First Circuit Affirms Bankruptcy Court’s Judgment in Favor of Mortgage Company

By Caren D. Enloe

A First Circuit Bankruptcy Appellate Panel (the “Panel”) recently held that a mortgage company’s communications did not violate the discharge injunction when viewed under an objective standard and considering the facts and circumstances surrounding the communications. Kirby v. 21st Mortg. Corp., 599 B.R. 427 (2019). 

In Kirby, the consumers filed Chapter 7 while engaged in a state sponsored Foreclosure Diversion Program.  After the Kirbys received their discharge, the parties continued with the diversion program, including mediation. Post discharge, but within the context of the mediation and other loss mitigation efforts, the mortgage company sent a series of communications to the Kirbys in care of their counsel.  All but one of the documents contained a bankruptcy disclaimer informing the Kirbys that

To the extent your original obligation was discharged, or is subject to an automatic stay of bankruptcy under Title 11 of the United States Code, this notice is for compliance and/or informational purposes only and does not constitute an attempt to collect a debt or to impose personal liability for such obligation. However, a secured party retains rights under its security instrument, including the right to foreclose its lien.

Id. at 434.  After all attempts at loss mitigation failed, the Kirbys’ counsel sent a cease and desist notice to the mortgage company.  After receipt of the cease and desist, the mortgage company sent an annual escrow account disclosure statement, a letter regarding a possible short sale as an alternative to foreclosure and a PMI Disclosure, all of which were addressed to the Kirbys in care of their counsel.  The mortgage company additionally sent a Right to Cure directly to the Kirbys which contained a bankruptcy disclaimer. In total, the mortgage company sent 24 written communications to the Kirbys or their counsel in the 26 month period following the discharge.

Post foreclosure, the Kirbys reopened their bankruptcy and initiated an adversary proceeding alleging, in part, that the mortgage company’s post-discharge communications were coercive attempts to collect a debt in violation of the discharge injunction.  The bankruptcy court disagreed and granted summary judgment in favor of the mortgage company.

On appeal, the issue before the court was whether the post-discharge communications improperly coerced or harassed the Kirbys into paying the discharged debt.  While the Kirbys argued that the sheer volume of the communications amounted to coercion, even if the individual communications did not, the Panel did not agree and concluded that the surrounding circumstances and context in which the communications were sent eliminated any coercive or harassing effect of the post-discharge communications. Id. at 444.

In reaching its decision, the Panel noted that the discharge injunction does not prohibit every communication between a creditor and debtor—only those designed to collect, recover or offset any discharged debt as a personal liability of the debtor. The court then examined the individual communications sent by the mortgage company.  Regarding the letters sent during mediation period, the Panel first observed that each of the communications was sent to the Kirbys’ counsel and not directly to the Kirbys.  Moreover, all but one of those communications included “unambiguous bankruptcy disclaimers informing Mr. Kirby that if he had received a bankruptcy discharge, 21st Mortgage was not attempting to collect a debt from him personally and the correspondence was for informational purposes only.” Id. at 444.  The communication which did not include the bankruptcy disclaimer was an ARM Notice which merely informed the Kirbys of a change in interest rate.  With respect to the ARM Notice, the lack of a bankruptcy disclaimer did not concern the Panel and was not a per se violation of the discharge injunction because it was evident from the circumstances that there was no coercion or harassment.  Id.  Moreover, the Panel noted, when debtors initiate contact with a creditor to negotiate alternatives to foreclosure after post-discharge, certain communications from the creditor are logical and will not violate the discharge injunction. Id. at 445.  The Panel also concluded that the post mediation communications were either sent for informational purposes or to enforce the Defendant’s mortgage foreclosure rights and therefore did not violate the discharge injunction.

Based on the totality of the circumstances surrounding the post-discharge communications, together with the substance of those communications, the Court concluded that the correspondence in question, whether viewed individually or cumulatively, was not coercive or harassing and did not violate the discharge injunction.  Id. at 448.

Caren Enloe is a partner with Raleigh, NC’s Smith Debnam and leads the firm’s Consumer Financial Services Litigation and Compliance Group. 

CFPB Issues Semi Annual Report to Congress

The CFPB has issued its Semi-Annual Report to Congress for the time period beginning April 1, 2018 and ending September 30, 2018. The Report is the first issued by newly confirmed Director Kathy Kraninger and outlines the actions taken by her predecessor in the April-September 2018 time period.

Significant Problems Facing Consumers.

The Report identifies two “significant problems” facing consumers shopping for or obtaining consumer financial service products: (a) credit invisibility and (b) mortgage shopping. “Credit invisibility” is not a new concern and was identified as an issue during Cordray’s tenure. The Report highlights a study released by the CFPB which examines the relationship of geography to credit invisibility. It is significant that there appears to be consensus from CFPB leaders (both liberal and conservative) that credit invisibility is an issue. The Report also identified “mortgage shopping” as an issue, pointing to studies indicating that consumers do not shop for the lowest interest rates when applying for a mortgage.

