Identifying a Qualified Written Request

QUESTION 

We are a medium-sized servicer with a servicing portfolio in almost all jurisdictions in the United States. I am an attorney who heads the team evaluating Qualified Written Requests (QWR). We recognize there are specific elements to a QWR. However, sometimes, it feels like a judgment call to determine what is or is not a QWR. 

I often find myself taking deep dives into RESPA’s Regulation X and case law to interpret whether a letter from a borrower constitutes a QWR or a complaint, each with obviously different – though sometimes overlapping – resolution criteria and statutory obligations. There are many instances where the letter is both a QWR and a complaint. 

My focus is on determining whether we have received a bona fide QWR. I was wondering if you could provide some guidance in navigating this legal jungle and provide a case that shows how a court has offered a way to identify a QWR. 

What constitutes the requirements for a Qualified Written Request? 

Is there a case with some guidelines for identifying a Qualified Written Request? 

COMPLIANCE SOLUTION 

Policies and Procedures 

ANSWER 

You have asked a question that involves one of the more litigious areas of servicing compliance. The Qualified Written Request (QWR) provisions of RESPA continue to produce an abundance of litigation. 

Generally, the court decisions typically use the more general statutory term QWR as they consider borrower claims regarding Notices of Error (NOEs) and Requests for Information (RFIs), the specific types of QWRs described in Regulation X[i].

Before proceeding with a possible case for you to consider, allow me to put down some foundation. 

RESPA[ii] specifies that 

“[d]uring the 60-day period beginning on the date of the servicer’s receipt from any borrower of a qualified written request relating to a dispute regarding the borrower’s payments, a servicer may not provide information regarding any overdue payment, owed by such borrower and relating to such period or qualified written request, to any credit reporting agency.” 

Similarly, Regulation X[iii] provides that, after receiving an NOE, a servicer may not, for 60 days, furnish adverse information to any consumer reporting agency regarding any payment that is the subject of the notice of error. 

This does not limit or restrict a servicer or lender from pursuing any remedy under applicable law, including initiating foreclosure or proceeding with a foreclosure sale, except for the Regulation X restrictions regarding assertions of errors relating to: 

(a) a first notice or filing required by applicable law for any judicial or nonjudicial foreclosure process in violation of Regulation X[iv]; or 

(b) a motion for foreclosure judgment or order of sale or conducting a foreclosure in violation of Regulation X[v]. 

Now, let's move on to a case that may be responsive to your inquiry. 

On remand from a decision of the U.S. Court of Appeals for the 4th Circuit, a federal district court in Maryland recently considered whether a borrower inquiry was a QWR and, if it were, then whether the servicer had violated the restriction on furnishing adverse information to a consumer credit reporting agency. The case is Morgan v. Caliber Home Loans, Inc.[vi] 

Here’s my outline. 

·       In 1998, Morgan borrowed from Nations Bank to refinance his home mortgage loan. Morgan modified the mortgage loan once to change the date of his monthly payment. 

·       In November 2014, after the loan matured, servicing was transferred from Bank of America to Caliber. At the time of the transfer, the loan documents showed an outstanding balance due on the loan. Morgan repeatedly contacted Caliber about the purported outstanding loan balance. 

·       Morgan learned through an employer-generated credit check that his credit report reflected a $16,806 arrearage on the loan. The employer told Morgan he needed to correct the adverse credit reports or he would lose opportunities for job promotions. 

·       Over the next year, Morgan continued receiving notices regarding the outstanding balance. 

·       On September 20, 2016, Morgan called Caliber to inquire about the notices because he believed the loan had been paid off. He learned during that call that the balance had increased to $30,656.89. 

·       On September 25, 2016, he sent Caliber a letter stating: 

o   “I called Caliber and talked to [an employee]…he stated I owe $36,656.89…Can you please correct your records. Your office’s reporting this wrong amount to this credit agency is effecting [sic] my employment. Please correct your records.” 

·       Caliber received the letter and responded in writing the next day. 

·       In its October 4, 2016 letter, Caliber acknowledged receipt and stated it would “perform the necessary research and respond within the time period required by law.” 

