Loss Mitigation: Foreclosure not “Debt Collection”

QUESTION

I’ve got a feeling that my question is kind of off the beaten path, but here goes! I am the General Counsel of a mid-sized bank in the mid-west. I am concerned about how to construe whether loss mitigation may be considered “debt collection” within the FDCPA. Briefly put, is the processing of loss mitigation options considered “debt collection” based on the FDCPA?

ANSWER

Your question is not as off the beaten path as you think. After all, this is the kind of issue that comes up quite a lot, especially in litigation. I will give you one example from last year.

In that case, a federal district court in Minnesota considered whether the processing of loss mitigation options falls within the meaning of “debt collection” within the FDCPA. The case was  Heinz v. Carrington Mortgage Services, 2019 U.S. Dist. (D. Minn. Nov. 19, 2019).

Come with me as I walk you through the basic outline!

In 2008, Heinz borrowed $247,344 from Countrywide Bank, secured by a mortgage on his home. Heinz fell behind on his mortgage payments on a couple of occasions and obtained loan modifications to bring him current. In 2016, he again defaulted and applied for loss mitigation assistance with Bank of America (BOA), the assignee of his loan.

In July 2017, Carrington began to service the loan. Carrington demanded that Heinz produce a loss mitigation package to prevent a foreclosure sale. Heinz sought assistance from the Minnesota Attorney General’s office, which represented him going forward. To avoid foreclosure, Heinz submitted his first loss mitigation application to Carrington on August 3, 2017. On August 8, Carrington acknowledged receipt of the application and requested more documentation. Additional contacts occurred over the next two months until the application was cancelled on October 8, 2017.

On October 12, 2017, Heinz submitted a second request for mortgage assistance to Carrington. More back and forth occurred into November, as Carrington determined that the application remained incomplete, although Heinz, to the contrary, alleged that Carrington told him his application was complete and had been sent to underwriting.

As they say at the track, opinions make horse races!

Carrington proceeded with the foreclosure sale on November 14, 2017, where BOA bought the property for $225,120, subject to a 6-month redemption period. One day after the redemption period expired, Carrington declined to rescind the sale, allegedly because the documentation for mortgage assistance had not been received.

In June 2018, Heinz sued Carrington, alleging, among other things, that Carrington had violated the Fair Debt Collection Practices Act (FDCPA) by falsely assuring Heinz that the sheriff’s sale would be postponed and by foreclosing on the property in violation of Minnesota’s dual-tracking statute. His claim covered pre- and post-foreclosure sale representations that the loan modification was under review and sent to underwriting and all documentation for loss mitigation applications was not received.

But this is how it came to shake out: the court granted summary judgment for Carrington. The lien foreclosure activities did not constitute “debt collection” under the FDCPA. And Heinz failed to point to any case law in the 8th Circuit suggesting that statements about mortgage foreclosures or loss mitigation applications related to “collection of a debt” within the meaning of the FDCPA. Furthermore, Heinz presented no evidence from which a reasonable jury could conclude that Carrington’s communications or conduct were in connection with the “collection of a debt” as the FDCPA requires.

None of Carrington’s alleged misrepresentations related to specific repayment terms. The challenged communications did not discuss the terms of the underlying debt, demand payment for the debt, or threaten additional collection proceedings.

Instead, Carrington was “actively engaged in a process to dispossess Mr. Heinz of the Property” and threatened foreclosure if Carrington did not receive the necessary documentation. These actions could only be considered “enforcement” of security interests pending the foreclosure sale. The “animating purpose” of the communications and conduct could not be appropriately described as seeking to collect the underlying debt.

Thus, the court, accepting Heinz’s allegations as true, acknowledged that “Mr. Heinz fully cooperated with Carrington to try to stop it from foreclosing on the Property. As such, Carrington’s actions during the foreclosure process…might appropriately be described as unfair….[But b]ecause the record does not suggest that Carrington sought to collect the underlying debt…, the law requires the Court to find in Carrington’s favor.”

