Debt Collection: Contact with the Consumer

QUESTION

We need help with revising our debt collection procedures. A few weeks ago, our regulator notified us that our debt collection policies are "defective" in the area of communicating with the consumer. We were shocked because we had passed previous exams. 

The two problem areas cited by the regulator involved the requirements for contact with the consumer and when an attorney represents the consumer. 

We have been in touch with your firm to help us with this project. However, I hope you will let other companies know about these issues since I’m sure they always come across them. 

What are the general requirements for communicating with a consumer for debt collection? 

Also, what is the prohibition against communicating with a consumer if an attorney represents the consumer? 

ANSWER

I will provide an answer that is generally responsive to your question. Keep in mind that the requirements of the regulatory framework that is foundational to debt collection, the Fair Debt Collection Practices Act (FDCPA), are rather vast, and there are plenty of regulatory minefields. We're glad to help you with a comprehensive policy document that reflects your compliance needs; however, much also depends on an institution’s size, complexity, and risk profile. 

Under the FDCPA,[i] a debt collector must have the prior consent of the consumer, or the express permission of a court of competent jurisdiction, to communicate with the consumer in connection with the collection of any debt. 

Essentially, there are three communication prohibitions. The debt collector should not contact the consumer 

1. At any unusual time or place or a time or place known or which should be known to be inconvenient to the consumer; 

2. Directly, if the debt collector knows the consumer is represented by an attorney concerning such debt and has knowledge of, or can readily ascertain such attorney’s name and address, unless

o   the attorney fails to respond within a reasonable period of time to a communication from the debt collector

o   or unless the attorney consents to direct communication with the consumer; or 

3. At the consumer’s place of employment, if the debt collector knows or has reason to know that the consumer’s employer prohibits the consumer from receiving such communication.[ii] 

I am often asked what constitutes an unusual or inconvenient time or place to contact the consumer. 

In the first place, without the required prior consent of the consumer or court authorization, 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. I hope I am making myself clear and unambiguous! Note, the term “consumer” includes the consumer’s spouse, parent (if the consumer is a minor), guardian, executor, or an administrator.[iii] 

Contact between 9:00PM and 8:00AM is presumed to be unusual and inconvenient.[iv] The Federal Trade Commission (FTC) has taken the position that contacts on Sunday are not presumptively unusual or inconvenient. But I advise you not to call a consumer on Sunday.[v] The courts and the FTC may view communications with certain types of employees at their places of employment as inherently inconvenient. Examples abound, such as contacting a nurse or doctor at a hospital or a waiter at the employing restaurant. 

So is there a rebuttal defense if the debt collector calls at an inconvenient time, date, or place? Not if the consumer has informed the debt collector, even casually or informally, that a particular time or place of contact is inconvenient. If the consumer informs the debt collector and the debt collector knows or should know that a time, date, or place is inconvenient, courts will generally find actual knowledge pertains. In fact, courts will often impose a burden of reasonable inquiry on the debt collector to determine what times or places are inconvenient. 

As to a debt collector learning – even indirectly or informally – that an attorney represents a consumer, the debt collector must contact only the attorney, not the consumer. The only exception that pertains here is obtaining the prior consent of the consumer or the attorney. 

But, there is no “should have known” language in the applicable statute. Consequently, it is more difficult to impute knowledge to the debt collector than under the FDCPA prohibition against contacting the consumer at an unusual or inconvenient time or place. Thus, if a debt collector knows that an attorney represents a consumer with respect to a debt, the debt collector is not required to assume similar representation with respect to other debts the consumer owes.[vi] A creditor’s knowledge of a consumer’s representation is not automatically imputed to the debt collector. 

