Compliance Q&A's

Question: On a purchase money transaction, the lender issued a Closing Disclosure which set forth a 30-year term, as opposed to the 15-year term the borrower wanted. The error was discovered while the borrower was at the closing table. The lender issued a corrected CD reflecting an APR increase of more than 0.125%, thus triggering a new three day waiting period. The lender did not give the settlement agent a “clear to close”. However, for whatever reason, the settlement agent thought he had funding authorization and proceeded to consummate the transaction, including the disbursement of funds to the seller. It appears that the settlement agent closed on the initial CD, as that is the CD, signed by the borrower, that he returned to the lender. The following day the lender learned that the transaction closed and now seeks to “cure” the regulatory violation through the issuance to the borrower of a corrected CD within 30 days of consummation in accordance with 12 C.F.R § 1026.19(f)(2)(iii). Does doing so, in fact, cure the situation?
 
Answer
You are correct, that under the TILA-RESPA Integrated Disclosure Rule (TRID), the lender must issue a revised Closing Disclosure (CD) if any of the fees reflected therein become inaccurate at or before consummation and, if such revisions result in an increase in the APR of more than 0.125%, consummation must not take place sooner than three business days following the issuance of the corrected CD. [12 CFR § 1026.19(f)(2)]
 
As to the regulatory violation described in your question, there is no “cure” for failing to comply with the three day waiting period rule. Regardless of what actions the lender takes now, the lender can still be cited for this violation. 
 
As to the 30-day post consummation cure period, under the regulation, a revised CD must be issued within thirty days of consummation if two criteria are met.
 
1. “An event in connection with the settlement of the transaction occurs that causes the disclosures . . . to become inaccurate”, and
2. “Such inaccuracy results in a change to an amount actually paid by the consumer from that amount disclosed under paragraph (f)(1)(i) of this section . . . “ [12 CFR 1026.19(f)(2)(iii)]
 
In the Section by Section analysis (78 FR 79878), the Bureau sets forth its position that post-consummation redisclosures should only be made if a subsequent event results in a change to a charge paid by the consumer.
 
“The final rule requires redisclosure only for post-consummation events that change an amount actually paid by the consumer. The Bureau does not believe consumers would benefit from revisions to the Closing Disclosure due to post-consummation events that do not affect charges imposed on them . . . Thus, the Bureau believes a redisclosure to the consumer after consummation should be required only if a subsequent event changes a charge actually paid by the consumer and not for any change to the transaction."
 
So the question is, what is the post-closing event that caused the disclosure to become inaccurate?
 
The lender learning that the settlement agent consummated the transaction using the incorrect CD? That does not appear to qualify as a post-consummation event, as the event was the consummation of the transaction, not the lender learning of the error.
 
The second question is, what charges did the consumer actually pay? Those charges disclosed on the incorrect CD or those disclosed on the corrected CD? If the former (assuming they are less), I would suggest the creditor simply eat the difference in fees. If the latter, consider looking to the cure provisions under 15 USC § 1640(b); notify the consumer of the error and refund the lesser of the charge actually disclosed or the dollar equivalent of the APR disclosed on the incorrect CD.
 
Additionally, if on a good faith analysis, the charges disclosed on the corrected CD exceeded the amounts set forth on the Loan Estimate beyond permissible tolerances, the corrected CD must be issued together with a refund for excess to the borrower within 60 days of consummation. [12 C.F.R. § 1026.19(f)(2)(v)]
 
Joyce Wilkins Pollison is director of Legal & Regulatory Compliance for Lenders Compliance Group.
Question: Have there been any recent changes or developments concerning Testing and Education Requirements for non-bank Mortgage Loan Originators?
 
Answer 
At the recent NMLS Annual Conference held in Austin, TX, I attended a break-out session conducted by SRR officials Pete Marks and Rich Madison. Also presenting was Tammy Scruggs, a Director in the Kentucky Division of Financial Institutions and Vice-Chairperson of the Mortgage Testing and Education Board. (MTEB)
 
The MTEB has approved Rules of Conduct which cover test takers, education students and Standards of Conduct which cover course providers. It has also approved Administrative Action Procedures which determine how violations and investigations will be managed. Their role is to act in both an oversight and advisory capacity. The MTEB is comprised of at least nine state regulators representing each of the five CSBS Districts and at least one AARMR representative.
 