·       Two days later, Caliber determined that the previously reported loan balance was incorrect. It recalculated the balance as $8,823. 

o   That same day, Caliber reported the new balance information to the credit reporting agencies using an Automated Universal Data form (AUD). 

·       Caliber also suspended its monthly report to the credit reporting agencies regarding the loan from October 6, 2016 through March 2017.

·       On October 11, 2016, Caliber informed Morgan that the credit report was “inaccurately reporting the amount past due.” 

o   The letter vaguely referred to Caliber having corrected the inaccuracy. Still, it did not explain what was inaccurate and how that error was corrected, and it did not share with Morgan that, in Caliber’s view, he still owed $8,823 on the loan.

o   The letter added that it might take up to four weeks before the “correct information” would appear in his credit report. 

·       Morgan continued to dispute that he owed anything and sent letters to the credit reporting agencies. According to Morgan, the notice from his employer regarding his poor credit and the dispute regarding the outstanding balance caused him emotional distress. 

·       On September 23, 2019, he sued Caliber for violating RESPA and Regulation X. 

The district court dismissed Morgan’s claim, holding that his September 25, 2016 letter did not meet RESPA’s requirements for a QWR. However, the U.S. Court of Appeals for the 4th Circuit reversed, finding that the letter was a QWR. 

On remand, Morgan moved for partial summary judgment as to liability only, and Caliber filed a cross motion for summary judgment as to liability and damages. 

The district court granted Morgan’s motion as to two of the three elements of the RESPA claim (QWR, and failure to refrain from credit reporting, but not as to damages). It granted Caliber’s motion as to the unavailability of statutory damages. 

Now, I want to break the foregoing decision into its three elements: QWR, Failure to Refrain, and Actual Damages. Thereafter, I will provide a few words about statutory damages. 

QWR 

First, the court concluded, as required by the 4th Circuit, that the letter was a QWR because it was “a written correspondence” that articulated a “statement of reasons” in “sufficient detail” to indicate to Caliber why Morgan believed the credit reporting was in error. The court granted summary judgment to Morgan on this element. 

Failure to Refrain 

Second, the parties did not dispute that within 3 days of receiving the QWR, Caliber submitted an AUD informing the credit reporting agencies that Morgan had $8,823 outstanding, and that this qualified as reporting an “overdue payment.” Accordingly, Caliber indisputably failed to refrain from reporting “any overdue payment” for 60 days after having received the QWR. The court also granted summary judgment to Morgan on this element. 

Actual Damages 

Third, the court determined that Morgan had produced sufficient evidence from which a reasonable juror could conclude that he suffered emotional distress as a result of the AUD Caliber sent to the credit reporting agencies. 

The mother of Morgan’s children had observed that Morgan was “worried and anxious,” which was “unlike Morgan.” When she asked what was troubling him, he would “almost always turn to Caliber.” His daughter recalled that while living with Morgan during this time, he was “anxious about Caliber hurting his financial status,” Morgan “regularly paced around,” he was “short tempered,” and could not eat. Morgan also sought medical assistance for his anxiety and depression. 

From this testimony, a juror could reasonably conclude that he suffered emotional distress due to Caliber’s failure to refrain from reporting adverse information in the AUD. This left a facial issue as to whether Caliber’s RESPA violation proximately caused Morgan’s emotional distress. Accordingly, the court denied summary judgment for Caliber as to actual damages. 

Statutory Damages 

Morgan also sought statutory damages, which RESPA allows when a servicer engages in a “pattern or practice of noncompliance” with RESPA. 

Morgan argued that Caliber’s single AUD constituted a pattern or practice because Caliber had forwarded it to three credit reporting agencies and violated multiple RESPA provisions. 

Not so, said the court, because Caliber submitted only one AUD on one occasion. If this alone were sufficient to establish a pattern or practice, then the pattern or practice requirement sufficient to trigger statutory damages would apply in almost every case. The court granted summary judgment to Caliber regarding statutory damages. 

I will conclude with an observation. 