Now, here is the point where you might wonder why the court never mentioned the U.S. Supreme Court’s decision in Obduskey v. McCarthy & Holthus LLP, 2019 (Mar. 20, 2019), which held that one principally involved in “the enforcement of security interests” is not a debt collector, except for the purpose of 15 U.S.C. § 1692f(6), the FDCPA provision that prohibits a “debt collector” from “[t]aking 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…; and (B) there is no present intention to take possession of the property; or (C) the property is exempt by law for such dispossession or disablement.”

I would point out that the case I’ve outlined involved the definition of “debt collection,” not the definition of “debt collector,” although similar policy concerns probably underly each holding.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

Backlogged Dispute Investigations

QUESTION

Our bank recently was put under an administrative action because we had failed to investigate credit disputes by the expiration of the investigation period. Several customers went so far as to complain to the CFPB and our regulator about it. 

We just don’t have the personnel to do the investigations quickly enough. Already two people have been terminated, one a supervisor, allowing this to happen. But that makes things worse because now we have even fewer personnel to work in doing these investigations. 

We need to get this fixed soon as the examiner is returning to check our compliance with their order. I am asking for your guidance: what should be done about handling dispute investigations, given our challenges?

ANSWER

You describe a situation that banks and nonbanks deal with all the time. It is frustrating, because you want to do the right thing and comply with the applicable regulations, but feel stymied by personnel, procedures, and a host of other issues.

Let’s look first at the guidelines by discussing briefly the Fair Credit Reporting Act (FCRA), which requires that when a furnisher receives notice of a dispute from a consumer reporting agency (CRA) pursuant to FCRA section 623(b)(1), the furnisher must complete its investigation of disputes “before the expiration of the period under section 611(a)(1)….” within which the CRA must complete its own dispute investigation.

This period of time is normally 30 days from the date the CRA receives a dispute and can be extended to 45 days in certain limited circumstances. For disputes filed directly with furnishers, Regulation V, which implements the FCRA, requires furnishers to conduct a reasonable investigation with respect to the disputed information and review all relevant information provided by the consumer with the dispute notice.

How to go about solving some of the challenges in providing a timely dispute investigation?

I do not know why the supervisor was terminated, but presumably she knew or should have known about this compliance issue. Let’s understand, examiners can’t stand backlogs of dispute investigations. Falling behind is going to attract regulatory scrutiny, whether from the CFPB or your primary regulator.

As a matter of fact, CFPB examiners recently found backlogs of disputes of which credit furnishers had received notice from the CRA but failed to conduct investigations or respond to the CRA. This was described to some extent in the CFPB’s Supervisory Highlights of Summer 2019 [84 Federal Register 49250 (September 19, 2019), and Fall 2019, 84 Federal Register 67725 (December 11, 2019)].

Examiners also found backlogs of thousands of direct disputes accumulated in document processing queues that had not been investigated or responded to at all. And when the furnishers discovered the backlogs, they had responded to disputes pursuant to methodologies that broadly categorized the correspondence, which resulted in the failure to undertake individual investigations of the disputes.

In one example, the furnishers had responded to disputes referred by CRAs and verified the disputed information as accurate without reviewing their own system records as part of the investigation. However, had the furnishers reviewed their records, they would have seen that some of the disputed accounts were, in fact, the result of identity theft.

In other cases, the furnishers had responded to CRA notices of dispute without verifying the accuracy of the disputed information and instead went with instructions to the CRA that the consumer should contact the furnisher directly and that the disputed information should not be deleted. Why not just wave a red flag for the examiners?

Examiners discovered system flaws, including coding errors and poor workstream management, that resulted in backlogs of complaints not investigated or responded to in a timely manner. Examiners also found inadequate control policies, poor resource allocation, and weak oversight that led to the results of dispute investigations not being sent to consumers.