Test Administration
The number of tests administered in 2010 totaled 368,000 and has slowed at a steady pace staying at the 130,000 level for three years and then further declining to the 2016 figure of 59,000. The drop is attributed to the decline in the number of state specific tests, resulting from the introduction of the Uniform State Test in 2013. The National Test numbers have been at their historical highs over the last three years with 2017 getting off to a great start.
 
Test performance has been declining throughout 2016 as evidenced by the National Test with Uniform State Content First-Attempt Pass Rates ranging from about 63 % for the first three months of 2016 to an average score of 58.8% for the last five months of the year. Trends suggest that the quality of the test takers may be deteriorating.
 
Content Outline Expansion Program 
Presently, individuals taking the SAFE Mortgage Loan Originator Test National Component with Uniform State Content can review a Content Outline that breaks down the sections of the test by categories and provides topics covered in each section along with the percentage of the questions coming from each section. The outline is roughly three and one-half pages. The outline will be going through a revision which will take the outline to four times the detail that is there now to about 16 pages. It is expected that test takers will have a much broader understanding of the test elements without exposing the test content. The content of the test will remain the same. It is expected to be implemented, subject to getting the necessary approvals, sometime in the second quarter of this year.
 
It was pointed out that the test taker is responsible for changes that may have occurred in laws and regulations within the test cycle. Below is the actual language that appears.
Legislative Updates Legislative changes may occur throughout the test administration cycle. Candidates are responsible for keeping abreast of changes made to the applicable statutes, regulations and rules regardless of whether they appear on this outline or the test.
 
Also in play is a Standard Setting Process which will link a passing score to the ability level of a minimally qualified candidate. A Subject Matter Expert Panel will evaluate the test resulting in the evaluation of the panel output.
 
UST Adoption
The State adoption of the Uniform State test has been very successful. Florida and Arkansas have either adopted the test or will do so shortly. That will leave the remaining states not adopting to four. Of those four, Utah, Minnesota and South Carolina have legislation in motion to allow adoption. West Virginia has been meeting with CSBS leadership to further discuss adoption. It is possible that all states may be using the UST by the end of 2017.
 
Test and Education Security
Enhancements to the security of education programs and tests have been made during the period. A Candidate Agreement has been completed. Candidates must sign the agreement in advance to be able to proceed with testing. Rules of conduct for education students are also completed and in place. The MTEB is now allowed to act in an appellate capacity on cases brought before them. Web surveillance is also in place with the primary focus of searching for misuse of test content. Student authentication is in process. The concept is to find a way to determine that the online course taker is legitimate.
 
The number of investigations is quite low. Twenty-five cases were investigated in 2016 which represented a 50% reduction over the previous year. Some of the areas of concern are bad content at the test center and MLO’s changing the test score on the score report and presenting it to their employer.
 


 
Alan Cicchetti is director of Agency Relations for Lenders Compliance Group, and executive director for Brokers Compliance Group.

Question: We originate loans almost exclusively through E-Sign procedures. Recently, we were cited for not providing proper disclosure to consumers regarding our E-Sign policies. What are the proper disclosures that we must provide consumers in order to ensure compliance with E-Sign?

Answer
The Electronic Signatures in Global and National Commerce Act (E-Sign Act) provides a general rule of validity for electronic records and signatures for transactions in or affecting interstate or foreign commerce. The E-Sign Act allows the use of electronic records to satisfy any statute, regulation, or rule of law requiring that such information be provided in writing, if the consumer has affirmatively consented to such use and has not withdrawn such consent.

Prior Consent is required from the consumers in order to implement the E-Sign Act procedures. Prior to obtaining their consent, financial institutions must provide consumers, a clear and conspicuous statement informing the consumer:

►Of any right or option to have the record provided or made available on paper or in a non-electronic form, and the right to withdraw consent, including any conditions, consequences, and fees in the event of such withdrawal;

►Whether the consent applies only to the particular transaction that triggered the disclosure or to identified categories of records that may be provided during the course of the parties’ relationship;

►That describes the procedures the consumer must use to withdraw consent and to update information needed to contact the consumer electronically; and

►That informs the consumer how the consumer may nonetheless request a paper copy of a record and whether any fee will be charged for that copy.