Consumer Complaints Reflect a Status Quo.

The Report also summarizes the consumer complaints received by the Bureau from consumers for the past year. There were no surprises here – the three front runners for complaints filed with the CFPB were credit reporting, debt collection and mortgage. 

Debt Collection Rules Are Coming!

Perhaps the most significant news in the Report was confirmation that debt collection rules are coming. For those that have followed the rulemaking, an advanced notice of proposed rulemaking was issued in late 2013. In the summer of 2016, the CFPB issued an Outline of Proposals for Third Party Rules and indicated that “[a]s part of its overhaul of the debt collection marketplace, the CFPB plans to address consumer protection issues involving first-party debt collectors and creditors on a separate track.” Later that summer, a third party SBREFA was held.

For two years, there was no further action. In October, however, the CFPB announced that it anticipated a Notice of Public Rulemaking in March of 2019. The Report confirms that a proposed rule is coming, but that it is likely to be a more narrowed version that what was suggested by Cordray’s CFPB in 2016. According to the Report, “the Bureau will work towards releasing a proposed rules concerning FDCPA collectors’ communications practices and consumer disclosures.”

What's Next?

Kraninger is expected to testify before the House Financial Services Committee on March 7th and the hearing is highly anticipated as it will be the first opportunity to see her interactions with the Democratic led committee. No doubt, the committee will have a number of questions concerning the Bureau’s decision to walk back the Payday Lending Rules.

CFPB Issues First Complaint Snapshot Under Kraninger

For the first time in over a year, the CFPB has issued a Complaint Snapshot. A practice started by Cordray in 2015, the report is a high level snapshot of trends in consumer complaints and provides a summary of the volume of complaints by product category and by state. While the Complaint Snapshot issued by Kraninger’s office differs slightly in content from the reports issued under Cordray and does not promise to be a regular occurrence, it provides excellent content that will allow financial services to identify risks within their organization structure. The January 2019 report focuses on mortgage products and looks at the three month period of August 2018-October 2018.

Here’s what you need to know:

• The Snapshot provides a high level overview of trends in consumer reports over the last 24 months;
• The Snapshot continues to use the three-month rolling average, comparing the current average to the same period in the previous year;
• Since the last Report issued by Cordray, not much has changed. Credit reporting and debt collection continue to be the leading sources of complaints.
• Mortgage complaints appear to have fallen off and are no longer in the top three sources of consumer complaints, having been surpassed narrowly by credit card complaints.

NATIONAL OUTLOOK. 

While credit reporting and debt collection continue to provide the most significant volume of complaints, credit reporting is showing a significant decrease when compared to its complaint average for the same period in 2017 – a 14% decrease. Similarly, mortgage products, which used to always be in the top three products for complaints, have shown a 15% decrease for the same period. Picking up the slack, prepaid card complaints have increased 26% for the same period and depository and credit card products have shown 14% and 8% increases, respectively. Debt collection remains relatively flat with a 3% decrease compared to the same period in 2017. 

FEATURED PRODUCT OR SERVICE. 

This Snapshot highlights mortgage products.  The most common issue identified by consumers between August and October 2018 was trouble during the payment process. Breaking that down further, the Snapshot indicates the majority of issues involved periodic statements, applications of payment, escrow accounts and payoff requests. Specifically,

• Periodic Payments. According to the Snapshot, the complaints centered on consumers not receiving statements on time and periodic statements which contained inaccurate information such as late fees being assessed despite payments made on or before the due date. 
• Application of Payment. According to the Snapshot, consumers complained of payments not being properly applied as directed. 
• Escrow Accounts. According to the Snapshot, consumers complained of inaccurate shortages being assessed on their escrow accounts as a result of misinformation as to increases in taxes or increases in insurance premiums. 
• Payoff Requests. Consumers also complained of payoff requests which were either ignored or delayed, resulting in inaccurate payoff information.

We hope this signals a return of the Complaint Snapshots which, if presented even handedly, provide financial service providers with an excellent tool to identify and mitigate risks within their organizations.

Fifth Circuit: Mortgage Servicing Rules Apply to Servicers Only

In a case of first impression, the Fifth Circuit has held that the CFPB’s Mortgage Servicing Rules only apply to servicers and do not impute liability to the lender.  In Christiana Trust v. Riddle, the consumer alleged that the prior and current servicers of her mortgage violated the Mortgage Servicing Rules by failing to evaluate her loss mitigation application as required by 12 C.F.R. 1024.41(c)(1).  Riddle contended that the original lender, Bank of America, was vicariously liable for its servicer’s violation.  The Fifth Circuit affirmed the dismissal of the claims against Bank of America in part because it held that “Bank of America, as a matter of law, is not vicariously liable for the alleged RESPA violations of its servicers.”  Christiana Trust v. Riddle, 2018 U.S. App. LEXIS 36217, *7 (5^th Cir. Dec. 21, 2018).

