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"The Regulatory Ins and Outs of Third-Party High-Touch Defaulted Mortgage Loan Servicing" OR What? Me A Debt Collector?

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In the wake of the economic downturn, the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), and the subsequent creation of the Consumer Financial Protection Bureau (CFPB), the residential mortgage servicing industry is facing the twin turbulence of unprecedented scrutiny and increased regulation. The Takeaway. Those regulatory ins and outs, and certain of their key consequences, are explored, below. But, heres the main takeaway for mortgage servicers: Servicers that engage third-party outreach providers to contact borrowers in distress or default should take steps to assure that such providers are in compliance with the legal and regulatory requirements applicable to them, including but not limited to: (a) maintaining all necessary debt collector licenses, (b) understanding and respecting the requirements of the federal Fair Debt Collection Practices Act, and (c) monitoring the changing scope and nature of such requirements. Failure to do so could lead to adverse consequences for the mortgage servicers involved, including potential fines and even suspension or revocation of necessary servicing approvals. When it comes to the regulatory turbulence, consider the following. The CFPB Speaks. In his written testimony before the House Subcommittee on Financial Institutions and Consumer Credit on July 7, 2011, senior CFPB official Raj Date singled out the mortgage servicing industry for maintaining inadequate staff to handle delinquent loans, and for failing to ensure that such staff received adequate training for their positions. He cited the the lack of comprehensive federal standards for mortgage servicers, and the lack of any direct federal oversight of non-depository servicers. The CFPB conclusion? When it comes to working with defaulted mortgagors and troubled homeowners, the evidence of shoddy practices and underinvestment is striking. The CFPB "solution?" Increased supervision of mortgage servicers and the establishment of national servicing standards through an interagency working group.i
*This August, 2011 whitepaper has been prepared by the Washington, DC law firm of Weiner Brodsky Sidman Kider PC, as one of a series of such

publications reviewing developments affecting the mortgage finance industry. It is not intended to be relied upon as a substitute for legal advice. Further information about the law firm may be found at www.wbsk.com. Inquiries related to the whitepaper may be directed to James A. Brodsky at the firm, at Brodsky@wbsk.com.

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The Agencies Speak. These concerns are not limited to the CFPB. Fannie Mae recently promulgated the Quality Right Party Contact (QRPC), which includes uniform standards for communicating with a borrower about resolution of a mortgage delinquency.ii These standards require affected servicers to engage in increased communication with borrowers to, in part, determine the reason for delinquency, determine whether the borrower has vacated or plans to vacate the property, determine the borrowers perception of his or her current financial situation and ability to repay the mortgage debt, settle payment expectations, and educate the borrower on the availability of foreclosure prevention alternatives, as appropriate. The Fannie Mae QRPC requires affected servicers to achieve a benchmark mortgagor contact rate of at least 60% on mortgage loans that have reached the 120 th day of delinquency. These requirements are effective September 1, 2011. HUD Spoke. These concerns and such remedies are not new. HUD, at least "on paper," has long required its approved FHA mortgagees to conduct a face-to-face interviews with a mortgagor, or to make a reasonable effort to arrange such a meeting, before three full monthly mortgage payments are unpaid.iii The Move To High Touch Servicing, Particularly For Troubled Borrowers. Clearly, the CFPB, Fannie Mae, HUD, and (as noted below) other federal and state regulators, are taking a serious interest in how mortgage servicers deal with delinquent or otherwise troubled homeowners and mortgagors. Mortgage servicers will be subject to new rules (and subject to renewed interest in the enforcement of current rules) requiring more high touch contact with borrowers, in particular borrowers in distress. Thus, in the recently proposed settlement agreement between and among Bank of America, Pacific Investment Management Company LLC, and Blackrock Financial Management, Inc., among others, it is required that the servicing of troubled borrower high-risk loans be transferred to specialized subservicers fully licensed and compliant and with all federal and state laws.iv This Note surveys that changing regulatory landscape for residential mortgage servicers. In particular, it considers the utilization by servicers of "in person "outreach to borrowers in trouble by trained professionals in compliance with applicable current and upcoming regulatory requirements. Not to put too fine a point on it, then, this Note thus considers the "ins" and "outs" of the changing regulatory waterfront for "high touch" defaulted mortgage loan servicing. Given capital constraints, the need for expedition, and increasing regulatory complexity, among other challenges, servicers appear to be turning with increasing frequency to third-party outsourced providers for such "in person" "outreach" services.v In doing so, their goal appears to be to increase the number and quality of their "contacts" with such defaulted mortgagors, and, through such contacts, help provide information such borrowers in distress need.