Plenty of FDCPA cases wind up in court. Courts will vary in deciding what contacts are subject to restriction when a debt collector knows the consumer is represented by an attorney and what constitutes a valid nullification of the restriction.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] Fair Debt Collection Practices Act (FDCPA), 15 USC § 1692c(a)

[ii] Idem

[iii] 15 USC § 1692c(d)

[iv] 15 USC § 1692c(a)(1)

[v] FTC Staff Commentary on FDCPA, § 805(a)

[vi] FTC Staff Commentary on FDCPA, § 805(a)(3)

Imperative of Pre-Funding Quality Control

QUESTION

My problem is that I have a CEO who does not want to do pre-funding quality control. When I insist on it, then we do it for a while. But he cuts it off again and again. He says our investors only care about post-closing quality control. 

Last month, one of our investors wanted to see our pre-funding quality control reports and checklists. Well, we had the checklists, but we only had a few pre-funding QC reports. Somehow, the word got out, and other investors are now asking for these things. 

Yesterday, we got a letter from Fannie Mae that singled out that we did not do pre-funding QC. The CEO called us into his office, showed us the letter, and admitted he was wrong. In the meantime, he's telling us to put pre-funding QC into action immediately. 

I am so frustrated I could scream! This was all avoidable. I want you to write something that I can show the CEO so that he understands what has happened and I don't have to deal with him again on this issue. 

Why is pre-funding quality control important, useful, and required? 

ANSWER

You deserve a badge of honor for warning your management all along. Sometimes, management thinks it is smarter and wiser than those handling the departments and functions. Good managers listen, learn, and are open to staff suggestions; bad managers pontificate and dictate. So, I am going to respond as if I were talking to your CEO. 

Mr. CEO, listen up! 

I have no skin in the game, but you do – and you have put your enterprise at risk. When you start to cut corners with investors, they will cut you out. Trust me, I've seen it happen many times. First, it's a letter. Then it's a per-file audit. Then it's a warning to restrict loan originations, putting you on a tight leash. The repurchase threats will accumulate. Keep it up and you're out. If Fannie gets burned, expect other investors to drop you. Game over! 

So let me give you some guidance. I suggest you give it your undivided attention. 

Think of pre-funding QC as a process, a tool to obtain real-time loan quality information about the loan you want to sell to investors. Without pre-funding reviews, you cannot proactively gauge the risk in advance while the loan is being originated. Post-closing and investor audits are "look-backs;" pre-funding QC reviews are "look-forwards." 

Read your Reps and Warrants – are you really sure you meet them without a pre-funding check? The fact is, an ineligible loan can lead to repurchase risk and impact your bottom line due to the time and effort needed to remediate defects. Get it right in the pre-funding stage, given that eligible loans are ostensibly eligible because they pass positively through pre-funding, notwithstanding that you have some confidence that the borrowers are in a sustainable home loan. 

And there are derivative benefits to your company. For instance, From point of sale to closing, insights are gained into the loan flow process – the very process in which specific risk elements, such as income calculation opportunities, appraisal quality, and fraud – can be identified early. Furthermore, pre-funding reviews allow management to implement initiatives to prevent recurring systemic or incidental errors. 

You need to keep pre-funding quality control separate from operations. Obviously, the purpose of pre-funding can be thwarted if the underwriters are evaluating their own decision process. How will a good understanding of loan quality be obtained if the pre-funding review does not provide independently derived information? 

Perhaps your organization's reporting structure doesn't have the capacity to separate these duties. That means you are exposed to increased risk, leading to potential conflict of interest, which can cause a failure to maintain an impartial view of your loan origination performance. If you can't provide internally independent personnel, you should use externally independent resources. Many audit firms, including mine, provide this service. Our LCG Quality Control pre-funding reviews are reasonably priced and cost-effective. You can contact us HERE. And visit our pre-funding QC audit overview HERE. We are very hands-on, as that is the only effective way of conducting pre-funding QC reviews. 

Whatever the case, you should deploy guardrails. For example, adverse pre-funding QC findings should not be overridden without conclusive and appropriate documentation. The Quality Control Plan needs to reflect an audit process that includes the pre-funding reviews, whether conducted internally or externally, to ensure that quality control procedures are performed correctly and independent from undue influence. 