In reaching its conclusion, the Fifth Circuit looked at the express language of both the Mortgage Servicing Rules and the source statute, RESPA.  The Court noted that the regulation only imposes duties on servicers.  See 12 C.F.R. 1024.41(c)(1) (if a servicer receives a complete loss mitigation application… a servicer shall…”) (emphasis added).  Likewise, a servicer’s obligation to comply with the Mortgage Servicing Rules derives from RESPA which provides that only “a servicer of a federally related mortgage shall not… fail to comply with another obligation found by the Bureau of Consumer Financial Protection, by regulation, to be appropriate to carry out the consumer protection purposes of this chapter.”  12 U.S.C. §2605(k)(1)(E) (emphasis added).  The Court was further persuaded by the fact that 12 U.S.C. §2605 imposes liability on “whoever fails to comply with this section” rather than a more broad class of interested parties.  The Court concluded that “[b]ecause only ‘servicers’ can ‘fail to comply’ with 12 U.S.C. §2605(k)(1)(E), only servicers can be “liable to the borrower’ for those failures.”  Id. at *8.

The opinion is a good news for lenders as there is now some precedent that lenders cannot be held vicariously liable for their servicers’ violations of the Mortgage Servicing Rules.  At least in the Fifth Circuit, lenders are provided with some insulation from liability.

Tenth Circuit Joins the Fray Regarding Whether Foreclosures Are Debt Collection Activity

The Tenth Circuit has weighed in on whether a non-judicial foreclosure is debt collection activity.  In doing so, the Tenth Circuit has joined a split in the circuits on the issue.  With the Tenth Circuit’s decision the circuits remain split with the Ninth Circuit and now the Tenth Circuit holding that non-judicial foreclosures are not debt collection activity and the Fourth, Fifth and Sixth Circuits holding that they are.

  In Obduskey v. Wells Fargo, 2018 U.S. App. LEXIS 1275 (10^th Cir., Jan. 19, 2018), Wells Fargo retained foreclosure counsel who sent the consumer an initial communication which stated that it “MAY BE CONSIDERED A DEBT COLLECTOR ATTEMPTING TO COLLECT A DEBT” and advised Mr. Obduskey that it had been retained to initiate foreclosure proceedings.  The letter referenced the amount owed and identified the current creditor as Wells Fargo.  In response, the consumer requested validation of the debt.  Instead of responding, the law firm initiated a non-judicial foreclosure.  Mr. Obduskey then filed suit alleging the law firm violated 15 U.S.C. §1692g. 

The law firm moved to dismiss the action asserting that it was not a debt collector covered by the FDCPA because a foreclosure proceeding is not a debt collection activity.  The district court agreed and dismissed the complaint.  On appeal, the Tenth Circuit addressed the issue of whether the FDCPA applies to non-judicial foreclosure proceedings.  

In doing so, the court first looked to the plain language of the statute and the nature of a non-judicial foreclosure.  Adopting the rationale of the Ninth Circuit, the court took the position that the FDCPA only imposes liability when an entity is attempting to collect money.  Because a non-judicial foreclosure does not preserve the right to collect a deficiency personally against the mortgagor and would require a separate action to do so, the Court was persuaded that it was not an attempt to collect money and was only the enforcement of a security interest. 

The Court also found that policy considerations supported its decision. The Court took into consideration the provisions of Colorado’s non-judicial foreclosure statutes and noted that they conflicted with the FDCPA.  Specifically, the state provisions required notice to any party that may have acquired an interest in the property.  The state statute therefore conflicted with the third party prohibitions under the FDCPA.  The state provisions also conflicted with the FDCPA by requiring direct notice to the consumer even when represented by counsel. Taking this into account, the court found that there is no ‘clear and manifest’ intention on the part of Congress to supplant state non-judicial foreclosure law. Indeed, many of the conflicts noted above are designed to protect the consumer and preempting them under the FDCPA would seem to undermine their purpose as well as the purpose of the FDCPA.”  Obduskey at *11-12 (internal citations omitted).

It is important to note that the Court’s decision is limited in several respects.  First, it is limited to non-foreclosure proceedings.  Secondly, the holding is limited to the facts of this case.  The court suggested that its holding might have been different had there been evidence of “aggressive collection efforts leveraging the threat of foreclosure into payment of money.” Id. at *12.  The court left that discussion for another day as there were no facts to suggest the law firm had demanded payment or used foreclosure as a threat to elicit payment.