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Key Third-Party Outreach Provider Characteristics: Who May Do What. Importantly, the third-party outreach providers considered in this Note contact borrowers in person, but do not actually collect any payments from such borrowers and are compensated for their services only by the servicers or investors who engage them to do such work. Even so, there are current regulatory requirements and constraints with respect to "who" may appropriately serve as such a third-party vendor to servicers, and "what" they may or may not do as they provide such services--and more are emerging. It is to a review of such provisions that we next turn. The House Speaks: Qualified Independent Third Parties. For example, a bill recently approved by the House of Representatives and awaiting Senate action would further amend the National Housing Act of 1934 by, in part, permitting HUD to provide reimbursement to servicers of covered mortgages for costs of obtaining the services of independent third parties to make contact with borrowers in distress whose payments are 60 or more days past due, for the purposes of providing these borrowers with information regarding available counseling, loan modification and refinance programs, and counseling on financial management and credit risk.vi However, importantly, this reimbursement would only be available to the extent that a servicer utilized a Qualified Independent Third Party, which is defined in part as an independent third party for-profit or nonprofit entity that is appropriately licensed or approved as required by the states in which it conducts such inperson contact activities. The apparent rationale for that requirement is that, as many states already require that entities and their employees or agents that engage in in-person contact activities of the type previously described be licensed or approved by such states as debt collectors, or as their functional equivalent in such states (more on that below), this provision similarly requires that a Qualified Independent Third Party be so licensed or approved in and by such states, thereby helping assure that those making such contacts also meet applicable state requirements and comply with federal and state debt collection laws. The Comptroller Speaks. Further evidence of the necessity of servicers utilizing knowledgeable third-party outreach providers who maintain the proper licenses and practices under applicable state and federal law can be found in the April 2011 consent order that the Office of the Comptroller of the Currency (OCC) entered into with Bank of America.vii The OCC charged, among other things, that Bank of America failed to sufficiently oversee outside counsel and other third-party providers handling foreclosure-related services. As part of the consent order, Bank of America agreed to implement policies and procedures requiring Bank of America to maintain appropriate oversight over its third-party service providers and independent contractors to ensure compliance with all applicable state and federal laws, including performing periodic reviews of third-party service provider work to determine compliance with applicable law. Under the consent order, Bank of America

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also agreed to perform appropriate due diligence on the qualifications, expertise, reputation, complaints, and other characteristics of potential third-party service providers. Consequently, it is important that mortgage servicers who engage third-party outreach providers to increase their borrower contact assure that such providers are fully versed in and compliant with all applicable debt collection laws, among othersthat is, that their "outsourced" "outreach" professional providers of "in person" contact services are "in compliance." The Congress Spoke: The Federal Fair Debt Collection Practices Act (FDCPA). The primary federal law on debt collection is the Fair Debt Collection Practices Act (FDCPA), which regulates the activities of entities that directly or indirectly collect or attempt to collect debts in default. The FDCPA defines a debt collector in part as a: 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.viii The Federal Trade Commission Speaks. The Federal Trade Commission (FTC) has taken a broad view of what activities constitute debt collection for purposes of the FDCPA. For example, the FTC has opined that a person engaged in merely locating a borrower in default and asking a series of questions regarding the borrowers finances and other circumstances is deemed to be a debt collector.ix Likewise, in a 1990 letter, the FTC stated that a person engaged in pre-collection services, including sending bills, handling telephone and written correspondence from patients who owed a debt and providing other services related to the patients account, was deemed to be a debt collector.x Pursuant to the Dodd-Frank Act, the CFPB will assume primary enforcement and rulemaking authority over the FDCPA. However, it is likely that the CFPB will read the definition of debt collector at least as broadly as the FTC has done. Therefore, the typical practices of thirdparty outreach providers, which normally involve contacting borrowers in default in order to provide them with information and to urge them to contact their servicers, would appear to fall within the definition of debt collector under the FDCPA, at least as an indirect attempt to collect a debt owed another. FDCPA Requirements. The FDCPA imposes a host of requirements on debt collectors. A sample of these requirements includes: Self-identification when contacting a borrower via telephone;xi Providing a mini-Miranda disclosure to a borrower in the initial written or oral communication with the borrower, informing him or her that the entity is attempting to collect a debt and that any information obtained will be used for that purpose;xii

