Mortgage Lenders Must Assess Borrowers’ Ability to Repay in New CFPB Guidelines

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The Consumer Financial Protection Bureau’s (CFPB) new rules that took effect on January 10, 2014 are getting mixed reviews from industry insiders.  This is particularly true of rules related to a consumer’s ability to repay and the steps loan originators must go through to ensure the numbers are correct.  The rules have been created to curtail risky lending practices that led to the housing market problems in 2008, and are part of the steps required by 2010’s Dodd-Frank Wall Street Reform and Consumer Protection Act.

Industry insiders’ concerns lie in the fact that the rules are further restricting an already heavily-restricted lending environment.  Additionally, the loans that are government backed—primarily those purchased or guaranteed by Fannie Mae and Freddie Mac—remain temporarily unaffected, even if the applicant’s debt-to-income ratio is above the 43% limit created by the new rules. 

The Center for Responsible Lending, a consumer watchdog group, has stated that the CFPB’s approach of increased regulation is a good idea.  However, the group believes that the CFPB should have gone one step further with their rule making, particularly related to allowing the borrower to file a lawsuit against any lender who does not effectively evaluate that borrower’s ability to repay the loan. 

These new rules require lenders to eschew “no documentation” and “low documentation” loans.  The hope is that these new rules will help the American economy avoid the crisis that hit in 2008.  Since that time, approximately 4 million American homeowners have lost their homes to foreclosure. 

Richard Cordray, the Director of the Consumer Financial Protection Bureau, said in a statement: "When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford.  Our ability-to-repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes.  This common-sense rule ensures responsible borrowers get responsible loans."

Could This Mean the End for Small Loan Servicers? Don’t Panic Just Yet!

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There’s no doubt about it: Smaller loan servicers are going to be challenged by the Consumer Financial Protection Bureau’s (CRPB) new rules.  This is particularly true concerning the costs associated with ensuring that all regulations are closely followed and monitored in-house.  In such, many small firms are now looking for strategic alliances with third-party vendors whom they can trust to comply with all of the CFPB’s new rules. 

In particular, residential mortgage servicers will be scrambling to implement new rules related to borrower notifications and interaction, as well as those focusing on key procedures and infrastructure improvements.  While many of the larger servicers have already implemented these changes in expectation of 2014’s regulatory changes, the smaller servicers, on average, are not nearly as well prepared.  This is primarily due to the costs associated with implementing these changes. 

Increased attention to detail in record keeping will require higher costs associated with paperwork and compliance issues for the smaller firms.  While many of the larger banks and mortgage servicers have been selling their servicing rights on loans that underperform to keep expenses down, smaller servicers might not have this option. 

Servicing mortgages is a business that is competitive, just like any other.  Now, with the new CFPB regulatory requirements, small servicers will be feeling the heat of balancing their compliance with turning a profit.  The question that is still on everyone’s mind is this:  will this situation lead to further consolidation in the loan servicing industry?  The answer to that question remains to be seen, although many industry analysts are suggesting that the increased cost of regulatory compliance is likely to cause this exact scenario. 

This doesn’t mean that small servicers should throw in the towel just yet.  It is possible to implement all the changes required by the CFPB and still maintain a profitable business if you’re a small firm servicing loans.  New acquisitions can help manage overall profitability.

How Smaller Firms Are Not Exempt From the CFPB’s New Rules

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While the bulk of the new rules enacted by the Consumer Financial Protection Bureau (CFPB) are aimed at the bigger banks and servicers of consumer loans, small banks will also experience some changes.  The January 10, 2014 deadline for these rules to go into effect has already passed, meaning that all firms (including the small, community banks) must now comply with the new regulations with new procedures or face heavy fines. 

Since the smaller banks and lending firms are often unprepared for this level of in-house scrutiny and regulatory compliance measures, many will look to third-party vendors for solutions to handling the increased workload of ensuring all transactions are compliant.  According to the CFPB’s new rules, these smaller firms will be responsible for the actions of their third-party vendors—including all debt collection practices—making their financial interest in maintaining compliance even more significant. 

Since the CFPB has made it clear that all servicers, whether large or small, are expected to uphold the new regulations or suffer penalty, no firm will be given special consideration unless it services 5,000 or fewer mortgages as of the first of each year.  However, even in this special circumstance, the smaller firm must originate and own the loans.  If it services loans that are originated or owned elsewhere, the exemption does not apply, even if that total number of loans falls beneath the 5,000 cut-off amount. 