Mortgage Servicer’s Transfer Notice Violates FDCPA

Mortgage servicers need to carefully review their Transfer Notices when the debt is in default at the time of transfer.  In an unpublished decision, the Eastern District of New York recently held that a “Notice of Servicing Transfer” violated 15 U.S.C. §1692e(10).  In Baptiste v. Carrington Mortgage Services, LLLC, 2017 U.S. Dist. LEXIS 103609 (E.D.N.Y. July 5, 2017), Carrington sent a “Notice of Servicing transfer” to the plaintiff alerting him that his mortgage servicing was being transferred to Carrington.  The letter went on to advise the plaintiff that “going forward, all mortgage payments should be sent to Carrington, but that ‘[n]othing else about [the] mortgage loan will change.”  Baptiste at *2.  The letter additionally included an FDCPA notice that stated that “[t]his notice is to remind you that you owe a debt.  As of the date of this Notice, the amount of debt you owe is $412,078.34.”  Id..  The attached FDCPA notice also noted that “[Carrington} is deemed to be a debt collector attempting to collect a debt and any information obtained will be used for that purpose.” Id. at *3.  At the time of the servicing transfer, the mortgage was in default.  The plaintiff contended the letter violated 15 U.S.C. §1692e(10) by failing to disclose that the balance on his debt was increasing due to interest.  Carrington moved to dismiss.

In denying Carrington’s motion to dismiss, the court relied upon the Second Circuit’s recent decision in Avila v. Riexinger & Associates, LLC, 817 F.3d 72 (2nd Cir. 2016).  In Avila, the Second Circuit held “that the FDCPA requires debt collectors, when they notify consumers of their account balance, to disclose that the balance may increase due to interest and fees.” Avila, 817 F.3d at 76. 

In support of its motion to dismiss, Carrington argued that Avila was not applicable because the Transfer Notice was not a collection attempt and therefore not subject to section 1692e.  The court, however, rejected that argument relying on another Second Circuit decision, Hart v. FCI Lender Servs., Inc., 797 F.3d 219 (2nd Cir. 2015).  In doing so, the court considered the following factors when reviewing the notice: (a) the Notice’s reference to the debt and direction that payments be sent to Carrington; (b) the reference to the FDCPA and inclusion of the section 1692g notice; and (c) the inclusion of a statement that the Notice is an attempt to collect a debt.  These factors, according to the court, indicated that the Notice of Transfer was sent in connection with the collection of a debt.

Mortgage servicers need to pay careful attention to each and every communication with consumers beginning with their Notice of Transfer. While mortgage servicers are not covered by the FDCPA when servicing current accounts, those mortgage servicers accepting transfers of defaulted portfolios or mixed portfolios should review each and every communication provided to a consumer to ensure its compliance with the FDCPA.

 

 

CFPB's Monthly Complaint Report Takes a New Approach

The CFPB has issued its monthly complaint report. The report is a high level snapshot of trends in consumer complaints. The report traditionally provides a summary of the volume of complaints by product category, by company and by state. This month, however, the Report has taken a new view- one based upon a state by state analysis and new national statistics. Here are the major takeaways on the national front:

• The Report rather succinctly notes the following
• Complaint volume rose 7% between 2015 and 2016.
• Debt collection and mortgage product types account for approximately half of all complaints filed. 
• Over half of all consumers submitting complaints want their narratives published.

CFPB Seeks Comment on Effectiveness of the RESPA Mortgage Servicing Rule

As required by the Dodd-Frank Act, the CFPB is conducting an assessment of its RESPA Mortgage Servicing Final Rule, which took effect on January 10, 2014. The assessment will seek to compare servicer and consumer activities and outcomes to a baseline that would exist if the Rule has not been implemented.

  Specifically, the CFPB’s assessment plan will examine how well the Servicing Rule has met its purpose of:

• Providing borrowers with timely and understandable information;
• Protecting borrowers from unfair, deceptive, or abusive acts and practices;
• Helping borrowers avoid unwarranted or unnecessary costs and fees; and
• Facilitating review for foreclosure avoidance options.

The CFPB is requesting comments on the assessment plan and is inviting stakeholders to comment on:

• The feasibility and effectiveness of the assessment plan and its proposed metrics and analytical methods for assessing the effectiveness;
• Data and other factual information that may be useful for executing the plan;
• Recommendations, data, factual information and sources of data to improve the plan;
• Data and other factual information about the benefits and costs of the rule for stakeholders, and the effects of the rule on transparency, efficient access and innovation in the mortgage market; Data and other factual information about the rule’s effectiveness in meeting the purposes and objectives of Dodd Frank; and
• Recommendations for modifying, expanding or eliminating the Mortgage Servicing Rule.