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Providing a debt validation disclosure within five days after the initial communication with the borrower, which describes the debt alleged to be owed and informs the borrower that if he or she does not dispute the debt within thirty days of receipt of the notice, the debt will be assumed to be valid; xiii Limits on the time and place that the debt collector may communicate or attempt to communicate with the borrower;xiv and Prohibitions on harassment or abuse of a borrower, false or misleading representations to a borrower, and unfair or unconscionable debt collection practices.xv

FDCPA Trouble. Violations of the FDCPA expose the debt collector to liability to an individual for damages in a civil action in an amount equal to the sum of: (1) actual damages as a result of a violation; (2)(a) in the case of any action by an individual, such additional damages as the court may allow, not exceeding $1000; or (2)(b) in the case of a class action, (i) such amount for each named plaintiff as could be recovered in an action by the individual for each named plaintiff, and (ii) such amount as the court may allow for all other class members, without regard to a minimum individual recovery, not to exceed the lesser of $500,000 or 1% of the net worth of the debt collector; and (3) in the case of any successful action to enforce the forgoing liability, the costs of the action and reasonable attorneys fees as determined by the court.xvi Servicer FDCPA Trouble. The FDCPA imposes direct liability on third-party outreach providers who violate its provisions, not on the servicers who engage them to contact borrowers in default. However, as noted above, there is a growing movement to require servicers to assure that those they engage for such services also are in compliance with all applicable federal and state law. Failure of a servicer to ensure that a thirdparty outreach provider complies with the FDCPA thus could subject the servicer to substantial reputational risk. Moreover, under Title X of the Dodd-Frank Act, the CFPB now has rulemaking authority with respect to the FDCPA, and has broad authority to designate certain practices as being unfair, deceptive, or abusive, and to enjoin or fine entities, including mortgage servicers, from engaging in such actions. xvii Under the DoddFrank Act, the civil penalties alone that can be levied against entities that violate a provision of a federal consumer financial law (including the FDCPA and any regulations promulgated thereunder by the CFPB) can be severe, ranging from $5,000 a day during the period that the violation continues, up to $1 million a day for knowing violations of a federal consumer financial law.xviii Privacy Concerns. Some mortgage servicers, reportedly, may have hesitated to use such third-party outreach providers due to concerns about sharing of borrower information with them, particularly in light of applicable FDCPA and Gramm-Leach-Bliley Act privacy-related requirements. Done carefully and well, however, it would appear that such concerns may be largely unfounded.xix Mortgage servicers generally are free to utilize third-party outreach providers to contact borrowers in distress, on their behalf. Nonetheless, it is vital that mortgage servicers only utilize trained, supervised third-party outreach providers licensed as debt collectors where appropriate under state law (or clearly exempt from such licensing requirements) to contact borrowers.

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Subcontractor Concerns. A particular concern in this area, for servicers and even for third-party vendors, could arise if such third parties, in turn, further sub-contract out to other companies or individuals actual borrower contact duties that are either independent of them, not trained and supervised by them, or not, themselves, appropriately licensed. As described below in more detail, most states require licenses to act as such debt collectors. Accordingly, a less than fully thoughtful and careful third-party outreach provider that further subcontracted out borrower contact duties to an unlicensed entity or to untrained or unsupervised persons could expose itself and its mortgage servicer to significant regulatory and reputational risks. The States Speak. As described above, in addition to the FDCPA, servicers also should be aware of state laws governing debt collection practices. Many states have debt collector licensure requirements, and also restrict and regulate permissible debt collection practices by their licensees either by largely mirroring those of the FDCPA (as noted above), or setting their own also applicable activities limitations and related penalties. Massachusetts. For example, under Massachusetts law, no entity may engage in the business of collection of debts in default or of third-party loan servicing without being licensed by the Commissioner of Banks.xx Massachusetts regulations governing the definition and practice of debt collection are similar to the requirements of the FDCPA and include provisions governing when and how debt collectors may contact borrowers or persons other than borrowers in relation to a debt in default, as well as proscriptions against deceptive debt collection acts or practices.xxi Additionally, servicers in Massachusetts must ensure that any third-party outreach provider they engage complies with applicable Massachusetts and federal law. Failure to do so can result in the Commissioner of Banks suspending or even revoking their servicing license. Texas. Similarly, Texas law forbids various debt collection practices and provides for penalties for violation of these restrictions. Debt collector for these purposes generally means a person who directly or indirectly engages in an action, conduct, or practice in collecting, or in soliciting for collection, consumer debts that are due or alleged to be due a creditor.xxii Debt collectors operating in Texas may not engage in the following practices: Using threats, coercion, or attempts to coerce that employ certain enumerated practices, such as threatening to take an action prohibited by law;xxiii Oppressing, harassing, or abusing a borrower by employing certain practices, such as placing telephone calls without disclosing the name of the individual making the call, with the intent to annoy, harass, or threaten a person at that number;xxiv Using unfair or unconscionable means that employ certain practices, such as collecting or attempting to collect interest or a charge, fee, or expense incidental to the obligation unless the incidental charge, fee or expense is expressly authorized by the agreement creating the obligation or is legally chargeable to the borrower;xxv and