As a CEO, you must ask the right questions if you are going to get useful answers. Here are four questions that I want you to discuss with your QC staff.

 

1. Does the pre-funding QC process lead to decisions that drive organizational change?

 

2. Does our Quality Control Plan detail the pre-funding process, setting expectations for all relevant stakeholders, departments, functions, and investors?

 

3. How confident are you that your pre-funding department operates independently from outside influence?

 

4. Is your QC plan compliant with Fannie Mae guidelines, such as:

·       Timing of the review,

·       Loan selection process,

·       Verification of data and documents, and

·       Reporting. 

These are the actions you should take in concert with your staff:

 

·     Review your Quality Control Plan to ensure all required pre-funding elements are included.

 

·     Determine if an audit process is in place to confirm that pre-funding QC is fully independent.

 

·     Review your pre-funding reporting to confirm it complies with investor guidelines regarding timing, process flow, and content.

 

·     Review your pre-funding QC reporting to improve the information provided to management.

A good suggestion is for you to use our QC Tune-up, which will let you know if your QC department and plan are properly interfaced internally and externally. For more information, contact us HERE. 

Finally, I will share with you some of the recurring findings that occur in our pre-funding QC reports. If you haven't been doing pre-funding reviews continually, you may have only a sparse understanding of these risks (and other risks) to which you have needlessly exposed your company. 

Untimely Selection of the Loan. This is a weak link because the timing of the pre-funding QC significantly affects the amount of information in the file. You should choose loans early enough in the origination process to complete all review steps but also at a point when sufficient information validates a correct credit decision. Your threshold metric must be a process that meets both the criteria for timing and validation. Ensuring the proper evaluation (i.e., timing and validation) is the basis for implementing a detailed remediation process. And, without exception, if the loan is acquired from a Third Party Originator (TPO), the pre-funding review should be performed pre-purchase. 

Defective Loan Selection Process and Quality Control Plan. You must document the pre-funding loan selection process and set forth the selection criteria in the Quality Control Plan, meaning you should:

·       Establish a process for loan selection,

·       Determine how often the selection criteria are revisited, and

·       Determine who is responsible for changing the selection criteria. 

Loans with a greater chance of errors, misrepresentation, or fraud should be selected in the pre-funding sample. Essentially, experience has shown that by tracking errors, the lender can select high risk loans and loans with a greater chance of having a defect. This is the reason behind discretionary sampling. A word about discretionary sampling is in order. The pre-funding sample method based on certain selection criteria includes emerging risks, testing of action plans, validation of employee, TPO performance, or targeting a specific component, such as complex income calculations. The discretionary pre-funding QC, therefore, leads to improved loan quality. 

Right to Cancel or Right to Rescind

QUESTION 

We did not get a receipt for a Notice of Right to Cancel. We usually do, but we messed up in this case. 

The borrower wants to rescind the loan, even though we closed the loan well over a year ago, outside the rescission period. She is claiming that she didn't receive the Notice. But she also says the right to rescind is tantamount to the right to cancel. So, she should be able to cancel the loan. 

We have never had a borrower make such a claim. How could she think that rescinding a loan somehow means she can cancel it? It makes no sense. 

How is it that a borrower can mix up the right to rescind with the right to cancel? 

And, how important is it to get a receipt for the Notice of Right to Cancel? 

ANSWER 

Financial people may not realize that a consumer does not necessarily understand the meaning of specific mortgage banking words, or maybe they do, but the meaning is not what they expect it to mean. 

“But 'glory' doesn't mean 'a nice knock-down argument,'” Alice objected.

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean – neither more nor less.”

“The question is,” said Alice, “whether you can make words mean so many different things.”

“The question is,” said Humpty Dumpty, “which is to be master – that’s all.”