Comments are due on or before July 10, 2017. A report of the assessment will be issued by January 2019.

CFPB Issues its Annual Fair Lending Report and Sets its 2017 Agenda

The CFPB has issued its 2016 Fair Lending Report which provides a summary of the Bureau’s efforts in fair lending for 2016.  The Report also includes an indication of the Bureau’s fair lending priorities for 2017.  Here are the highlights:

·        A Risk Prioritization Approach. The Report confirms that the Bureau takes a risk-based prioritization approach to supervisory and enforcement.  Risk based prioritization considers several factors including cooperation with the Bureau’s special population offices, consumer complaints, tips and leads from advocacy groups, whistleblowers and other governmental agencies, supervisory and enforcement history and, of course, analysis of HMDA and other data.

·        2016 Fair Lending Activities.  The Report indicates that its 2016 focus was on mortgage and indirect auto lending, as well as credit card account management.  While the Bureau is expected to continue investigations in these three areas, it will also increase its focus on other segments of consumer credit.

·        2017 Fair Lending Priorities. Based upon this approach, the Bureau intends to increase its focus in the areas of redlining, mortgage and student loan servicing and small business lending.

·        Mortgage and Student Loan Servicing. The Report expresses concerns as to whether student loan and mortgage servicers are handling workouts and loss mitigation differently with customers based upon their race, ethnicity, sex or age.

·        Small Business Lending.  Dodd Frank charges the CFPB with ensuring that women owned and minority businesses have fair access to credit.  The CFPB intends to begin exercising small business lending supervisory authority to ensure fair access to credit.

·        Fair Lending Supervisory Observations.  The Report recaps examination observations which were previously provided by the CFPB in its 2016 Summer and Fall Supervisory Highlights and reported previously.

·        Redlining.  While we are not going to rehash all of the 2016 Supervisory Highlights, the Bureau’s observations as to redlining bear repeating. The Report indicates the factors considered by the CFPB is assessing redlining risk and provides the following laundry list:

o   Strength of the institution’s compliance management system including its underwriting policies and guidelines;

o   Unique attributes of the relevant geographic area, including population demographics, credit profiles and the housing market;

o   Lending patterns including applications and originations with and without purchased loans;

o   Peer and market comparisons;

o   The institution’s physical presence in the area (full service branches, ATM only branches, brokers and loan production offices, etc.) as well as the services offered;

o   Marketing;

o   Mapping;

o   CRA assessment area and market area more generally;

o   The institution’s lending policies and procedures record;

o   Additional, miscellaneous evidence (including whistleblower tips, loan officer diversity, testing, and comparative file reviews); and

o   An institution’s explanation for apparent disparate treatments.

·        Ongoing Investigations.  The Bureau’s ongoing investigations and referrals to DOJ include discrimination in mortgage and auto lending, as well as discrimination in credit card account management.

Based upon the Report and prior announcements regarding fair lending prioritization from the Bureau in the past several months, mortgage and student loan servicers should be re-examining their policies and procedures as to loss mitigation and workouts to ensure their practices are consistent with the Equal Credit Opportunity Act and other fair lending mandates.

Eleventh Circuit Takes on Mortgage Servicing Rules

In a brief opinion, the Eleventh Circuit recently examined Regulation X’s requirement that a loan servicer provide a written response acknowledging receipt of a written request for information (“RFI”) pursuant to 12 C.F.R. 1024.36.  In Meeks v. Ocwen Loan Servicing, the consumer’s counsel sent an RFI to the loan servicer via certified mail, return receipt requested.  Meeks v. Ocwen Loan Servicing, 2017 U.S. Dist. LEXIS 3677 (11th Cir. Mar. 1, 2017). Upon receipt, the mortgage servicer’s agent signed the certified return receipt and the receipt was then received by the consumer’s counsel.  Nine days after its receipt of the RFI, the mortgage servicer sent a substantive response to the RFI. 

12 C.F.R. 1024.36(c) requires the loan servicer to provide a written response acknowledging receipt within five days of receiving the RFI.  The issue before the court on appeal was whether: (a) the signed certified mail receipt satisfied the written acknowledgement provision of Reg X; and (b) the consumer had suffered a real and concrete injury.  Regarding the first issue, the court succinctly agreed with the district case that under the circumstances of the case, the return receipt satisfied the written acknowledgement provision of Reg X.  In making its determination, the court paid particular attention to the fact that the consumer’s counsel received the signed return receipt was undisputed.  As to the second issue, the court determined the consumer did not have standing under Article III, again noting that “Meeks (and his attorneys) had undisputed actual knowledge of receipt of the RFI, although they dispute that its form was sufficient to meet Regulation X’s requirements.  Thus, Meeks suffered at most ‘a bare procedural violation’ and he cannot show that he suffered a real, concrete injury from Ocwen’s actions.” Meeks at *4.