Jonathan Foxx is managing director of Lenders Compliance Group, the first and only full-service, mortgage risk management firm in the United States, specializing exclusively in outsourced mortgage compliance and offering a suite of services in residential mortgage banking for banks and non-banks. If you would like to contact him, please e-mail Compliance@LendersComplianceGroup.com.

Question: We are considering whether to sell our mortgage servicing rights. This has been a long, drawn out process of complicated decision-making. At this point, we are still struggling with how to determine the valuations. Perhaps there is a given set of valuation criteria that we could use. Essentially, we just want to be sure we are including the basics in our valuation. Is there a set of valuation data sets that we should be considering in our valuation approach?

Answer
Servicers Compliance Group, our affiliate, handles due diligence for virtually all aspects of mortgage servicing, so this is a subject with which we have considerable familiarity. First, it is important to define “mortgage servicing rights,” often referred to by the acronym “MSR”. At the most rudimentary level, MSRs are the capitalized value of the right to receive future cash flows from the servicing of mortgage loans. The concept of capitalized value asserts that the current value of an asset can be determined based on the total income expected to be realized over its economic life span. Those cash flow periods are the anticipated earnings, as discounted (viz., given a lower value), so they take into account the time value of money.

MSRs are considered a source of value derived from originating or acquiring mortgage loans. Because residential mortgage loans typically contain certain features, such as a prepayment option, borrowers often elect to prepay their mortgage loans by refinancing at lower rates during declining interest rate environments. But, when the refinance occurs, the cash flows generated from servicing the original mortgage loan are terminated. Thus, the market value of MSRs is extremely sensitive to changes in interest rates. For instance, the MSR market value tends to decline as market interest rates decline and increase as interest rates rise.

It is usual to capitalize MSRs on the fair market value of the servicing rights associated with the underlying mortgage loans at the time the loans are sold or securitized. Generally Accepted Accounting Principles (GAAP) requires that the value of MSRs be determined based upon market transactions for comparable servicing assets or, in the absence of representative market trade information, based upon other available market evidence and even modeled market expectations of the present value (PV) of future estimated net cash flows – such as internally developed discounted cash flow models to estimate the fair market value – that market participants would expect from servicing.

Obviously, valuation requires considerable expertise. I offer here a few of the many possible ways to process assumptions in a valuation of MSRs. This outline is by no means comprehensive. It assumes that MSRs are carried at estimated fair market value.

Prepayment: This is the most significant driver of MSR value based on the actual and anticipated portfolio prepayment behavior. Prepayment speeds, sometimes referred to as “velocity,” represent the rate at which borrowers repay their mortgage loans prior to scheduled maturity. As interest rates rise, prepayment velocity generally slows down, and as interest rates decline, prepayment velocity generally accelerates. When mortgage loans are paid off or expected to be paid earlier than originally estimated, the expected future cash flows associated with servicing such loans are reduced.

Discount Rate: The cash flows of MSRs discounted at prevailing market rates, which often include an appropriate risk-adjusted spread.

Base Mortgage Rate (BMR): This is the current market interest rate for newly originated mortgage loans. It is considered a key component in estimating prepayment speeds of a portfolio because the difference between the current BMR and the interest rates on existing loans in the portfolio is an indication of a borrower’s likelihood to refinance.

Cost to Service: Servicing costs are based on actual expenses directly related to servicing. These servicing costs are compared to market servicing costs when market information is available. It is advisable to include expenses associated with activities related to loans in default.

Volatility: This is an assumption that represents the expected rate of change of interest rates. The rate of change is often notated with this sign Δ and is referred to as “Delta”. Without getting too technical, the Delta is used in valuation methodologies to place a theoretical boundary around the potential interest rate movements from one period to the next.

As you proceed with your valuation approach, it is important to reconcile actual monthly cash flows to projections, which means reconciling actual monthly cash flows to those projected in the MSR valuation. After each such reconciliation, an assessment should be undertaken to determine the need to modify the individual assumptions used in the valuation.



Jonathan Foxx is managing director of Lenders Compliance Group, the first and only full-service, mortgage risk management firm in the United States, specializing exclusively in outsourced mortgage compliance and offering a suite of services in residential mortgage banking for banks and non-banks. If you would like to contact him, please e-mail Compliance@LendersComplianceGroup.com.