Alice in Wonderland, Lewis Carroll 

Would you know what "rescind" means if you weren't a financial person? You might; then, again, you might not! Or, you might know what "cancel" usually means, such as voiding an arrangement, contract, or obligation of some kind, but you might not know what canceling has to do with rescinding – especially if you don't know what rescinding means. 

Unless specifically exempted by the Truth in Lending Act (TILA), for any credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, Regulation Z[i], TILA’s implementing regulation, gives each consumer residing in the subject dwelling whose ownership interest is (or will be) subject to the security interest the right to rescind the transaction. 

A case comes to mind that resembles some of your issues, although it concerns a trust. But, in this instance, that’s alright since credit extended to a trust established for tax or estate planning purposes is considered credit extended to a natural person.[ii] These trusts are considered consumers entitled to TILA disclosures and the right to rescind. 

The case is Alejandro v Freedom Mortgage Corp.[iii] It partially touches on your concerns in a way that helps to respond to your question. 

On January 22, 2021, Olivia Alejandro, individually, and Olivia Alejandro and Jonathan Alejandro, trustees of the Alejandro Family Revocable Living Trust, obtained a mortgage loan from Finance of America Mortgage to refinance a prior mortgage loan secured by their home. On March 26, 2021, the mortgage note was assigned to Freedom Mortgage Corp. (“FMC”). 

On March 8, 2022, the Alejandros filed a complaint, alleging violations of TILA and the FDCPA. They claimed they had not received notices of their right to rescind and all the required TILA disclosures. They also claimed FMC had harassed them by calling them "almost every day at our workplace" and at home, "sabotaged" their credit ratings, "defamed our character," and "sunk our credibility." 

The court dismissed the claims. Their Fair Debt Collection Practices Act (FDCPA) claim failed because the Alejandros had not alleged facts to show that FMC fell within the definition of "debt collector." Specifically, none of their allegations suggested that FMC was (1) an entity whose most important aim was the collection of debts; (2) collecting the debts of another; or (3) a servicer assigned the loan after it went into default. 

As happened with your loan, the TILA damages claim was time-barred because the Alejandros filed their claim more than one year after the alleged violation. 

However, it is the rescission claim that I want to zero in on. Their TILA claim for rescission failed because the Alejandros had not alleged any facts to rebut the presumption of delivery created by their signing of the "Notice of Right to Cancel" that FMC attached to its motion to dismiss. 

Similar to the assertion made by your borrower, the Alejandros made an unusual argument that the "Notice of Right to Cancel" they received was misleading because it used the term "cancel" instead of "rescind." So much for plain language! But it might be interesting to survey the public to determine how many people know what the term "rescind" means or whether they have ever heard the term outside the TILA context. In any event, the court rejected this argument because the notice contained substantially similar language and an identical heading, "Notice of Right to Cancel," as the model rescission (i.e., cancellation) forms set out in Regulation Z. 

Even if the claim was timely, though, the TILA claims failed because they were inadequately pleaded: the Alejandros had not alleged that the violations were apparent on the face of the disclosure documents, as necessary to charge the assignee with liability. The notices attached to the motion to dismiss did not reveal any apparent TILA violations. 

A brief thought about assignees. Assignees are exempt from any alleged disclosure violations except as provided under TILA[iv]. TILA[v] provides, in essence, that assignees may be liable for disclosure violations only if the disclosures are apparent on the face of the disclosure statement, except when the assignment was involuntary. A "violation apparent on the face of the disclosure statement" is held to include, but is not limited to, either (1) a disclosure that can be determined to be incomplete or inaccurate from the face of the disclosure statement or other documents assigned, or (2) a disclosure that does not use the precise terms required to be used by TILA and Regulation Z. TILA also excludes high-cost mortgage loans from the general rule exonerating assignees.[vi] 

My view is that it is useful and often critical to obtain signed acknowledgments of the receipt of disclosures, including receipt of the "Notice of Right to Cancel." Under TILA[vii] written acknowledgments are specifically addressed, with a limitation: 

"Notwithstanding any rule of evidence, written acknowledgment of receipt of any disclosures required under [TILA] by a person to whom information, forms, and a statement is required to be given pursuant to [TILA § 125 (right of rescission)] does no more than create a rebuttable presumption of delivery thereof." 