The court noted that Morgan might wish to pursue an alternative argument that Caliber violated Regulation X[vii], which requires a servicer to respond to an NOE by either correcting the error and providing written notification of the correction, or conducting a reasonable investigation and providing a written notice that no error occurred. Thus, a legitimate argument could be made that Caliber did not satisfy the notification requirement, that is, it did not describe the error, how it was corrected, or the effective date of the correction. 

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

Lenders Compliance Group

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[i] Regulation X §§ 1024.35 (NOEs) and 1024.36 (RFIs), as amended by the 2013 Mortgage Lending Rules.

[ii] See RESPA § 6

[iii] § 1024.35

[iv] § 1024.41(f) or (g)

[v] §1024.41(g) or (j)

[vi] Morgan v. Caliber Home Loans, Inc., 2024 U.S. Dist. (D. Md. Feb. 22, 2024)

[vii] § 1024.35(e)(1)(i)(B)

Bankruptcy Still Requires Periodic Statements

QUESTION 

Recently, our internal auditors found that we were not sending our borrowers periodic statements for the billing cycle. As a servicer, we are well aware that this should be done. However, what happened is the borrowers who did not receive the statements were in bankruptcy, so we stopped sending them statements. 

Our position was that there could be no more periodic statements because no more borrower payments were expected, so no more billing was needed. However, the internal auditors said we were wrong to stop billing. 

Frankly, sending periodic statements to a borrower who filed for bankruptcy makes no sense. Maybe you could shed some light on whether the auditors are correct. You may know of a situation or case where periodic statements should still be sent, even if the borrower went into bankruptcy. 

Is a servicer required to provide periodic statements for loans involving bankruptcy? 

COMPLIANCE SOLUTION

Servicing Quality Control Audits

ANSWER 

The answer to your question may surprise you. The Truth in Lending Act (TILA) requires a servicer to provide a periodic statement “for each billing cycle.”[i] A federal district court in California recently considered and rejected a servicer’s argument that it was not required to provide statements for loans it considered “matured.” 

Let's set forth some foundational information before I get to the servicer’s defense. The January 2013 Regulation Z Servicing Rule amended Regulation Z.[ii] In particular, the amendment generally requires mortgage loan servicers (other than small servicers) to provide periodic statements for any closed-end consumer credit transaction secured by a dwelling.[iii] The provision deals primarily with content requirements.[iv] 

Now, for that sample “situation or case” you requested. I have in mind the case of Naranjo v. Bank of America.[v] The moral of this story is to continue sending mortgage statements until a loan is paid off or forgiven. That said, TILA offers an exception for bankruptcy cases. But I get ahead of myself. 

In August 2006, the Naranjos obtained a secondary mortgage loan from Golden Empire and secured the loan with a Deed of Trust on their home. Bank of America, Veripro Solutions, and West Coast were successive servicers of the loan. The documents required the loan servicers to provide monthly statements. 

Sometime between 2006 and 2012, the Naranjos defaulted on their loan, and in February 2012, they filed for Chapter 7 bankruptcy protection. When the Naranjos received a notice of default and foreclosure a decade later, in January 2023, they filed a temporary restraining order application, which the court converted to a motion for a preliminary injunction. The complaint asserted claims for TILA and Real Estate Settlement Procedures Act (RESPA) violations, breach of contract, and other claims. 

However, the Naranjos alleged that they had thought their bankruptcy case had extinguished their debt. 

The court granted in part and denied in part the motion for a preliminary injunction and also granted in part and denied in part the servicers’ motion to dismiss. 

The court found that the Naranjos had properly alleged that their loan servicers had failed to send any statements since at least 2012, violating TILA. They were not required to allege causation to establish the TILA violation, a finding that the 9th Circuit had previously emphasized, stating that 

“even technical or minor violations of the TILA impose liability…to ensure that the consumer is protected.” 

The court further found that, even if there were a causation requirement, the Naranjos plausibly stated a claim because they alleged injury in the form of the threat of foreclosure and the interest that had accrued during the time they believed the loan had been discharged – both injuries the Naranjos plausibly could have avoided had they received timely statements. 

The court noted that the reasonableness of the Naranjos’ belief that their loan had been extinguished was a factual issue not properly resolved on a motion to dismiss. 