Question: As a result of an internal audit, we just found out about two reverse occupancies. It turns out that our investors were already aware of this happening and were about to send us repurchase requests. We received the repurchase requests and it seems we have no way out but to do the repurchases. What could we have done to prevent this from happening in the first place?

Answer
To some extent, this situation can be avoided. However, when it comes to mortgage fraud, nothing is foolproof. A “reverse occupancy” occurs where a borrower buys a home as an investment property and lists rent proceeds as income in order to qualify for the mortgage, but instead of renting the home the borrower occupies the home as a primary residence.

Typically, these schemes have certain markers. Here are the most salient:

►Subject properties are sold as investment properties;

►Purchasers are first time home buyers with minimal or no established credit;

►Purchasers have low income but significant liquid assets that are authenticated by bank statements;

►Purchasers make large down payments;

►The appraisal has a comparable rent schedule (to show expected rental income from the subject property);

►Purchasers present “rent free” letters stating they are not paying rent to live in their primary residence.

►Ethnic commonality among the purchasers and other parties to the transaction; and

►Transactions occurring in a specific geographic location.

Just because one or more of these are present in a mortgage loan transaction does not necessarily mean that the transaction is a reverse occupancy scheme.

If the financial institution is going to prevent this type of mortgage fraud, the best approach is to ensure prudent origination, processing, and underwriting practices, with an emphasis on “Red Flags” that may occur in the loan documents. For instance, closely reviewing liquid assets as compared to income and the source of qualifying income can identify a potential reverse occupancy scheme. I would further recommend that training be given not only to the operations staff but also to loan officers. In our training on Identity Theft Prevention and Anti-Money Laundering–such training being statutorily required of financial institutions–we discuss many Red Flags.

Ultimately, if this kind of mortgage fraud is to be prevented, the following initiatives would be advisable:

►Periodically conduct vendor compliance procedures of third-party originators

►Train, Train, and Train, either through in-source or out-source

►Establish a “Zero Tolerance” policy for preventing mortgage fraud

►Share information through sales and operations meetings

►Report all suspicious activity through established channels

►Perform a quarterly audit of loan transactions of investment properties

►Ensure that quality control does audits for investment property transactions



Jonathan Foxx is managing director of Lenders Compliance Group, the first and only full-service, mortgage risk management firm in the United States, specializing exclusively in outsourced mortgage compliance and offering a suite of services in residential mortgage banking for banks and non-banks. If you would like to contact him, please e-mail Compliance@LendersComplianceGroup.com.

Question: Thank you for these weekly FAQs! My staff and I find them very informative. I am with the compliance department of a bank. We offer a full range of loan and savings products. We are preparing for a regulatory examination that will include UDAAP compliance. I was hoping you could let us know some review areas that we should include in our risk assessment. Specifically, what documentation should we be reviewing for our UDAAP risk assessment?

Answer
We appreciate your kind words about our weekly FAQs. We receive many questions and try to choose the ones that may be broad enough for our large readership. Thank you for submitting your question!

Preparing a risk assessment for Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) requires a great deal of focus not only on the material subject to review but also a concerted effort by all stakeholders. I have written extensively on UDAAP, most recently in connection with advertising compliance. You might want to read my eBook on advertising compliance (viz.,visit our website), which includes a discussion on UDAAP.

Generally, there are four examination areas that regulators seek to audit. The examiner wants to determine whether the financial institution:

►Avoids unfairness, deception, and abuse in the context of offering and providing consumer financial products and services;
►Assesses the risk of its practices being unfair, deceptive, or abusive;
►Identifies unfair, deceptive or abusive acts or practices; and
►Understands the interplay between unfair, deceptive, or abusive acts or practices and other consumer protection statutes.

A risk assessment of the financial institution should take into account its marketing programs, product and service mix, customer base, and other factors, as appropriate. This risk assessment is extensive. In responding to the posed question, only the aspects involving certain documentation is here provided. For more information, review the CFPB’s Examination Manual on UDAAP.