There are loss mitigation requirements that are also required of the small servicers.  A notice of foreclosure or filing of foreclosure cannot be processed until the borrower has reached 120 days of delinquency on his or her loan.  Additionally, the foreclosure cannot be continued and the sale cannot be conducted if a borrower is following specific actions stated within the loss mitigation agreement.  

Three New Year’s Resolutions You Should Make If You’re in the Debt Collection Industry

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The past year has been a whirlwind of speculation and heated discussion in the debt collection industry and among collection attorneys, as federal regulators zeroed in on ways to resolve the backlash of problems created by the financial crisis of 2008.  Much of those solutions involve increased regulations in an already heavily regulated industry, as topics like accurate originating documentation for litigation and communication via digital methods became “hot button” issues across the media. 

With this in mind, here are three New Year’s resolutions you need to make now if you’re in the collections industry in any capacity. 

Resolution #1:  Stay vigilant and informed

By February 16^th, 2014, the Consumer Financial Protection Bureau will stop taking advice from consumer advocates and collection industry insiders.  At that point, they’ll determine the new rules based on the knowledge they received during the Advance Notice of Proposed Rulemaking period.  This means that there will be new rules and you will have to stay updated on them, so vigilance is more important this year than it has been in a long time. 

Resolution #2: Pay close attention to your third-party vendors

Last year, the Consumer Financial Protection Bureau made it very clear that a collection agency could be held responsible for the collection actions taken by any third-party vendor it hires.   

Resolution #3: Remember that communication is working, and will continue to work

The Consumer Financial Protection Bureau stated that out of the 5,329 debt collection complaints it added to its consumer complaints database, 5071 consumers reported a timely response from the company.  What this means is that despite the current agitation between consumer advocacy groups and debt collection insiders, opening lines of communication to improve the consumer experience works and both sides want to see it happen.  Also, almost 20 percent of the total number of complaints added to the database fell under the category of “communication tactics,” with the largest portion complaining about too-frequent calls, or calls that occurred after a cease and desist request was filed.  Honest discussion about digital communication, or methods of contact other than calling, should be (and are being) brought to the forefront of the debate.  

What are the biggest changes anticipated from the Consumer Financial Protection Bureau's proposed new rules?

The Big Wait for the Consumer Financial Protection Bureau’s Next Move

The Consumer Financial Protection bureau has placed the topic of debt collection at the forefront of their priorities as soon as the period of Advance Notice of Proposed Rulemaking ends.  What this means for the debt collection industry is that 2014 might become one of the most important years for the collection industry since the FDCPA was passed in 1977.

Some of the changes announced by the agency include increased regulations for debt collection practices.  These regulations could include restrictions placed on the originating creditors, as well as better accuracy on forms or documents that are shared between collection parties, debt buyers and settlement companies.  The potential also exists for updated rules on the limit and scope of communication that must transpire between a collection agency or collection attorneys and a debtor, including communication via text messaging. 

The biggest changes, according to senior CFPB officials, will likely occur for creditors that both originate -and collect on debt.  Currently, the Fair Debt Collection Practices Act only places restrictions on third-party collectors.  These changes proposed this year by the CFPB could affect first-party creditors in much the same way that the Fair Debt Collection Practices Act affects current third-party collectors.  It could also give the Consumer Financial Protection Bureau the authority to supervise larger debt collectors that are not affiliated with a bank; although banks are also under fire for their current debt collection practices, as well. 

This past July, American Banker interviewed Paul Joseph, the director of business development for McCarthy, Burgess & Wolff, a debt collection firm.  In that interview, Joseph stated: “You can't ignore this.  It's a freight train.  I have no doubt they're going to eventually come after everything [with regard to consumer debt].” If his conclusions are true, the ARM industry might be in for a rude awakening when the dust settles and the new regulations are in place.  

What companies are under the oversight of the Consumer Financial Protection Bureau with the new rules?

