Loss mitigation is the new mantra of any servicer. With slumping housing markets and economically depressed customers, loss mitigation offers a solution for everyone.
Skyrocketing real estate owned inventory, vacant properties that are devaluing daily and pressure from the courts are great incentives to offer loss mitigation. Other servicers may see that failing to offer loss mitigation options results in their becoming the pariah in the media's and courts' eyes.
Most servicers' loss mitigation programs are born out of economic necessity and good intentions. Helping a customer stay in his or her home not only benefits the customer, but also transforms a nonperforming loan.
From forbearance agreements to loan modifications, to deeds in lieu or consent judgment entries, the options for loss mitigation vary depending on the customer's circumstances and financial ability as well as the lender's loan portfolio. Contested foreclosures provide opportunities for the servicer to offer loss mitigation in lieu of continuing legal fees and potential exposure.
With all the positives of loss mitigation, it seems nearly inconceivable that it would create a new wave of litigation. However, despite a servicer's good intentions and the benefits to the consumer, loss mitigation can create new litigation battles. With some forethought to compliance issues, the benefits of loss mitigation will still far exceed the threat of litigation.
Federal legislation
Federal legislation meant to protect consumers from predatory lending practices or unfair and deceptive acts or practices provides grounds for consumers to challenge a company's loss mitigation practices. While loss mitigation will ultimately help borrowers, compliance with federal statutes is a must when offering loss mitigation.
Servicing a mortgage falls squarely under the activities governed by the Fair Debt Collection Practices Act (FDCPA). Most often, a servicer is not collecting its won debt, thus a servicer is a "debt collector" under the FDCPA.
The FDCPA requires that debt collectors treat debtors fairly and prohibits certain methods of debt collection. In general, the debts that are covered by the act are consumer debts incurred as a result of transactions for personal, family and/or household purposes. Any home loan, home equity line of credit or mortgage interest in a residential property is included in the FDCPA.
The Federal Trade Commission (FTC) is the government agency that can enforce violations, although consumers have a private right to file suit or a counterclaim alleging violations of the FDCPA.
The ultimate purpose of the FDCPA was to achieve the following three objectives:
- eliminate abusive debt collection practices by collectors,
- ensure collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and
- promote consistent state action to protect consumers against debt collection abuses.
The areas where many FDCPA violations occur are those in which there must be a verification or validation of debts. Under the FDCPA, the first written notice to a debtor must occur within five days after the initial contact. The notice must contain:
- the of debt,
- the name of the creditor
- language to the effect that the purpose is to collect debt,
- a statement that unless the consumer, within 30 days after receipt of the notice, disputes the validity of the debt or any portion thereof, debt will be assumed to be valid by the debt collector,
- a statement that if the consumer notifies the debt collector in writing within a 30-day period that the debt – or any portion thereof – is disputed, the debt collector will obtain verification of debt or a copy of judgment against the consumer, and a copy of such verification or judgment will be mailed to consumer by the debt collector, and
- a statement that, upon receipt of the consumer's written request within the 30-day period, the debt collector will provide the consumer with the name and address of original creditor, if different from the current creditor.
Precedent
Loss mitigation raises the issue of when and how offers can be made to the consumer. Industry trade group and attorney network USFN recently asked the FTC for an advisory opinion on loss mitigation offers. USFN questioned whether the FDCPA prohibits debt collectors from discussing settlement options in the initial or subsequent communications with the debtor.
The FTC opinion stated that discussing settlement options in initial communications is not a per se violation. In 2006, Congress amended the FDCPA to provide that "any collection activities and communication during the 30-day period may not overshadow or be inconsistent with the disclosure of the consumer's right to dispute the debt."
Additionally, if loss mitigation options are offered in the initial communication, and the consumer requests validation/verification, that validation/verification must still be provided.
Servicers should also be careful that the language used in the loss mitigation offer does not create confusion for the borrower. The standard that the courts apply when evaluating a consumer's claim is that of the least sophisticated consumer.
Any offer of loss mitigation must be clear that collection is not stopping, that foreclosure may still be filed or that the account will still be reported as delinquent.
Recent case law also addressed the issue of one-time-only settlement offers. Although the case did not involve foreclosure, one court found that an offer that said it was good only through a certain date and was a one-time-only settlement offer violated the FDCPA.
The court found that one-time-only offers might confuse consumers to believe that, after that time, settlement was not a possibility. Instead, the court recommend language such as, "We are not obligated to renew this offer."
Additionally, any conditions for loss mitigation must be made clear to the consumer. For example, if the servicer's requirement for loss mitigation is that the consumer has a job for the last three months, make a yearly income of a specified amount, and be able to put down 10% of the arrears, those conditions should be expressly stated so that the consumer is not confused or misled into believing that he or she will automatically qualify for loss mitigation.
Some servicers attempt more personal communications with default borrowers, such as door knocks or telephone calls. Both of these approaches provide fertile ground for FDPCA violations.
Door-knocking is the practice of sending someone to physically go to the borrower's home. Depending on what the door knocker does at the home, he or she may be violating the FDCPA.
Even if the servicer hires an outside company that leaves materials or pamphlets stating that they are not debt collectors, it is not the label that matters, but rather the activity performed. Thus, if the door knocker is obtaining identifying information or attempting to collect a debt, such activities may be subject to the FDCPA. This type of activity must be taken with caution to fully comply with all aspects of the FDCPA.