The following is a list of documentation areas that should be compiled and reviewed for the purposes of a UDAAP risk assessment:

►Training materials.
►Lists of products and services, including descriptions, fee structure, disclosures, notices, agreements, and periodic and account statements.
►Procedure manuals and written policies, including those for servicing and collections.
►Minutes of the meetings of the Board of Directors and of management committees, including those related to compliance.
►Internal control monitoring and auditing materials.
►Compensation arrangements, including incentive programs for employees and third parties.
►Documentation related to new product development, including relevant meeting minutes of Board of Directors, and of compliance and new product committees.
►Marketing programs, advertisements, and other promotional material in all forms of media (including print, radio, television, telephone, Internet, or social media advertising).
►Scripts and recorded calls for telemarketing and collections.
►Organizational charts, including those related to affiliate relationships and work processes.
►Agreements with affiliates and third parties that interact with consumers on behalf of the entity.
►Consumer complaint files.
►Documentation related to software development and testing, as applicable. 



Jonathan Foxx is managing director of Lenders Compliance Group, the first and only full-service, mortgage risk management firm in the United States, specializing exclusively in outsourced mortgage compliance and offering a suite of services in residential mortgage banking for banks and non-banks. If you would like to contact him, please e-mail Compliance@LendersComplianceGroup.com.

Question: We are a mortgage banker. Our policy is to place limits on points and fees in our residential mortgage loan transactions. But an applicant complained to the CFPB that we denied the application because of our limits on points and fees. Our regulator has told us that a lender does have limits on points and fees based on certain guidelines. What are those guidelines?

Answer
At a rudimentary level, the CFPB expects lenders to (1) Document the loan transaction, and (2) Determine the consumer’s ability to repay the loan. Depending on the loan transaction, the ability-to-repay feature–which offers certain standards for demonstrating a good faith effort to determine that the consumer is likely to be able to pay back the loan–may have some bearing on the points and fees concern.

If a consumer does not have the ability to repay the loan, the lender may not offer the credit extension. In fact, some lenders may choose to comply with the ability-to-repay rule by making only “Qualified Mortgages,” which do have caps on upfront points and fees.

Certain loan features are not permitted in Qualified Mortgages, such as an “interest-only” period, negative amortization, balloon payments, loan terms that are longer than 30 years, a limit on how much of the consumer’s income can go towards debt, and no excess upfront points and fees. If the consumer applies for a Qualified Mortgage, there are limits on the amount of certain upfront points and fees the lender can charge. These limits will depend on the size of the loan. Not all charges, like the cost of a credit report, for example, are included in this limit. If the points and fees exceed the threshold, then the loan can’t be a Qualified Mortgage.

The reason for the CFPB’s position is clear: the consumer needs protection from paying very high fees; therefore, a lender making a Qualified Mortgage can only charge up to the following upfront points and fees:

►For a loan of $100,000 or more: Three percent of the total loan amount or less.
►For a loan of $60,000 to $100,000: $3,000 or less.
►For a loan of $20,000 to $60,000: Five percent of the total loan amount or less.
►For a loan of $12,500 to $20,000: $1,000 or less.
►For a loan of $12,500 or less: Eight percent of the total loan amount or less.

The foregoing loan amounts reflect the initial statutory base. There have been annual adjustments to these tiers. Under the CFPB’s rules, only Qualified Mortgages have a limit on points and fees. But, lenders are not required to make Qualified Mortgages, so they can charge higher points and fees if they so choose.



Jonathan Foxx is managing director of Lenders Compliance Group, the first and only full-service, mortgage risk management firm in the United States, specializing exclusively in outsourced mortgage compliance and offering a suite of services in residential mortgage banking for banks and non-banks. If you would like to contact him, please e-mail Compliance@LendersComplianceGroup.com.

 

Question: We are a lender with a client that is very passionate about NOT signing the Patriot Act Disclosure that is included in our initial closing package. He is a permanent resident alien and claims that the Patriot Act has not been in existence since June 2015 and that a lender should not be requiring him to sign the U.S. Patriot Act Information Disclosure form.  The client has no difficulties with providing the identification documents we require, but he feels that the disclosure form is a legal document which is inaccurate, as it is now the Freedom Act that governs. Is the client correct and how should we respond?  