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Using a fraudulent, deceptive, or misleading representation that employs certain practices, such as failing to maintain a list of all business or professional names known to be used or formerly used by persons collecting consumer debts or attempting to collect consumer debts for the debt collector.xxvi

Servicer Texas Trouble. Texas law imposes liability not just on debt collectors who engage in prohibited practices, but also on creditors who use independent debt collectors if the creditors have actual knowledge that the independent debt collectors repeatedly or continuously engage in practices that are prohibited under Texas debt collection law.xxvii For these purposes, creditor is defined very broadly as a party, other than a consumer, to a transaction or alleged transaction involving one or more consumers, that would appear to include servicers.xxviii Consequently, servicers in Texas should assure that any independent debt collectors they employ are in full compliance with Texas law. Many More States Speak. These are only two examples of state specific provisions that impose requirements and restrictions on third-party vendors that provide customer outreach for servicers. Most states impose them, and related debt collector licensing requirements.xxix The Attorneys General Speak. In addition, and more broadly, servicers employing third-party outreach providers should appreciate the growing and important role that state financial regulators and attorneys general likely will have in the future of mortgage servicing and debt collection issues. For example, the CFPB has already signed a memorandum of understanding with various state financial regulators to share oversight of state banks and non-depository financial institutions, including servicers. As the CFPBs Elizabeth Warren stated: Weve all been confronted recently with ample evidence of haphazard and possibly illegal practices of mortgage servicing companies that have called into question home mortgage foreclosuresWe can learn from the [Conference of State Bank Supervisors] efforts and what they have seen on the ground. We are hopeful these lessons will inform the bureau and the agency going forward.xxx Additionally, state attorneys general have begun focusing more on servicing practices. For example, it recently was reported that the Connecticut Attorney General has requested meetings with representatives of various large financial institutions, citing a concern that these institutions are failing to devote sufficient resources to mortgage servicing. The Connecticut Attorney General has stated that he wants assurances that the servicers are prepared to implement new loan servicing standards as they arise. xxxi Attorney General Trouble. State attorneys general also have been granted broad powers under the DoddFrank Act, to act on their servicing-related concerns. Under that Act, state attorneys general have the power to bring civil actions (in federal district court or in state court) or other appropriate proceedings to enforce both

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Title X and any regulations that the CFPB adopts pursuant to Title X, as discussed above, against any entity that is licensed, chartered, incorporated, or otherwise authorized to do business in a particular state. A state attorney general must give notice to the CFPB and any applicable prudential regulator before initiating such an action against an entity subject to CFPB supervision, and the CFPB is free to intervene in this action as a party and may remove the action to federal court. xxxii Nonetheless, it is important to note these broad enforcement powers, and to further note that state attorneys general likely will share enforcement responsibility of new mortgage servicing standards and laws with the CFPB. What Servicers Might Do. In light of current state and federal law, and the rapidly-changing landscape of mortgage servicing requirements, it can be quite important for mortgage servicers carefully to examine the qualifications and practices of any third-party outreach providers they employ to contact borrowers in distress or default. With the new focus on increased borrower contact, and the interest in borrower contact practices being evidenced by the CFPB and state authorities, mortgage servicers should assure that they only engage the services of third-party outreach providers that are in compliance with the legal and regulatory requirements applicable to them. Failure to do so could lead to adverse consequences for the mortgage servicers involved, including potential fines and even suspension or revocation of necessary servicer approvals. Consequently, mortgage servicers would be well-advised to engage only third-party outreach companies to contact borrowers, in person and on their behalf, that demonstrate both a knowledge of and commitment to full compliance with all applicable federal and state debt collection and other related laws and regulations, including but not limited to maintaining all necessary licenses and monitoring the changing scope and nature of such requirements. Further, such providers should train and supervise their staff and others with whom they work to provide such services, to help assure that they comply fully with the myriad of complex requirements under the FDCPA and state laws, and should not pass along to unsupervised, untrained, unlicensed or unreliable companies or individuals such in-person borrower contact responsibilities. The Last Word. Done poorly, third-party outreach providers of defaulted mortgagor services can immerse both the provider and the servicer that engages it in troubled and turbulent regulatory waters. However, and far more importantly, done properly, and with skill and care, defaulted mortgage loan servicing through qualified third-party service providers can and will both be responsive to the regulatory ins and outs applicable to such activities, and also should well-serve the interests of the servicers, investors, guarantors and insurers that increasingly are encouraging or requiring them and the mortgagors who benefit from them.