2014: What the Consumer Debt Collection Industry Can Expect with the New CFPB Debt Collection Rules

Get ready for it—2014 is going to change the entire credit and collection world, particularly the world of creditors in the banking and healthcare industry.  These changes are going to come in the form of new rules for credit collections expected to be released by the Consumer Financial Protection Bureau (CFPB) in the first half of the year.  In the meantime, the CFPB has released its Advanced Notice of Proposed Rulemaking (ANPR) to allow a period of time for feedback from interested parties—from consumers and creditors to collection attorneys, vendors and government officials—and fine tune the rules before they become regulations that must be followed. 

The biggest change noted so far is that these rules will affect everyone along the chain of collections, and some industries previously unaffected by the rules will now be affected.  Concerns are being raised about the care that will go into considering these new regulations and considering the impact they will have on the collections industry, as a whole.  ACA International, a trade group representing debt collectors, issued the following statement concerning this pending rulebook. “We agree that modernizing the nation’s consumer debt collection system is important so long as changes are based on common sense solutions that preserve balance between consumer protection and the ability of a creditor or debt collector to lawfully recover debts.” 

Particularly of concern to the Consumer Financial Protection Bureau are contact frequency, contact methods and claims during contact, including threats to initiate lawsuits or criminal prosecution, garnish wages, seize assets or damage a consumer’s credit rating.  The CFPB is looking to ascertain the extent of these activities, and if they are occurring, who is doing it. 

The gist of the changes is that every business will now be held liable for what it does (and doesn’t) know about Federal regulation for debt collection procedures.  A business’ reputation and future will depend on following such regulation, making it all the more important to stay updated on the changes being made in the industry.   

Are Debt Buyers Ever Going to Start Buying Paper Again?

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Ever since the new policies of the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB) went into action over the past few months, bringing with them a sustained focus on collection agencies and collection law firms that has yet to abate, there has been a perceived shift in the industry.  Banks and other large players in the debt field have put severe restrictions on who they will sell “paper” to, restrictions which have had the practical effect of freezing out the smaller collection agencies.  At the same time, many small firms have shown a disinterest in buying all but the most sparklingly well-documented paper for fear of running afoul of the newly watchful Federal Government.  The spate of charges and lawsuits brought by the FTC in recent months has underscored the new reality: Shady practices and robo-signed no-doc debts or contested debts will no longer fly for very long.

The market for paper has thus been in a depressed state, as in many ways, the FTC has forced the larger collection agencies who meet the $10,000,000 revenue baseline to collude against smaller agencies as a form of self-defense. They want the scrutiny to go away, and as such feel they can’t afford to be connected to smaller firms who might play fast and loose with disclosure and documentation regulations.

There are signs that smaller firms are ready to start buying paper again.  After all, the debt business in the U.S. alone is worth $12.2 billion annually.  That means, no matter how large the big players are, there is a lot of money left over for small firms to reap.  And the larger firms can’t afford to take on smaller debts that aren’t cost-effective for them to handle, traditionally the impetus to sell paper off down the food chain.

However, while most experts in the field feel certain that the small firms will begin buying paper in bulk again soon, so far there has been no overt sign that this gold rush has begun.

Is it worth making a complaint to the Consumer Financial Protection Bureau (CFPB) about collection agencies?

FTC and CFPB Affecting Collections Large and Small

The recent change in focus and attitude on the part of the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) has brought an aggressive new strategy from the Federal Government against the tactics and business practices of collection agencies and related industries such as debt relief companies.  While the new rules and policies were welcomed by consumer advocates who have long complained that debt collection has been existing in a quasi-legal and certainly immoral space for some time, the new policies at first seemed to focus only on the larger firms that had revenues of $10,000,000 and up.  Many consumer advocates were unhappy with this baseline as it meant the vast majority of agencies would be excluded from review, as only 175 out of approximately 4,500 collection firms meet the revenue baseline.

However, in the months since the new rules went into effect, it’s become clear that this aggressive new policy will affect the smaller collection agencies that don’t meet the revenue baseline just as heavily.  This has been demonstrated in two ways, direct and indirect.

Directly, the FTC and CFPB have brought several complaints and suits against smaller agencies in Florida and California in recent months, seeking judgments for violations including charging fees for debt relief services and improperly withholding information from consumers.  Many of the firms targeted do not meet the revenue baseline.