CFPB Monthly Report Spotlights Mortgage Products

The CFPB has issued its monthly complaint report and is shining its spotlight on mortgage products.  The Monthly Complaint Report provides a high level snap shot of trends in consumer complaints, using a three month rolling average of complaints.  Each month, the report focuses on a category of consumer financial products.  Here are the highlights of the most recent report:

 IN GENERAL

·       Student loans showed the greatest increase in complaints comparing October -December 2015 with October-December 2016, showing a 109% increase.  In February 2016, the CFPB updated its student loan intake form to accept complaints about federal student loan servicing.  The CFPB attributes a portion of this increase to the increased scope of complaints accepted.

·       Complaints about prepaid products showed the greatest decrease in complaint volume comparing October-December 2015 with October-December 2016, showing a 59% decrease in complaint volume.

·       Debt collection, credit reporting and mortgage remain the most complained about products for December 2016.  Together, the three complaint categorizes comprise 65% of all complaints submitted.  Of note, both credit reporting and mortgage complaints were down a bit, each showed a 5% decrease in complaints from the prior month.  Meanwhile, debt collection complaints increased 7% over the prior month. 

PRODUCT SPOTLIGHT: MORTGAGE

·       49% of the complaints submitted regarding mortgage products concerned problems when consumers were unable to pay. This category includes loan modification, collection and foreclosure issues.  The Report notes that within this category, consumers complained about their efforts to obtain loss mitigation and specifically, that servicers were slow to respond, made repeated requests for documents that had already been submitted and provided denial reasons that were ambiguous.

·       33% of the complaints submitted concerned payment issues.  Consumers complained their mortgage servicers “lost their timely payments” and reported the accounts as delinquent to consumer reporting agencies.  Consumers also complained about bill pay services not correctly crediting payments.

·       The report also indicates that consumers reported issues involving escrow accounts.  Two issues were identified specifically:  the handling of shortages in the accounts and the use of escrow for paying insurance premiums.  As to the former, consumers complained that funds paid towards escrow shortages were not properly applied leading to increased monthly payments.  Consumers also complained of no explanations being provided for escrow shortages.  As to the latter, consumers reported servicers failing to submit timely payments to insurers.

·       Finally, the report indicates consumers reported mortgage loan processing delays that resulted in expiration of rate lock agreements.  Consumers attributed the delays to inaccurate documents requirements, lack of communication from lenders and inexperienced loan officers.

CFPB Enters into Consent Orders with Citibank Subsidiaries Over Mortgage Servicing Practices

The CFPB recently entered into consent orders with several Citibank subsidiaries attacking their mortgage servicing practices during the early days of the Mortgage Servicing Rules  despite the CFPB’s assurances that early examinations would focus on efforts to comply rather than the technical aspects of compliance.  The consent orders require CitiMortgage to pay $17 million to affected consumers and a $3 million civil penalty and require CitiFinancial Services to pay $4.4 million to affected consumers and a $4.4 million civil penalty.

Mortgage servicers should heed these lessons:

1.      Loss Mitigation is Not a One Size Fits All Solution.  The CitiMortgage Consent Order makes clear there is a right way to handle loss mitigation applications and a wrong way.  Specifically, the documentation necessary to complete a loss mitigation application should be tailored to the consumer’s specific application and not include a generic list which may or may not take into account documentation already provided.

·        The Wrong Way. The Consent Order suggests that in the early days of the Mortgage Servicing Rules (January 10, 2014 through August 19, 2014), CitiMortgage responded to incomplete loss mitigation applications by sending a notice to borrowers which included a laundry list of documents “that may or may not have been applicable to a borrower’s loss mitigation application.”  CitiMortgage Consent Order, ¶ 9.  “For example, the…[notice] requested, among other things, the following documents: ‘Form 1065 (Partnership Tax Return) with all schedules’’; Form 1120S (S-Corporation Tax Return) with all schedules’; ‘Social Security Award Letter’; ‘Trust Agreement’; ‘Broker’s Statements at Year-End’; ‘Teacher Contract’; ‘Pension Statement’; and a “most Current year of Real estate tax bill For Rental’.” Id. at ¶ 11.  In some cases, the notice requested documents already received from the consumer.  The Consent Order asserts that CitiMortgage’s practice violated Reg X as well as the UDAAP provisions of the Consumer Financial Protection Act.

·        The Right Way.  The Consent Order requires CitiMortgage take corrective action, including:

·        Remediating their notices of incomplete loss mitigation applications to set forth in “plain language” the purpose of any enclosed forms which the borrower must complete and include a description of any documentation that must be submitted;

·        Clearly identifying any missing documentation.  To the extent certain applicable income and financial documents are valid for a limited period of time, communications must clearly identify the length of time those documents are valid; and

·        Communications should accurately reflect the documentation necessary to complete the loss mitigation application.