According to the court, the Naranjos had sufficiently pled that the servicers had violated Regulation Z by failing to send monthly statements. The court rejected the argument that servicer West Coast had no obligation to send statements because the loan had “matured” before it became the servicer; that is, because the loan had “matured,” no billing cycles remained within the meaning of the regulation’s requirement that a loan servicer must provide a statement “for each billing cycle.” 

However, the fact that the loan had “matured” made no difference in the obligation; such an unstated limitation would not serve the purpose of the regulation, which was to provide mortgagors with information about the amount they were expected to pay on their loans. 

The court denied the motion to dismiss a claim that the servicers’ conduct was unfair under California’s Unfair Competition Law. The Naranjos sufficiently alleged that the defendants had neglected their obligations to the Naranjos for a decade, leaving them to believe that the loan had been forgiven, only to be revived once they had built up enough equity in their home for it to be worth being foreclosed upon. 

They also asserted that the activity that led them to believe the loan had been forgiven allowed interest and fees to accumulate that would not otherwise have accumulated. 

Regarding the moral of this story, on October 16, 2013, the CFPB added to Regulation Z an exemption for a servicer concerning periodic statement requirements while the consumer is a debtor in bankruptcy.[vi] 

The CFPB modified this exemption, effective April 19, 2018. The CFPB had received comments seeking more detail on statements in the original Servicing Rule’s preamble regarding bankruptcy. The preamble had acknowledged that the Bankruptcy Code might prevent attempts to collect a debt from a consumer in bankruptcy, but stated that the Bureau did not believe the Bankruptcy Code would prevent a servicer from sending a consumer a statement on the status of the mortgage loan. The CFPB had also specified that the final rule allows servicers to make changes to the periodic statement they believe are necessary when a consumer is in bankruptcy. For example, a servicer could include a message about the bankruptcy and alternatively present the amount due to reflect payment obligations determined by the individual bankruptcy proceeding.[vii] 

The exemption was part of an interim rule exempting servicers from the TILA requirements[viii] while the consumer was a debtor in bankruptcy. To exempt a mortgage loan from the normal periodic statement requirements where any consumer on the loan is a debtor in bankruptcy[ix] or has discharged liability for the mortgage loan[x], the following must take place: 

(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 with regard to the dwelling securing the loan, or requiring the servicer to cease providing a periodic statement or coupon book; or 

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

This 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).[xi] 

Instead of the normal periodic statement, while any consumer on a mortgage loan is a debtor in bankruptcy or if the consumer has discharged personal liability for the mortgage loan[xii], a servicer must provide a modified periodic statement. The modified periodic statement may omit the normally required information regarding late fees, length of delinquency, risks of delinquency, and delinquent account history, and it need not show the amount due more prominently than other disclosures. A servicer then transitions to providing the normal periodic statement when the loan ceases to be subject to discharge, the debtor exits bankruptcy, or the bankruptcy exemption no longer applies.

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

Lenders Compliance Group

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[i] § 1026.41

[ii] Including § 1026.41, which implements TILA § 128(f), added by § 1420 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

[iii] Ibid

[iv] Appendix H-30 offers sample forms, which are properly used to provide a safe harbor for compliance.

[v] Naranjo v. Bank of America, 2023 U.S. Dist. (C.D. Cal. Nov. 17, 2023)

[vi] § 1026.41(e)(5)

[vii] Commenters sought clarification on reconciling the periodic statement requirements with various bankruptcy law requirements. They expressed concerns that bankruptcy courts, under certain circumstances, might find a servicer in violation of bankruptcy’s automatic stay or discharge injunction if the servicer provided a periodic statement, whether or not it included a disclaimer. Also, servicers had expressed concern about fulfilling the Regulation Z requirements in a way that did not confuse consumers regarding their status in bankruptcy, and that servicers were not attempting to collect on accounts. Others had asked questions about possible consumer confusion depending on what “amount due” and “payment due date” servicers would disclose in a Chapter 13 case that has different pre-petition arrearage cure payments and post-petition monthly payments, which might be due on different dates.

[viii] Op. cit. i

[ix] Under Title 11 of the U.S. Code

[x] Pursuant to 11 U.S.C. § 717, 1141, 1228, or 1328

[xi] A servicer may establish an exclusive address that a consumer must use to submit a written request under this provision.