http://financialservices.house.gov/UploadedFiles/070711date.pdf th Fannie Mae Servicing Guide, Announcement SVC-2011-08, June 6 , 2011; see also Freddie Mac Servicing Alignment Initiative, http://www.freddiemac.com/singlefamily/service/servicing_alignment.html iii 24 C.F.R. 203.604(b)
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http://www.gibbsbruns.com/files/Uploads/Documents/Settlement%20Agreement.PDF See, e.g., http://www.mortgageloan.com/some-lenders-farming-out-loan-modification-work-to-third-parties-3418; http://www.mortgageorb.com/e107_plugins/content/content.php?content.9271 vi th FHA Reform Act, H.R. 5072, 111 Cong. (2010) vii In the Matter of Bank of America, N.A., AA-EE-11-12, #2011-048 (OCC, April 13, 2011) (available at http://www.occ.treas.gov/news-issuances/news-releases/2011/nr-occ-2011-47b.pdf) viii 15 U.S.C. 1692a ix FTC Op., Isgrigg, November 10, 1992 x FTC Op., Gibson, February 21, 1990; FTC Staff Report, 40 Years of Experience with the Fair Credit Reporting Act, July 2011 (available at http://www.ftc.gov/os/2011/07/110720fcrareport.pdf) xi 15 U.S.C. 1692e(14) xii 15 U.S.C. 1692e(11) xiii 15 U.S.C. 1692g xiv 15 U.S.C. 1692c xv 15 U.S.C. 1692d, 1692e, 1692f xvi 15 U.S.C. 1692k xvii Dodd-Frank Act 1031, 1089 xviii Dodd-Frank Act, 1002, 1055 xix http://www.mortgageorb.com/e107_plugins/content/content.php?content.9306 xx Mass. Gen. Laws Ann. ch. 93, 24A xxi Mass. Gen. Laws Ann. ch. 93, 49; 940 Mass. Code Regs. 7.00 et seq xxii Tex. Fin. Code Ann. 392.001 xxiii Tex. Fin. Code Ann. 392.301 xxiv Tex. Fin. Code Ann. 392.302 xxv Tex. Fin. Code Ann. 392.303 xxvi Tex. Fin. Code Ann. 392.304 xxvii Tex. Fin. Code Ann. 392.306 xxviii Tex. Fin. Code Ann. 392.001 xxix Among the states that have debt collector licensing, registration of collection practice restrictions or requirements are: AL (Collection Agency License Tax); AR (Collection Agency License); CA (California Rosenthal Fair Debt Collection Practices Act); CO (Collection Agency License); CT (Consumer Collection Agency License); FL Consumer Collection Agency License); ID (Collection Agency License); IN (Collection Agency License); IA (Debt Collector Notification); LA (Collection Agency Registration); ME (Debt Collection License); MD (Collection Agency License); MA (Collection Agency License); MI (Collection Agency License); MN (Collection Agency License); NE (Collection Agency License); NV (Collection Agency License); NJ (Collection Agency Bond); NM (Collection Agency License); NC (Collection Agency Permit); OR (Collection Agency License); RI (Debt Collection Registration); TN (Collection Service License); TX (Collection Agency Bond); UT (Collection Agency Registration); WA (Collection Agency License); WV (Collection Agency Bond); WI (Collection Agency License); and WY (Collection Agency License). xxx http://www.coesterappraisals.com/blog/regulations/cfpb-signs-cooperation-agreement-with-states/ xxxi http://www.bloomberg.com/news/2011-07-20/connecticut-attorney-general-calls-banks-to-meet-over-mortgageservicing.html xxxii Dodd-Frank Act, 1042