Furthermore, the examiners found that some furnishers of information had failed to implement reasonable written policies and procedures regarding the accuracy and integrity of account information it furnished to nationwide specialty CRAs. Policies and procedures were also not appropriate to the nature, size, complexity, and scope of the furnishing activities. For instance, there were no written policies and procedures for handling disputes regarding account information from certain files. The existing policies also did not address compliance with the FCRA dispute requirements, such as the duty to conduct a reasonable investigation. There were also no policies and procedures for training, monitoring, or conducting internal audits regarding a business unit’s responsibilities to forward disputes of furnished information.

Finally, one or more furnishers failed to have policies and procedures for a business unit to conduct investigations of consumer disputes alleging account abuse caused by fraud.

Let’s take a look at the mistakes that others have made and learn from them.

Pitfalls of Outsourced Telemarketing

QUESTION

We need help with how to handle our third-party telemarketers. We use third-party telemarketers for a lot of purposes, such as contacting customers to offer overdraft protection or surveying actual and potential customers for loan products and services. What we believe we lack is a clear set of guidelines to manage these third-party telemarketers. How do we maintain oversight of these outsourced telemarketers?

ANSWER
If you are using third-party telemarketers but do not have a clear, unambiguous policy and procedures, fully monitored, periodically testable, and continually reviewed for such relationships, your financial institution is at high risk for regulatory violations.

So, let me begin this response with a stern warning: get compliance assistance immediately, no excuses, no explanations, and no dithering!

I will take the overdraft protection customers as a proxy for most other purposes of telemarketing. There is an “opt-in rule” under Regulation E that requires regulated financial institutions, before assessing overdraft fees, to obtain customers’ affirmative consent to covering overdrafts on automated teller machines (ATM) and one-time debit card transactions. Like any other bank regulation, this obligation applies whether the institution directly markets its debit card overdraft services or uses a third-party service provider to enroll customers in overdraft protection.

My answer is going to describe how a vendor’s aggressive marketing tactics violated Regulation E’s opt-in rule. I am going to provide an example of what can go wrong when the opt-in rule is violated, which is but one of many hurdles in the outsourced telemarketing space.

I am going to provide a Telemarketing Vendor Management Checklist that can be used to judge whether your institution’s vendor management policies are sufficiently comprehensive to stop telemarketing violations and thereby avoid tough regulatory enforcement actions. 

For the Telemarketing Vendor Management Checklist, click HERE. 

Or click below.

Outsourced overdraft telemarketing services can result in problems for banks that don’t closely monitor what the telemarketers are saying and doing. For instance, a large bank was sanctioned after the vendor it hired to sign card customers up for overdraft services failed to comply with the opt-in rule. In effect, the bank itself failed to comply because, according to an investigation by the Consumer Financial Protection Bureau (CFPB), the bank did not adopt internal controls that were adequate to the task of properly managing the vendor’s telemarketing behavior.

There are numerous internal controls. Here’s one: Call Calibration. What is it?

Call Calibration is a way to audit call sessions, whereby auditors listen to calls - either before or during the calibration session – and score them according to a specific set of metrics. The scores and findings are shared and any discrepancies are reconciled, either by refining the telemarketing scripts, for instance, or providing additional training for participants. A primary goal of call calibration is to assure that the telemarketers’ contact with the public conforms with regulatory compliance rules. Lenders Compliance Group is the only compliance firm with the widest array of mortgage compliance services that also offers Call Calibration compliance specifically designed for mortgage lenders.

For Call Calibration details, contact us for details, click HERE. 

Or click below.

Weaknesses in vendor management are among the types of compliance problems that may be revealed during a security incident or an internal audit. If the bank monitors and manages its outsourced telemarketing program, it should be able to substantially reduce its exposure to potentially million-dollar penalties as well as the cost of taking remedial actions after the violations come to light.

Don’t let this happen to your financial institution! Read on.

A national bank violated the opt-in rule and was charged with marketing and enrolling consumers in its account protection overdraft service in a manner that violated Regulation E, which implements the Electronic Fund Transfer Act.

The opt-in rule was adopted in 2009 when the Federal Reserve Board amended Regulation E. The rule requires financial institutions to obtain consumers’ affirmative consent – or opt in – to an overdraft service before assessing overdraft fees on ATMs and one-time debit card transactions. The opt-in rule also requires financial institutions to disclose any overdraft fees they will charge on covered transactions.