2.      Deferments are Loss Mitigation and Should Be Treated as Such.  The CitiFinancial Consent Order alleges that requests for deferments were not treated as requests for loss mitigation.  Under Reg X, loss mitigation option means “an alternative to foreclosure offered by the owner or assignee of a mortgage loan that is made available through the servicer to the borrower.” 12 CFR 1024.31.  The Consent Order asserts that the deferments offered by CitiFinancial were loss mitigation and as such should have been treated as loss mitigation applications and evaluated as such.  The Consent Order requires that upon requests for deferments, CitiFinancial must:

·        Exercise reasonable diligence in obtaining the necessary documents and information to complete loss mitigation applications;

·        Acknowledge receipt of loss mitigation applications in a timely manner;

·        Identify any documents needed to complete a loss mitigation application; and

·        Evaluate borrowers for all loss mitigation options.

3.      Deferments Require Full and Complete Disclosure of Impact on Principal and Interest.  The CitiFinancial Consent Order alleges that CitiFinancial sent consumers who applied for deferments authorization forms which disclosed that “the repayment term of the loan will be extended” and that “interest will continue to accrue.”  The Consent Order alleges that the disclosures were deceptive because they implied the deferred payments (including interest) would be added to the end of the borrower’s loan when in fact interest continued to accrue during the deferment period and became due on the next payment date.  The Consent Order requires CitiFinancial to “clearly and prominently” disclose in plain language all material terms of any deferment, including the effect of deferment on principal and interest, the application between principal and interest when the borrower resumes payment and that deferment may delay repayment of principal resulting in additional interest over the term of the loan.

4.      Credit Reporting Policies Need to be Consistent with Reg X.  The CitiFinancial Order alleges that CitiFinancial furnished adverse information to consumer reporting agencies regarding payments that were subject to a Notice of Error within 60 days of receiving such notice.  CitiFinancial Consent Order, ¶ 47.  The Consent Order alleges that CitiFinancial’s practice violated Reg X which prohibits servicers from furnishing adverse information to CRAs regarding any payment that is subject to a Notice of Error within 60 days of receipt of the Notice of Error.

Mortgage servicers should take note that examiners, despite earlier indications, are taking a hard look at mortgage servicing practices from the effective date of Reg X forward and continue to review their practices and procedures for compliance with Reg X.

CFPB Hones Its Fair Lending Agenda for 2017

A recent blog post from the CFPB indicates it will focus its Fair Lending efforts in three directions in 2017.  According to the post, the CFPB will increase its focus on: (a) redlining; (b) mortgage and student loan servicing; and (c) small business lending. 

Redlining. The Bureau’s has shown a renewed interest in redlining claims in the past two years.  In 2017, the Bureau “will continue to evaluate whether lenders have intentionally avoided lending in minority neighborhoods.” 

Mortgage and Student Loan Servicing. The Bureau’s turn to the mortgage and student lending markets is likely to take up where its focus on auto lenders and credit card providers left off.  The Bureau has indicated it will determine “whether some borrowers who are behind on their mortgage or student loan payments may have more difficulty working out a solution with the servicer because of their race or ethnicity.”  Entities in these markets should pay close attention to the Bureau’s recent use of mystery shoppers in other fair lending investigations. 

Small Business Lending.  Finally, the Bureau’s focus on small business lending should come as no surprise.  Its last two rule making agendas have included small business lending. Currently, the CFPB’s efforts have been in the pre-rule making stages, but it would not be surprising to see their “research” include examinations results as they move towards developing proposed regulations.

CFPB Introduces Its “Consumer Credit Trends” Tool

Roughly eighteen months ago, the CFPB introduced its Monthly Complaint Reports which provide monthly summaries of complaints received in the complaint portal against financial service providers regarding a number of financial service products.  Each month, the CFPB issues a report summarizing the information. 

This week, the CFPB introduced a new research tool, its Consumer Credit Trend Tool.  According to the CFPB, the new tool’s purpose is to track originations of various consumer credit products.  In its current beta form, the tool pulls information from one of the three major consumer reporting agencies in a “de-identified manner”.  The Bureau’s release indicates that “de-identified” means that no information is provided to the CFPB as to the consumers’ identities including names, social security numbers or addresses are provided to the CFPB with the data.  For now, the tool will focus on four credit products: mortgage, student loan, credit cards and auto loans.   The CFPB press release, however, indicates that the CFPB “plans to include other consumer credit products and information on credit applications, delinquency rates, and consumer debt levels” and plans to update the information regularly and provide analysis of notable findings. 