[xii] Op. cit. x

Servicing Quality Control: System and Procedures

QUESTION 

We are a mortgage lender in the Midwest. We were doing portfolio retention through a servicer, but now we are bringing servicing in-house and doing our own servicing. 

The plan is to launch the new servicing department in the next ninety days. We need a full complement of servicing policies and procedures. 

In addition, we need to know about the system requirements for servicing quality control and the basic servicing quality control procedures. 

Your firm provides a servicing policies and procedures library, so we hoped you could provide the information we need. Please note we contacted your office recently for assistance. 

What are the system requirements for quality control servicing? 

What are some quality control procedures involved in servicing? 

ANSWER 

We provide a policies and procedures compliance library for servicing (as well as one for mortgage loan originations). The compliance library is customized to your servicing platform. And we’ll maintain it for you. 

As a servicer, you must have fully documented, written policies and procedures that address all aspects of mortgage servicing. If you want to contact me directly, I would be glad to discuss your needs in detail. Contact me here. 

With respect to system requirements, I advise thinking ahead about the quality control system needs because how your system operates will determine its effectiveness and flexibility. 

There are numerous investor and legal requirements in each jurisdiction where you operate as a servicer. These must be well-documented and provide for a review of the following:

 

·       aspects of the delinquent mortgage loan servicing system;

 

·       the system to control and monitor bankruptcy proceedings; and

 

·       the foreclosure monitoring system.

The servicer must develop a quality control program addressing delinquency management and default prevention. Proper staffing and training are mandatory. And you must implement a strong business continuity and disaster recovery program. 

The servicer must audit quality control regularly at the loan level. (If you are subservicing, you must audit the servicer’s process at the loan level.) For loan level servicing quality control audits, contact us here. 

The servicer must implement certain primary system requirements for servicing quality control, as follows:

 

1.   Conduct regular testing of compliance with applicable laws in all jurisdictions in which it operates;

 

2.   Regularly review and assess the adequacy of internal controls;

 

3.   Keep a record of any activity under the applicable internal systems;

 

4.   Report comprehensive results of all testing to the senior management;

 

5.   Promptly take appropriate corrective action if these systems identify a problem area; and

 

6.   Make comprehensive testing results and any evidence of corrections available for review upon the investor’s request. 

With respect to servicing quality control procedures, there are a few themes that run throughout the written policies and procedures. As a servicer, you must monitor your compliance with the investor’s requirements and federal and state mandates through regular quality control procedures that are ratified, established, conducted, and monitored. 

The servicer must maintain adequate quality control procedures and systems. Implementing a self-assessment for various operational functions should be considered. At a high level, the servicer must be able to:

 

·      ensure that the mortgage loans are serviced under sound mortgage banking and accounting principles and in compliance with investor guidelines;

 

·      guard against misrepresentation and dishonest, fraudulent, or negligent acts by any parties involved in the mortgage loan servicing process;

 

·      protect against errors and omissions by officers, employees, or other authorized persons;

 

·      verify and audit the accuracy of the loan adjustment (i.e., ARM adjustments) and facilitation of timely responses to errors identified by the borrower, the servicer’s regulatory agency, or the investor; and

 

·      protect the investor’s investment in the security properties. 

Failure to maintain adequate servicing quality control standards may result in a servicer being in breach of its contact with investors. 

Furthermore, I urge you to perform annual quality control tests to ensure that all outsourcing firms and third-party vendors fully comply with investor guidelines and federal and state requirements. 

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

Lenders Compliance Group

Servicing Quality Control: Recurring Adverse Findings

QUESTION 

We have used your servicing quality control group for many years. We like how we can have direct contact with the auditors. Recently, we asked one of your auditors for feedback about the adverse findings they see happening among the many servicers you audit. 

The response was very helpful because your servicing compliance group provides servicing quality control to servicers in many states. We have virtually eliminated “confirmation bias” by getting your wide-ranging information across the servicing spectrum. 

We’re hoping you would share with others a few of these findings. 