Answer
Actually, the client is incorrect. He is operating under a common misconception that the entire USA Patriot Act expired. In reality, the vast majority of the Act, including Title III, which carries a great majority of the requirements for financial institutions, remains in effect. Thus, financial institutions are still required to (1) monitor for customers and transactions that could be related to terrorist activities through section 314(a) & (b); (2) verify the identity of customers through a customer identification program under section 326; and (3) have an established AML Program under section 352.

The sections that “expired” were section 215, which included the so-called “Lone Wolf” and “Roving Wiretap” provisions. The “Lone Wolf” provision allowed U.S. intelligence and law enforcement agencies to target surveillance at suspected terrorists who are not part of any group and without direct ties to terrorist groups. The “Roving Wiretap” provision permitted the monitoring of a specific person regardless of the devices used. The National Security Agency used section 215 as a basis for the mass collection and monitoring of phone records of millions of Americans who were not necessarily under investigation, a program Edward Snowden exposed in 2013. The USA Freedom Act essentially restored and amended section 215 through 2019.     

It is not clear which version of the USA Patriot Act Disclosure form you are using.  However, in all likelihood, just above the signature loan there is a statement to the effect of “By signing the form, you acknowledge receipt of this disclosure”. So, the client’s difficulty with acknowledging receipt of the form is difficult to grasp. If you are keeping the loan in portfolio, depending on your policies, you could have a documented exception, as there is no legal requirement that it be signed.



Joyce Wilkins Pollison is director of Legal & Regulatory Compliance for Lenders Compliance Group.

Question: We recognize the requirements of E-Sign. One subject of discussion has been its role in contractually binding our financial institution in mortgage loan originations, especially in the area of consumer disclosures. How valid are electronic signatures? Can electronic signatures be used to enforce contracts?

Answer
The Electronic Signatures in Global and National Commerce Act (E-Sign) was designed to allow greater flexibility to implement electronically signed transactions. Its requirements have been used more and more since E-Sign’s inception in 2000. E-Sign specifies that an electronic record or transaction may not be rendered invalid solely on the basis of its electronic or digital nature, but it makes no guarantees about the overall enforceability of such electronic contracts.

An electronic record is only enforceable if it meets the criteria specified in relevant contract laws as well as the language of E-Sign. It is worth noting that E-Sign applies to interstate or government interactions. With respect to in-state transactions, these are bound either by the Uniform Electronic Transactions Act (UETA) or the governing state laws relevant e-Signature laws–which, in some states, are actually more strict than E-Sign or UETA.

For an electronically signed document to be enforceable in court, it must meet certain requirements for legal contracts in addition to the electronic signature guidelines specified in the appropriate laws (such as E-Sign and UETA). According to E-Sign, an electronic signature is "an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record."

In contract law, signatures serve the following general purposes:

►Evidence: Authenticates agreement by identifying the signer with a mark attributable to the signer that it is capable of authentication.

►Ceremony: Act of signing calls attention to the legal significance of the act, preventing inconsiderate engagements.

►Approval: Express approval or authorization per terms of agreement.

To elucidate on factors involving authentication, broadly, authentication is defined as evidence that a given record, contract, or form is a genuine, unaltered written representation of an agreement approved by two or more parties, whether in paper or electronic form.

An authentic document contains no evidence of fraud or tampering, such that it may be reasonably concluded that the parties in agreement did indeed assent to the enclosed terms. Assent is evidenced by an attributable, authenticated signature. To be authenticable, the transaction must contain enough information uniquely attributable to the user that fraud, forgery, or validity can be reasonably proven.

For an electronic transaction to withstand scrutiny in court, it must meet the definitions and criteria stated above; that is, it must be capable of authentication and non-repudiation, call attention to the document's legal significance (viz., creation of the electronic signature), and demonstrate approval of the terms of the agreement.

Some electronic signature technologies sufficiently meet these criteria and some do not. Therefore, it is very important for businesses and government agencies to choose their electronic signature technology carefully or risk making agreements that cannot be enforced.

If interested in a review of your electronic signature technology, please contact us. We have subject matter experts who can review the technological and regulatory compliance requirements of E-Sign.



Jonathan Foxx is managing director of Lenders Compliance Group, the first and only full-service, mortgage risk management firm in the United States, specializing exclusively in outsourced mortgage compliance and offering a suite of services in residential mortgage banking for banks and non-banks. If you would like to contact him, please e-mail Compliance@LendersComplianceGroup.com.