The opt-in rule had been in place for years, so the bank could not claim the need for time to transition from prior practices. When customer complaints grew, the CFPB investigated the bank’s overdraft service telemarketing practices and found cause to take enforcement action. To resolve the matter, the bank signed a consent order.

Is a Guarantor an Applicant?

QUESTION

We believe that a guarantor is not an applicant under the ECOA. However, we are getting conflicting views. Hopefully, this is a settled issue. So, is a guarantor also an applicant under the ECOA?

ANSWER

I applaud that you look to resolve conflicting views vis-à-vis matters involving regulatory compliance. So, thank you for asking this question. I will first give you a straight answer and follow with some discussion for you to consider.

The short answer is, a guarantor is not an applicant under the ECOA.

Now let’s get to the discussion.

I take you back to March 2016, when the U. S. Supreme Court, evenly split - because Justice Scalia had died - affirmed without opinion a lower court’s decision in Hawkins v. Community Bank of Raymore, 761 F.3d 937 (8th Circuit 2014). Hawkins affirmed summary judgment for a bank that allegedly had required Hawkins and Patterson to guarantee commercial loans solely because they were married to their husbands, in violation of the Equal Credit Opportunity Act (ECOA). The decision turned on the definition of “applicant.”

Consider this: the ECOA makes it unlawful for

“any creditor to discriminate against any applicant[,] with respect to any aspect of a credit obligation…on the basis of…marital status.”

The ECOA defines “applicant” to mean:

“any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.”

The 8th Circuit held that:

(1) the text of the ECOA clearly provides that a person does not qualify as an applicant under the statute solely by virtue of executing a guaranty to secure the debt of another, because a guaranty is not an application for credit; and

(2) because the ECOA language is unambiguous, the court did not need to defer to the definition of “applicant” in Regulation B.

But here's the rub: since 1985, Regulation B, the ECOA's implementing regulation, has defined the term “applicant” to include guarantors. 

At the time, Regulation B's definition of “applicant” continued to control outside the Eighth Circuit. NOTE: The Eighth Circuit includes Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.

In any event, the affirmance by the U.S. Supreme Court had no precedential value in any other circuit. So, let's move on.

Last year, the 11th Circuit joined two other circuits (the 7th and 8th Circuits) in holding that a guarantor is not an “applicant” under ECOA. [Regions Bank v. Legal Outsource PA, 936 F.3d 1184 (11th Cir. 2019)] NOTE: The 7th and 11th Circuits include Alabama, Florida, Georgia, Illinois, Indiana, Wisconsin.

I will spare you the extensive details of this litigation; however, the bottom line was that, according to the 11th Circuit, although a guarantor makes a promise related to an applicant’s request for credit, the guaranty itself is not a request for credit, and certainly not a request for credit for the guarantor. Put succinctly, to say that a guarantor requests credit by supporting another’s request for credit would push the bounds of ordinary usage “at the very least, it is to use one word in two obviously different senses. And to say that the guarantor applies for credit by supporting another’s application is to leave ordinary usage behind entirely.”

I think the court’s proffered illustration is worth considering, as follows:

Suppose a high-school senior is applying to her parents’ alma mater, and her parents – who happen to be wealthy donors – promise the school that they will make a large gift if their daughter is admitted. The parents’ promise supports the daughter’s application for admission, just as a guarantor’s promise supports a loan applicant’s application for credit. The parents will be grateful if their daughter is admitted, as a guarantor ordinarily is grateful when the debtor’s application for credit is granted. But it would be unnatural to say that the parents have “applied” for their daughter’s admission or to call them “applicants” for admission. Under any ordinary use of the word, the student is the only “applicant” in this scenario.

Thus, according to the court, an examination of the statutory text as a whole, with its use of the term “applicant” in other provisions, provides ample evidence that the term refers to a person who requests a benefit for himself. This lack of ambiguity rendered Regulation B’s interpretation of the term (as including guarantors) not entitled to judicial deference.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group