What are some recurring violations in your servicing quality control findings concerning servicing transfers, payment posting, loss mitigation, and UDAAP? 

ANSWER 

Thank you for the opportunity to provide our servicing compliance solutions. Most of our servicing clients retain us for servicing quality control and monthly or hourly servicing compliance support. 

Because we work with servicers of differing sizes, complexity, and risk profiles, we constantly update our review criteria to reflect the range of audit findings. One of the aims of servicing quality control is to anticipate examiners’ regulatory compliance expectations. 

Contact us for information regarding our servicing quality control.

Active subscribers receive a 10% discount per loan file. 

Contact us HERE. 

I will provide an outline of recurring adverse findings along with remedial recommendations. Of course, the potential list of adverse results is formidable. Since 2006, when we first began servicing quality control, we have identified numerous recurring regulatory violations. 

Interestingly, as noted in its reports, the Consumer Financial Protection Bureau has picked up on similar violations.[i] Clearly, anticipating adverse findings is critical to quality control auditing. 

Servicing Transfers 

Policies and Procedures 

Regulation X[ii], implementing the Real Estate Settlement Procedures Act (RESPA), requires servicers to maintain policies and procedures reasonably designed to achieve specific objectives.[iii] By “procedures,” Regulation X refers to the actual practices the servicer follows.[iv] 

Under Regulation X[v], transferee servicers must maintain policies and procedures to identify necessary documents and information not included in a servicing transfer and obtain such information from the transferor servicer. 

But we have found that some servicers violated Regulation X when they failed to maintain policies and procedures reasonably designed to achieve the objective of facilitating the transfer of information during servicing transfers. 

For instance, servicers’ policies and procedures were not reasonably designed because they failed to obtain copies of the security instruments or, in fact, any documents reestablishing the security instrument, to establish the lien securing the mortgage loans after servicing transfers. 

Recommendation: Update policies and procedures; implement new training. 

Payment Posting 

After a transfer of servicing, Regulation X requires that, during the 60-day period beginning on the effective date of transfer, servicers not treat payments sent to the transferor servicer as late if the transferor servicer receives them on or before the due date.[vi] We’ve found that servicers treated payments received by the transferor servicer during the 60-day period as late when not transmitted by the transferor to the transferee until after the 60-day period. 

This violates Regulation X because the transferor had received the payment within the 60-day period beginning on the effective date of the transfer. 

Recommendation: Remediate consumers; update policies and procedures; implement training; and revise internal controls. 

Contact us for information regarding our servicing quality control.

Active subscribers receive a 10% discount per loan file. 

Contact us HERE. 

Loss Mitigation 

Disclosure Violations 

We have issued adverse findings when servicers violated Regulation X and Regulation Z by failing to provide the specific required information in several circumstances: 

• Specific reasons for denial when they sent notices that included vague denial reasons, such as informing consumers that they did not meet the eligibility requirements for the program; that is, If a servicer denies a borrower’s complete loss mitigation application for any loan modification option available to the borrower, then its evaluation notice[vii] must include the specific reason or reasons for the denial.[viii] 

• Correct payment and duration information for forbearance: When a servicer offers a short-term loss mitigation option, such as a forbearance plan, it must promptly provide a written notice that includes the specific payment terms and duration of the program.[ix] and

• Information in periodic statements about loss mitigation programs, such as forbearance, to which consumers had agreed. Regulation Z requires servicers to include delinquency information on the periodic statement or in a separate letter if a consumer is more than 45 days delinquent.[x] This includes a requirement to provide a notice of any loss mitigation program to which the consumer has agreed.[xi] 

Recommendation: Update letter templates; implement enhanced monitoring. 

Timing and UDAAP Violations 

Suppose a servicer receives a complete application more than 37 days before a scheduled foreclosure sale. In that case, Regulation X[xii] requires servicers to evaluate the complete loss mitigation application within 30 days of receipt and provide written notices to borrowers stating which loss mitigation options, if any, are available. We have found that some servicers violated Regulation X when they failed to evaluate complete applications within 30 days of receipt.[xiii] 

Indeed, examiners often find that some servicers evaluate the application within 30 days but fail to provide the required notice to borrowers within 30 days as required.[xiv] 

Recommendation: Improve policies; implement additional training. 