Question: Our compliance group recently passed around the E-Book on Advertising Compliance, written by Jonathan Foxx. In Part II, there is a section on UDAAP. We are particularly interested in UDAPP because we are updating our policies to include new language for UDAAP conduct in debt collection. Mr. Foxx’s outline was terrific in showing the range of UDAAP issues involving Advertising Compliance, but we wonder if he would provide some examples of how debt collection is impacted by UDAAP guidelines. So, what examples of conduct related to the collection of consumer debt could constitute UDAAP violations?

Answer
Thank you for the kind words about the E-Book, entitled Advertising Compliance: Getting Ready for the Banking Examination, which compiled two of my published White Papers. I have written extensively on this subject, but the E-Book has been found useful for individuals seeking a path to understanding this very complicated area of regulatory compliance.

There are many examples of Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) violations in the context of debt collection, but any list is not going to be comprehensive. Also, please note that the obligation to avoid UDAAPs is in addition to any obligations that may arise under the Fair Debt Collection Practices Act (FDCPA).

First, what is an unfair act or practice? There are generally three components: (1) it causes or is likely to cause substantial injury to consumers; (2) the injury is not reasonably avoidable by consumers; and (3) the injury is not outweighed by countervailing benefits to consumers or to competition. [Dodd-Frank Act §§ 1031, 1036, 12 U.S.C. §§ 5531, 5536]

Second, what is a deceptive act or practice? This consists of three components: (1) it misleads or is likely to mislead the consumer; (2) the consumer’s interpretation is reasonable under the circumstances; and (3) the misleading act or practice is material. [Section 5 of the FTC Act. See CFPB Exam Manual at UDAAP 5]

Third, what is an abusive act or practice? This is more nuanced than the foregoing elements, but there are two primary factors: (1) the act or practice materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of (a) a consumer’s lack of understanding of the material risks, costs, or conditions of the product or service, (b) a consumer’s inability to protect his or her interests in selecting or using a consumer financial product or service, or (c) a consumer’s reasonable reliance on an institution to act in his or her interests. [Dodd-Frank Act § 1031(d), 12 U.S.C. § 5531(d). See also CFPB Exam Manual at UDAAP 9. See Stipulated Final Judgment and Order, Conclusions of Law ¶ 12, 9:13-cv-80548 and Compl. ¶¶ 55-63, CFPB v. Am. Debt Settlement Solutions, Inc., 9:13-cv-80548 (S.D. Fla. May 30, 2013)]

Given the above-outlined features of UDAAP, the following non-exhaustive list of examples of conduct related to the collection of consumer debt could constitute UDAAPs:

►Collecting or assessing a debt and/or any additional amounts in connection with a debt (including interest, fees, and charges) not expressly authorized by the agreement creating the debt or permitted by law.

►Failing to post payments timely or properly or to credit a consumer’s account with payments that the consumer submitted on time and then charging late fees to that consumer.

►Taking possession of property without the legal right to do so.

►Revealing the consumer’s debt, without the consumer’s consent, to the consumer’s employer and/or co-workers.

►Falsely representing the character, amount, or legal status of the debt.

►Misrepresenting that a debt collection communication is from an attorney.

►Misrepresenting that a communication is from a government source or that the source of the communication is affiliated with the government.

►Misrepresenting whether information about a payment or non-payment would be furnished to a credit reporting agency.

►Misrepresenting to consumers that their debts would be waived or forgiven if they accepted a settlement offer, when the company does not, in fact, forgive or waive the debt.

►Threatening any action that is not intended or the institution or service provider does not have the authorization to pursue, including false threats of lawsuits, arrest, prosecution, or imprisonment for non-payment of a debt. [CFPB Bulletin 2013-07]

Facts and circumstances will dictate the presence of a UDAAP violation; however, these examples are but a few of the many potential UDAAP acts or practices involving consumer debt collection.



Jonathan Foxx is managing director of Lenders Compliance Group, the first and only full-service, mortgage risk management firm in the United States, specializing exclusively in outsourced mortgage compliance and offering a suite of services in residential mortgage banking for banks and non-banks. If you would like to contact him, please e-mail Compliance@LendersComplianceGroup.com.