditional call.

Saunders sued, alleging violations of the TCPA. The defendant filed a motion for summary judgment, arguing that the voicemails did not violate the TCPA. But the federal district court in Michigan denied the motion for summary judgment, holding that a direct-to-voicemail message qualified as a “call” under TCPA’s section 227(b)(1)(A)(iii).

With respect to telephonic access to the consumer, the TCPA does cast a broad net in regulating any “call,” which is a term that includes any communication or attempt to communicate via telephone. It is worth noting that the Court emphasized the effect of the call, as it opined that the “effect on Saunders is the same whether her phone rang with a call before the voicemail is left or whether the voicemail is left directly in her voicemail box” – specifically, she receives a notification on her phone that she has a new voicemail.

By leaving a voicemail directly in the server space associated with Saunders’ phone, the defendant had attempted to communicate with Saunders via her phone, which is the definition applied to the TCPA’s use of the term “call.” Further, the automated message instructed Saunders to call back at a specific telephone number, inviting additional communication over the telephone. Thus, the effect on Saunders was the same whether her phone rang with a call before the voicemail was left or whether the voicemail was left directly in her voicemail box.

So, whether this technology offers “back-door” voicemails or “direct drop” voicemails (another term referring to the same kind of service), it would be smart to approach this issue with considerable care. Courts have consistently held that voicemail messages are subject to the same TCPA restrictions as traditional phone calls. By the way, the same can be said for text messages. The U.S. Supreme Court has observed that “[a] text message to a cellular phone, it is undisputed, qualified as a ‘call’ within the compass of § 227(b)(1)(A)(iii).” [Campbell-Ewald Co. v. Gomez, 136 S. Ct. 663, 667 (2016)]

Jonathan Foxx
Managing Director
Lenders Compliance Group