Thus, although TILA does not elsewhere so provide, this TILA subsection certainly implies that a written acknowledgment of receipt of disclosures in a nonrescindable transaction would be at least some evidence that the disclosures were actually received. 

TILA offers even more specific protection to assignees, except as to rescindable transactions: 

"[I]n any action or proceeding by or against any subsequent assignee of the original creditor without knowledge to the contrary by the assignee when he acquires the obligation, written acknowledgment of receipt by a person to whom a statement is required to be given pursuant to [TILA] shall be conclusive proof of the delivery thereof and, except as provided in subsection (a), of compliance with [TILA chapter 2]."[viii] 

This TILA subsection does not affect the obligor's rights in any action brought against the original creditor (as opposed to an assignee). 

One final observation: Regulation Z generally provides that the segregated closed-end disclosures (including the TILA disclosures that must be presented in a "federal box")[ix] may not contain any information not directly related to their required disclosure items, and the regulation expressly authorizes the inclusion of an "acknowledgment of receipt" among the segregated disclosures or in the federal box. 

We’ll let Humpty have the last word, words being his expertise: 

“So here’s a question for you” [says Humpty]. "How old did you say you were?”

 Alice made a short calculation, and said “Seven years and six months.”

 “Wrong!” Humpty Dumpty exclaimed triumphantly. “You never said a word like it.”

“I thought you meant ‘How old are you?’” Alice explained.

“If I’d meant that, I’d have said it,” said Humpty Dumpty.

Alice in Wonderland, Lewis Carroll

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

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[i] Regulation Z § 1026.23(a)(1)

[ii] Comment 2(a)(11)-3 clarifies that "Credit extended to trusts established for tax or estate planning purposes, as described in comment 3(a)-10, is considered to be extended to a natural person for purposes of the definition of consumer."

[iii] Alejandro v. Freedom Mortgage Corp., 2022 U.S. Dist. (E.D. Pa. June 8, 2022)

[iv] TILA § 131(a) and (d) (12 U.S.C. § 1641)

[v] TILA § 131(a)

[vi] TILA § 131(d)

[vii] TILA § 125(c) (12 U.S.C. § 1635)

[viii] TILA § 131(b)

[ix] A “federal box” is a place on the document where all TILA disclosures are grouped together, separating them from all other information. It is a term for the TILA disclosure requirements set forth in Regulation Z § 226.17.

Customer Satisfaction and RESPA

QUESTION

We originate and service our loans. When we get a QWR, our team determines how to handle the response. 

Recently, we received a QWR from a borrower’s attorney that is causing concern. He claimed that we had confused the borrower in the way we responded. He said our service was “lousy” and felt we had no commitment to “customer satisfaction.” 

This attorney letter is being treated as a complaint, and we sent it to our legal department. When we looked at the notes on the loan file, it appears we were courteous, timely, and reasonable. Sometimes, it seems you just can’t win! 

However, we want to know how something done right can be construed as done wrong. 

How important is customer satisfaction in response to a QWR? 

ANSWER

If you monitor servicing processes regularly for appropriate compliance and update them as needed, there will still be such wayward claims from time to time. Customer satisfaction is subjective, but it presents certain evaluative metrics. Perhaps a way to view it is how happy a consumer is with products and services. Determining this likely requires surveys and encouraging customer feedback. 

But when you get a complaint, treat it with considerable care. It can fester into all manner of annoying legal and regulatory issues if left unattended. That said, no provision in RESPA requires you to guarantee customer satisfaction! 

RESPA and Regulation X require mortgage loan servicers to respond to a mortgage borrower's Request for Information (RFI) and Notice of Error (NOE). This rule results from the Dodd-Frank Act’s expansion of the scope of RESPA’s complaint handling requirements beyond the previously existing Qualified Written Request (QWR) requirements. 

