On August 4, 2016, in conjunction with issuing the final mortgage servicing rule, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule under the Fair Debt Collection Practices Act (FDCPA).  Although a mortgage servicer’s conduct is not always governed by the FDCPA, as the CFPB explains in the interpretive rule, servicers that acquire a mortgage loan following default are subject to the FDCPA with respect to that loan.  In situations where the prohibitions of the FDCPA apply, a conflict arises between the requirements under the 2016 Servicing Final Rule and the FDCPA.  The CFPB stated that the interpretive rule “constitutes an advisory opinion for purposes of the FDCPA,” creating safe harbors from liability for certain actions taken in compliance with the mortgage servicing rules under the Real Estate Settlement Procedures Act (RESPA) and implementing Regulation X, and the Truth in Lending Act (TILA) and implementing Regulation Z.

The safe harbors apply in three situations: (1) when communicating about the mortgage loan with confirmed successors in interest in compliance with specified mortgage servicing rules in Regulation X or Z; (2) when providing the written early intervention notice required by Regulation X § 1024.39(d)(3) to a borrower who has invoked the cease communication right under FDCPA section 805(c); and (3) when responding to borrower-initiated communications concerning loss mitigation after the borrower has invoked the cease communication right under FDCPA section 805(c).

Confirmed Successors in Interest

Section 805(b) of the FDCPA generally prohibits debt collectors from communicating with third parties in connection with the collection of a debt in the absence of a court order or prior consumer consent given directly to the debt collector.  The 2016 Servicing Final Rule extends the protections of Regulations X and Z to cover “confirmed successors in interest” whether or not a successor has assumed the mortgage loan obligation.  This extension of the TILA and RESPA protections to confirmed successors in interest requires servicers to communicate with these third-party successors regarding the debt.

In order to avoid the conflict, the CFPB interpreted the term “consumer” for purposes of Section 805 to include a confirmed successor in interest as defined in Regulation X §1024.31 and Regulation Z § 1026.2(a)(27)(ii). Under this interpretation, servicers do not violate section 805(b)’s prohibition on communicating with third parties by communicating with a confirmed successor in interest about a mortgage loan secured by property in which the confirmed successor in interest has an ownership interest.  The CFPB noted because of the expanded interpretation of “consumer” under section 805, confirmed successors in interest are entitled to the protections under 805(a) and (c), including the obligation to cease communicating and communicating only at convenient times or places.  The CFPB was also careful to note that the expanded definition of consumer under the interpretive rule applies only to the use of the term in section 805 and “it does not affect the definition of consumer under the remaining FDCPA provisions.”

Required Early Intervention Notice

Section 805(c) of the FDCPA prohibits a debt collector from communicating with a consumer (subject to enumerated exceptions) where a consumer refuses in writing to pay a debt or requests that a debt collector cease communicating with the consumer about the debt.  At the time of the CFPB’s initial and modified rules concerning mortgage servicing in 2013, it provisionally had exempted servicers from the early intervention requirements when a borrower had properly invoked the FDCPA’s cease communication protections.  However, in the interpretative rule, the CFPB partially eliminated the exemption, exempting servicers from the written early intervention notice only (1) if no loss mitigation option is available or (2) while any borrower on the mortgage loan is a debtor in chapter 11 bankruptcy.  Where these conditions are not met, the servicer is required to provide a modified written early intervention notice as set forth in the model language in the 2016 Servicing Final Rule.

In interpreting the FDCPA to permit the modified early intervention notice, the CFPB noted that the notice is “closely linked to a servicer’s ability to invoke its specified remedy of foreclosure,” and therefore, falls under the exception allowing the debt collector to notify the consumer that the debt collector or creditor intends to invoke a specified remedy.  The CFPB emphasized that this interpretation provides only a “narrow safe harbor” and that all other provisions of the FDCPA remain unchanged, which would impose liability on a servicer to the extent that anything in the notice violates any other provision of the FDCPA.”

Borrower-Initiated Communications Concerning Loss Mitigation

In addition to requiring the early intervention notice, the CFPB permits servicers to communicate to borrowers who have invoked the cease communications protection where the borrower initiates the communication concerning loss mitigation options.  This safe harbor applies only to a servicer’s communications relating to loss mitigation.  If the borrower provides a communication to the servicer specifically withdrawing the request for loss mitigation, the cease communication prohibition then extends to loss mitigation communications.

In extending this safe harbor, the CFPB emphasized that the cease communication prohibition continues to apply to a servicer’s communications with a borrower about payment of the mortgage loan that are outside the scope of loss mitigation.  The CFPB’s interpretation does not protect against pretextual communications seeking to circumvent the prohibition under the FDCPA; instead, the communications must be part of a good faith effort to discuss loss mitigation options.  Examples of prohibited communications include initiating conversations with the borrower related to repayment of the debt that are not for the purposes of loss mitigation, demanding that the borrower make a payment, requesting that the borrower bring the account current or make a partial payment on the account, or attempting to collect the outstanding balance or arrearage, unless such communications are immediately related to a specific loss mitigation option.

Although the CFPB addresses many servicers concerns relating to the Servicing Final Rule by issuing the separate advisory opinion to create safe harbors under the FDCPA, servicers still must be cautious whenever a mortgage falls within the FDCPA’s scope.  The safe harbors offer limited protections to servicers and unforeseen conflicts may still arise.