Most servicers do make telephone calls to borrowers who are in default. Recent FDCPA cases suggest that leaving a pre-recorded message without the required FDCPA warning violates the act, as a mere identification of a collection agency by name did not disclose that the caller was a debt collector.
Another case granted summary judgment to a consumer for phone calls made to her cell phone. Although the consumer listed her home, cell and work phone numbers on her loan application, the court found that phone calls made to her cell phone with an auto dialer and prerecorded message, without first obtaining her prior expressed consent, violated the Telecommunications Consumer Protection Act.
A similar argument could be made that dialing a consumer's cell phone may result in an increased cost to the consumer, which would violate the FDCPA.
Other areas of concern would be hiring third-party appraisers to evaluate properties or hiring real estate agents to gain interior inspections. With both of these options, strict compliance with the FDCPA is required as the servicer is communicating with a third-party regarding a consumer's debt.
Truth-In-Lending
The federal Truth-In-Lending Act (TILA) is a disclosure statute that imposes obligations on creditors when they extend credit to consumers. TILA was originally drafted as a consumer protection act. Its purpose is to promote informed use of credit by requiring creditors to provide meaningful disclosures of credit terms to consumers.
Special early disclosures must be given when a consumer gives the lender an interest in his or her principal residence. These disclosures are in addition to the general disclosures required under TILA. Mortgages and home equity lines of credit require these disclosures. Further disclosures are required on variable-interest loans when the interest rate may increase.
If the required disclosures are not provided, a consumer has additional time to rescind the loan. A consumer has the right to rescind the credit transaction until midnight, three business days after the last of the following events: consummation of the transaction, delivery to the consumer of the notice of the right to rescind, or delivery to the consumer of all material disclosures of the credit terms.
With loss mitigation changing the terms of loans, a question arises whether new TILA disclosures must be provided to the consumer. While a pure modification would not require new disclosures, other situations may.
Pure modifications include only those where the existing note and mortgage remain the same, with some modifications made to the amount and payment schedule. However, if additional funds were advanced, then there would be a modified loan with a new balance in excess of the outstanding loan balance, requiring a TILA disclosure.
Regulation Z, a subpart to TILA, actually defines refinancings. Regulation Z defines when a refinancing occurs as "when an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same consumer. A refinancing is a new transaction requiring new disclosures to the consumer."
The definition continues, stating that the following are not treated as refinancings:
- a renewal of a single payment with no change in the original terms,
- a reduction in the annual percentage rate with corresponding change in the payment schedule,
- an agreement involving a court proceeding,
- a change in the payment schedule or a change in collateral requirements as a result of the consumer's default or delinquency, unless the rate is increased or the new amount financed exceeds the unpaid balance plus the earned finance charge and premiums for continuation of insurance, and
- the renewal of option insurance purchased by the consumer and added to an existing transaction, if disclosures relating to the initial purchase were provided as required.
Based on the definitions, if loss mitigation options include loan modifications, new TILA disclosures must be provided if additional monies are lent (look carefully if additional monies are lent to pay for legal costs/fees), if the rate increases or if the old note and mortgage are satisfied. When in doubt as to whether a TILA disclosure should be provided, the safe route is to provide the disclosure.
Common-law claims
Common-law claims have routinely been used to thwart foreclosure proceedings. In this heightened foreclosure environment, these claims are still being raised and directed at loss mitigation practices.
A consumer may try to bring a breach-of-contract claim. The consumer would essentially claim that a loss mitigation offer establishes a contract between the consumer and the lender or servicer. When the loss mitigation is not completed, then the contract is breached.
While these claims will create litigation, the consumer will have a hard battle, as the consumer will need to prove that a contract existed.
To prove a contract, the consumer would need to show a meeting of the minds on all terms involved and consideration. On loss mitigation offers, the lender/servicer should be able to show that the offer is merely an offer and does not establish terms on which the lender/servicer and borrower agreed.
The easiest way to defeat these claims is consideration. To claim that a contract exists, the borrower will need to show consideration from all involved. The borrower will need to show that he or she gave something to the lender and that the servicer, in turn, gave something to the borrower.
In some situations, these claims have merit. An example is when a borrower receives a loss mitigation offer that includes language that if he or she makes a payment of $4,000, foreclosure proceedings will not begin. If the borrower then makes that payment, the terms of the contract are reached.
All too often, the servicer may send such a letter, while the lender receives the $4,000 payment. The $4,000 payment may not be sufficient to pay the arrears, and a foreclosure begins. The borrower then files a counterclaim or new matter claiming breach of contract.
To prevent such cases, make sure the lender and servicer both understand the terms of the loss mitigation offer. Promises to stop or avoid foreclosure must be worded carefully. Most courts would see such a payment as good-faith consideration to stop the filing of foreclosure.
Similarly, a consumer may make a claim of fraud or negligent misrepresentation based on a loss mitigation offer.
Like the example above, if the consumer reads the letter as an offer and acts upon it, the consumer may claim that he or she relied on the representations of the lender/servicer. Offers of loss mitigation must be carefully worded to avoid any confusion on behalf of the consumer.
Despite the threat of potential claims involving loss mitigation, the benefits far outweigh the risks. The benefits of loss mitigation will continue to increase, as both consumers and servicers understand the impact of loss mitigation. With careful programs and an eye on compliance, loss mitigation should still be the first option on any defaulted note or mortgage.
Jennifer M. Monty is an attorney handling litigation and defense matters for Ohio-based law firm Weltman, Weinberg & Reis Co. LPA. She can be reached at (216) 685-1136.