Also, there is a UDAAP issue involved in this determination since examiners have found that servicers engage in an unfair act or practice when they delay processing borrower requests to enroll in loss mitigation options (including COVID-19 pandemic-related forbearance extensions) based on incomplete applications.

Non-Foreclosure and Time-Barred Collection Activities

QUESTION

We are a client of yours and retain you for our servicing compliance. One of the things we’ve realized over the years in working with your firm is the impact the FDCPA has on our collection activities. In particular, the non-foreclosure and time-barred collection activities. 

Our foreclosure process has passed numerous regulatory reviews. But we want to ensure we handle the non-foreclosure and time-barred collection policy needs. Your team is already working on it. However, I would like you to share your insights with your readers about how the FDCPA applies to the abovementioned concerns. 

As the Chief Risk Officer, I believe other servicers need to get their FDCPA policy and read it carefully to be sure that these aspects are adequately covered. A few years ago, we learned the hard way! I hope you’ll share some information about my concerns. 

What is the relationship between non-foreclosure and time-barred debt collection activities? 

ANSWER 

Of course, I recognize you are one of our clients. I was privileged to work with you to arrange compliance support services. Thank you for the opportunity to work with your organization! 

Now, to your question. I would be glad to share some information. Let me first provide a brief outline that should set the stage for further explication involving non-foreclosure and time-barred debt collection. 

The Consumer Financial Protection Bureau issued an advisory opinion related to time-barred debts.[i] The advisory opinion affirms that the Fair Debt Collection Practices Act (FDCPA) and the Debt Collection Rule prohibit FDCPA-covered debt collectors from suing or threatening to sue to collect a time-barred debt. The advisory also affirms that this prohibition may apply to debt collectors who bring state-court mortgage foreclosure actions to collect on time-barred mortgage debt. 

The FDCPA and its implementing Regulation F govern the conduct of debt collectors when they collect debt.[ii] The statute and regulation generally define a debt collector as 

“any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.”[iii] 

Many individuals and entities seeking to collect defaulted mortgage loans and attorneys bringing foreclosure actions on their behalf are FDCPA debt collectors. 

So, to expand this outline further, the FDCPA and Regulation F define debt as 

“any obligation or alleged obligation of a consumer 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, whether or not such obligation has been reduced to judgment.”[iv] 

Thus, a consumer’s payment obligation arising from a mortgage transaction primarily for personal, family, or household purposes, such as the purchase of the consumer’s residence, falls within the plain language of this definition.[v] It follows that state court foreclosure proceedings often constitute the collection of debt under the FDCPA, and debt collectors who engage in such debt collection activity are subject to the requirements and prohibitions of the FDCPA and Regulation F, whether or not that debt is time-barred.[vi] 

Regulation F prohibits a debt collector from suing or threatening to sue to collect a time-barred debt. As the CFPB explained in finalizing this prohibition, 

“a debt collector who sues or threatens to sue a consumer to collect a time-barred debt explicitly or implicitly misrepresents to the consumer that the debt is legally enforceable, and that misrepresentation is material to consumers because it may affect their conduct with regard to the collection of that debt, including whether to pay it.”[vii] 

Regulation F’s prohibition on lawsuits and threats of lawsuits on time-barred debt is subject to a strict liability standard; that is, a debt collector who sues or threatens to sue to collect a time-barred debt violates the prohibition “even if the debt collector neither knew nor should have known that a debt was time-barred.”[viii] 

Consequently, a debt collector who brings or threatens to bring a state court foreclosure action with respect to a time-barred mortgage debt may violate the FDCPA and Regulation F. This is true even if the debt collector neither knew nor should have known that the debt was time-barred. 

Regarding non-foreclosure collection activities, the CFPB has noted a broad range of non-foreclosure debt collection-related activities are covered by the FDCPA, such as communicating with consumers about defaulted mortgages. FDCPA debt collectors undertaking such activity are subject to the other requirements and prohibitions of the statute and Regulation F when collecting debt, regardless of whether that debt is time-barred. 