CFPB Supervisory Highlights: It’s all about the Compliance Management System

The CFPB published its Fall Supervisory Highlights last week, highlighting its examination observations across various financial products for examinations conducted between May and August 2016.  The Report highlights key findings made by the CFPB and provides insight into the current focus of the examiners.  The current edition of Highlights reveals a heavy focus on compliance management systems across product types. Because of the volume of information in the Report, we will break down the Report over several blog posts in the coming week. 

There’s a country song that says “it’s all about that bass”.  In the case of regulatory compliance, it’s all about that compliance management system.   Nowhere is that more evident than in this issue of the CFPB’s Supervisory Highlights.  Throughout the report, the CFPB highlights and defines what constitutes a strong compliance management system (“CMS”) and what does not.  It is clear that the CFPB is honing in on a theme which has become prevalent throughout many of its enforcement actions: “beneficial practices centered on good compliance management systems” go a long way.

To that end, the Report provides insight into what constitutes a strong CMS. Particularly, the Reports singles out the qualities of strong compliance management systems in automobile finance, debt collection, mortgage and fair lending.  Generally, what constitutes a compliance management system is dependent upon the size of the business, its risk profile and its operational complexity.   The Report noted, however, that that a strong compliance management system generally reflects:

• Strong and active boards and management oversight.  The Report set forth the expectation that boards and management:
  • Demonstrate clear expectations about compliance;
  • Have an adequate compliance audit program;
  • Adopt clear policy statements regarding consumer compliance; and
  • Ensure that compliance-related issues are raised to the board of directors or management.
• Policies and procedures to address compliance with all applicable consumer financial laws relating to the product;
• Current and complete compliance training designed to reinforce policies and procedures that is tailored to job functions and updated as needed;
• Adaptive internal controls and monitoring processes which provide for timely corrective actions where appropriate;
• Policies and procedures setting forth clear expectations for timely handling and resolution of complaints;
• Processes for appropriately escalating and resolving consumer complaints including analysis for root causes, patterns or trends;
• Processes for escalating identified violation trends to management for proposed changes to policies and procedures;
• Comprehensive audit programs that are independent of the compliance program and business functions; and
• Strong oversight of service providers commensurate with the risk and complexity of the processes or services provided.

Institutions need to view their compliance management system as part of an eco-system that is always changing.  Compliance management systems should be reviewed on an ongoing basis and remain adaptive.  While a strong compliance management system may not prevent violations and regulatory irregularities, it certainly can mitigate the damage and the most recent Supervisory Highlights makes clear that the CFPB continues to make them a point of emphasis.

CFPB Turns its Attention to Prepaid Products and North Carolina

The CFPB issued its Monthly Report this week. The report is a high level snapshot of trends in consumer complaints and provides a summary of the volume of complaints by product category, by company and by state. Additionally, each month it highlights a product type and a geographic area. This month’s report highlights prepaid card products and emphasizes the CFPB’s concern for the unbanked and underbanked population. Cordray noted that for the unbanked and underbanked, “prepaid products are a vital source of financial security.”  CFPB Monthly Complaint Snapshot Highlights Prepaid Product Complaints.

 

NATIONAL OUTLOOK. Each month, the Report breaks down complaint volume by product looking at a three month average and comparing the same to the prior year. Student loan complaints showed the greatest percentage increase when compared to the same period of 2015, increasing 96% over last year.  As has been the case in prior months, the Report continues to indicate that the three products yielding the highest volume of complaints on a month to month basis are debt collection, mortgage and credit reporting.  Together, they represent about 63% of all complaints submitted in September.

 

FEATURED PRODUCT OR SERVICE. This month’s report focuses on prepaid cards which, aside from “other financial service”, comprise the smallest percentage of complaints received by the CFPB for September and continue to remain toward the bottom of the list overall.  Put simply, prepaid product complaints make up less than 1% of all complaints received by the CFPB.

 

The most common issues identified by consumers are managing, opening or closing an account and unauthorized transactions or other transaction issues. Specifically, 

 

• According to the report, consumers complained of questionable transactions being posted to their prepaid cards and claimed their cards were cancelled without notification after they submitted a dispute;
   

• Consumers also reported difficulty using prepaid cards after purchase and being asked to submit validating documentation; and
   
• Consumers also complained about receiving prepaid cards as a refund, but being unable to activate the card, access the funds or both.  

NORTH CAROLINA. As it does every month, the Report spotlights a geographic area.  This month, the Report shined its bright light on North Carolina and the complaint trends for both the state and the Charlotte metropolitan area.  For perspective, only about 3% of all complaints received by the CFPB originate in North Carolina.  The most complained of products and services mirror the national picture with mortgage, debt collection and credit reporting comprising the vast majority of all complaints.  As noted by the CFPB, the rate of mortgage related complaints is slightly higher than the national average and it is the most frequently complained of product in North Carolina.