Indirectly, the tightened rules and renewed focus have impacted the smaller collection shops and collection law firms by a trickle down affect. Hence, a large collection agency that is subject to the new rules will have to insure their subcontractors all meet the new stringent guidelines. Therefore, smaller collection firms are now impacted—therefore their bottom lines are being negatively affected as well.  Poorly documented or contested debts that were previously sold to smaller shops as well as larger firms are now being sold more or less solely to the largest debt firms in the country.  The result is that smaller collection agencies do not have access to a great deal of the existing collectible debt.  As a result, even without direct action from the Federal Government, the smallest debt collection shops are suffering a sizable reduction in business.

Is The Consumer Finance Bureau Becoming Draconian Like In Its Attempts To Audit And Control Collection Firms?

The Consumer Financial Protection Bureau is in charge of overseeing banking practices so that consumers are protected from abusive tactics.  It was created in 2010 as one of the parts of the 2010 Consumer Protection Act, and while most people will agree that the consumer must be protected against abuses it needs to be asked if the bureau is actually overreaching in an attempt to audit collection agencies.

Last January 2013, CFPB declared that any party with greater than $10 million in annual revenue from consumer debt collection activities will be subject to the Bureau's audit. The 3 major categories of debt collection included under the rule are:  (1) firms that buy defaulted debt and collect the proceeds for themselves; (2) firms that charge fees for collecting defaulted debt owned by another company; and (3) debt collection attorneys that collect through litigation.  This is the first time that the federal government will supervise collection attorneys.  Because of this, the CFPB will start overseeing about 175 debt collection agencies, representing more than half of the debt collection industry's annual receipts.

Why Collection Firms Are Targeted

Collection agencies and firms seem to be targeted a lot more because it is up to consumers to complain about practices.  Since no one likes to be called about a payment (even when they know they owe the money), it is more likely that they will complain to the Consumer Financial Protection Bureau.  That means that the more complaints, even when they are not justified, make it more likely that a firm will be paid closer attention to.

Is It Fair?

While there are some collection agencies which have made mistakes and in some cases even overstep the things they can and cannot do, most firms are responsible in their practices.  Collection firm owners and workers will be happy to see an abusive firm go off the market, but unfortunately a lot of the good players in the industry are also suffering the consequences.  Some will be happy to make the industry look bad which means the firms have to pay a fine plus legal fees even when the complaint seems to be a little unjustified.

What Firms Can Do

The one thing that the best firms have been doing is to ensure that their personnel have the latest in training so that they can stay updated with the latest changes in the industry.  The bureau can propose changes in the laws at any time and if adopted the firm must comply from day one.  

What the Consumer Financial Protection Bureau Means for Small Collections Firms

Due to recent changes that the Obama administration made in creating the Consumer Financial Protection Bureau, beginning January 2, 2013, there will be a federal agency that will oversee the country’s largest debt collection firms.  Under the new regulations, the Consumer Financial Protection Bureau (CFPB) will oversee any debt collection firm that brings in annual profits of more than $10 million.  Companies that do not meet this $10 million minimum will not be included in the CFPB’s crosshairs for increased regulation and oversight. 

The CFPB’s aim is to ensure that debt collectors follow the regulations and consumer protection practices that the Consumer Protection Act requires, including civil communication with debtors and maintaining fair debt collection practices.  However, although there are approximately 4,500 debt collection firms in the country, approximately 175 of these collections firms will be under the scrutiny of the Consumer Financial Protection Bureau.  The remainder will continue to be under the general regulations of the Federal Trade Commission but will not be under such close scrutiny. 

This recent push is due to the Federal Trade Commission’s attempt to crack down on unfair debt collection practices such as calling more than a certain number of times a day, harassing debtors at their place of employment, and calling outside of the hours of 8 a.m. to 9 p.m. in the debtor’s local time zone.  According to an FTC spokesman, the agency received 180,000 complaints in 2011 due to actions initiated by debt collectors in the attempt to collect upon unpaid debts that violated these restrictions, among others. 

While the FTC will continue to focus on collections firms of all sizes, the CFPB will regulate and enforce consumer protection law on the 175 firms that turn the biggest profits from collections.  This means that the smaller collections firms can breathe a sigh of relief that their own debt collections practices won’t be under such close scrutiny, although they must still follow the restrictions set forth in the Fair Debt Collection Practices Act.    

How are financial regulators focusing on the credit and collections practice this year?