For instance, these requirements and prohibitions include the prohibition on debt collectors: 

·     Falsely representing the character, amount, or legal status of any debt;[ix] 

·     Threatening to take any action that cannot legally be taken or that is not intended to be taken;[x] and 

·     Selling, transferring for consideration, or placing for collection a debt that the debt collector knows or should know has been paid, settled, or discharged in bankruptcy.[xi]  

The requirements and prohibitions would also include the requirements that debt collectors: 

·     Identify themselves as a debt collector in all communications with the consumer (except formal pleadings in connection with a legal action);[xii] 

·     Provide the consumer with validation information in certain circumstances;[xiii] and 

·     Respond to consumer disputes adequately before continuing to collect.[xiv]

 Even if an FDCPA debt collector engages only in actions necessary to undertake a nonjudicial foreclosure action, the debt collector is still subject to the FDCPA and Regulation F,[xv] which generally prohibit taking or threatening to take any nonjudicial action to effect dispossession or disablement of property if the debt collector has no present right or intention to do so. 

Because you are our client, I know you service second mortgages. So, a final note. Mortgage servicers (and other entities) selling or collecting on second mortgages are also subject to certain requirements under the Real Estate Settlement Procedures Act (RESPA),[xvi] the Truth in Lending Act,[xvii] and the CFPB’s mortgage servicing regulations.[xviii], [xix] 

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

_____________________________

[i] Fair Debt Collection Practices Act (Regulation F); Time-Barred Debt, CFR Part 1006, Advisory Opinion, April 26, 2023, Consumer Financial Protection Bureau.
[ii] This advisory opinion applies to debt collectors as defined in section 803(6) of the FDCPA and implemented in Regulation F, 12 CFR 1006.2(i).
[iii] 15 U.S.C. 1692a(6); 12 CFR 1006.2(i). The statute and regulation also provide that, for purposes of section 808(6) and 12 CFR 1006.22(e), the term debt collector also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests. See 12 CFR part 1006.
[iv] 15 U.S.C. 1692a(5); 12 CFR 1006.2(h).
[v] See, e.g., Cohen v. Rosicki, Rosicki & Assocs., PC, 897 F.3d 75, 83 (2d Cir. 2018).
[vi] See 15 U.S.C. 1692a(5); 12 CFR 1006.2(h).
[vii] 86 FR 5776, 5778 (Jan. 19, 2021).
[viii] Idem at 5777.
[ix] 15 U.S.C. 1692e(2)(a); 12 CFR 1006.18(b)(2).
[x] 15 U.S.C. 1692e(5); 12 CFR 1006.18(c)(1); 15 U.S.C. 1692f(6); 12 CFR 1006.22(e).
[xi] 12 CFR 1006.30(b).
[xii] 15 U.S.C. 1692e(11); 12 CFR 1006.18(e).
[xiii] 15 U.S.C. 1692g(a); 12 CFR 1006.34.
[xiv] 15 U.S.C. 1692g(b); 12 CFR 1006.38(d); 85 FR 76734, 76845-48 (Nov. 30, 2020).
[xv] See FDCPA section 808(6)25 and Regulation F, 12 CFR 1006.22(e).
[xvi] 12 U.S.C. 2601 et seq.
[xvii] 15 U.S.C. 1601 et seq.
[xviii] See, e.g., 12 CFR 1024.33(b) (requiring a transferee and transferor servicer to provide a timely notice of transfer of servicing to the affected borrower); 12 CFR 1024.39 (requiring servicers to make early intervention contacts with delinquent borrowers); and 12 CFR 1024.41 (requiring servicers to follow certain loss mitigation procedural requirements, including certain foreclosure-related protections). Note that small servicers, as defined in 12 CFR 1026.41(e)(4), are exempt from certain of these requirements. See 12 CFR 1024.30(b).
[xix] See 12 CFR 1026.41(a); see also, e.g., 12 CFR 1026.41(e)(4) (exempting small servicers from this requirement) and 12 CFR 1026.41(e)(6) (exempting servicers from periodic statement requirements for certain charged-off loans but only if, among other conditions, the servicer sends a specific notice to the consumer and does not charge additional fees or interest on the account).