RESPA defines a QWR to mean 

“… a written correspondence, other than notice on a payment coupon or other payment medium supplied by the servicer, that –

(i) includes, or otherwise enables the servicer to identify, the name and account of the borrower; and

(ii) includes a statement of the reasons for the belief of the borrower, to the extent applicable, that the account is in error or produces sufficient detail to the servicer regarding other information sought by the borrower.” 

In my estimation, the QWR requirements have probably become the most litigated topic in mortgage lending cases filed in the federal courts, with at least 50 reported court decisions in the first 8 months of 2022 and more than 3,600 decisions since 1994. In many cases, the servicer failed to respond in a timely or responsive manner; however, sometimes, the servicer appears to have done almost everything correctly – or, to paraphrase you, they did right but were construed to do wrong. 

But claiming lousy customer satisfaction is not a great winning argument. Take the case of Rakestraw v. Nationstar Mortgage, a U.S. Court of Appeals decision for the 11^th Circuit.[i] Rakestraw sent Nationstar Mortgage an RFI requesting a complete payment history, a certified copy of the original note, and a signed affidavit from someone in the company stating that the note was an original, not a scanned copy. 

Two days later, Nationstar responded with a copy of transaction histories and a copy of the note and security instrument. The response also included a statement that Nationstar could not provide a certified copy of the note and signed affidavit until the loan was paid in full. But it informed Rakestraw of the location of the originals, and gave a name and contact information for more assistance. 

Five months passed, and Rakestraw sent another RFI asking for a complete payment history. Four days later, Nationstar responded with a copy of an updated transaction history for the period during which it serviced the loan, along with the transaction history from the previous servicer. The response indicated that some of the transaction history from a previous servicer, which had been provided in response to the first RFI, was difficult to read and suggested Rakestraw directly contact that servicer if she wanted a different version. Nationstar also explained that it could not attest to how funds had been disbursed from escrow by prior servicers. 

Rakestraw then sent a third RFI, again seeking a complete transaction history, a certified copy of the original note, and an affidavit attesting to the note’s authenticity. Nationstar responded six days later. 

In that same month, Rakestraw sent yet another RFI seeking a complete breakdown and stating that Nationstar had not yet provided detailed accounting information for the loan. Nationstar responded two days later, providing account histories for the entire life of the loan, a code sheet for the servicer’s own transaction history, contact information, and its response to the previous RFI. 

Rakestraw sued Nationstar, alleging that it had violated RESPA by “refus[ing] to provide [a] complete and comprehensible account history … and the explanation … of charges and credits” that she had requested in four separate RFIs. 

The district court granted summary judgment for Nationstar, finding that its responses had complied with RESPA and that it had “performed a ‘reasonable search’ as required by RESPA” in connection with the borrower’s RFIs relating to a previous servicer. 

The court also found that Rakestraw had failed to show: 

(1) a material issue as to whether the responses complied with RESPA; 

(2) whether Nationstar had conducted a reasonable search regarding records of a prior servicer; 

(3) whether Rakestraw had incurred actual damages; and 

(4) whether Nationstar’s conduct entitled Rakestraw to statutory damages. 

The 11th Circuit affirmed. 

The undisputed evidence showed that the responses to the RFIs were not “incomprehensible” for two reasons: 

(1) To the extent Rakestraw was struggling to understand the account histories, she kept it to herself until submitting the fourth RFI, at which point Nationstar provided a code sheet, which included the information she requested; and 

(2) Rakestraw pointed to nothing in the record showing that the transaction histories actually were “incomprehensible.” According to the court, “[b]orrower satisfaction is not the standard by which we measure a servicer’s response to a request for information, and [the borrower’s] confusion does not equate to a RESPA violation.” 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] Rakestraw v. Nationstar Mortgage, LLC, 2022 U.S. App., 11th Cir. Mar. 4, 2022