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Complaining to HUD about Servicing: Thunder on Deaf Ears?

posted by Katie Porter

In my own research, and frequently on Credit Slips, I've noted problems that homeowners face in dealing with their mortgage servicers. As a recent post from guest blogger Max Gardner explained, many of these problems are structural to the servicing industry. I think the people on the phone are good folks, trying to be helpful, but without the tools, training, and resources that they need to do so. One marker of the increasing pressure that servicers are under is the HUD complaint statistics. According to this Pro Public report, mortgage servicing issues were 31% of  complaints to HUD in 2006. Just two years later in 2008, that fraction has jumped to 78%. No surprise here. More families are in default or foreclosure and that means more friction between homeowners and servicers. And as many of us have pointed out, consumers aren't the mortgage servicers' customers--the mortgage note holders are. So it makes sense that consumer satisfaction ("non-customer satisfaction", so to speak) is low in the industry.

The interesting part to me is that HUDs own complaint website doesn't even list mortgage servicing as an area of concern. Four out of five consumers who contact HUD are frustrated with their mortgage servicer, but HUD doesn't even acknowledge--at least in the obvious location--that it is in charge of complaints about mortgage servicing? I think this reflects a real problem in consumer protection regulation. Perhaps HUD sees mortgage servicing as just pretty far afield from its core concerns about housing discrimination and federal housing programs. HUD, more than any other agency anyway, has authority to implement the Real Estate Settlement Procedures Act (RESPA), which provides a process (a QWR) for consumers to motivate servicers to respond to problem. But historically, and still today, HUD's oversight of mortgage servicing could generously be characterized as "thin." Is mortgage servicing an example of the need for a Financial Product Safety Commission or will the mortgage market (when, and if, it revives itself) offer new and improved servicing models that reduce consumer frustration and improve transparency?

Comments

In fairness to HUD, HUD doesn't really have the statutory authority to do much in the way of servicer substantive regulation; RESPA just allows for HUD to regulate about servicing change notification and contact procedure, not substantive servicing issues. I guess FDCPA and FCRA cover some of the other issues, although not with a lot of teeth.

I think you're right in noting that this is a major gap in consumer protection regulation. Part of that is because servicing is a relatively new consumer protection issue. Before the rise of private-label securitization in the past decade this wasn't a big issue. Of course a decade is a long time to go by with a regulatory gap...

The FDCPA is almost never applicable. Typically, the only way to bring the servicer under the statute's coverage of "debt collectors" is if the servicer acquired the servicing rights after the mortgage loan was in default. That is not usually the case. I do think the state-law FDCPA-equivalents (one hates to call them "mini-FDCPAs" since they have more teeth than the federal law) may be an underutilized tool. Of course, to make out a claim that you are being charged for amounts not due under the agreement, one has to actually have an itemized statement of the debt. That puts us right back to complaints about the responsiveness of mortgage servicing companies and RESPA.

I agree that HUD's authority is limited but HUD is an agency; they can provide evidence to Congress of the extent of the problem and advocate for larger statutory authority. When Rep. Waters had her hearing on a stand-alone mortgage servicing bill, the representative that HUD sent talked only about FHA loans; I think that reflects a cramped view of HUD's own mission (housing for low-income people; housing discrimination) and not stepping up to taking broad responsibility for the role of housing in America--including mortgages for middle-class families.

Why wouldn't FDCPA be applicable? A third-party servicer in a securitization deal likely falls within the FDCPA's definition of "debt collector": they are in the business of using the instrumentalities of interstate commerce to collect a debt owed another (the securitization trust). If the servicer owned the loan, the FDCPA wouldn't apply, but in securitization deals the servicer doesn't own the loan. I don't think any of the FDCPA's exclusions from the definition of "debt collector" apply. Perhaps the servicer is considered an "employee" of the securitization trust, but I doubt it, given how little control there is over non-GSE servicers. The 803(F)(iii) exclusion which you refer to for debts that are not in default at the time they are acquired shouldn't apply. Maybe the 803(F)(ii) self-originated debts would apply to GSE securitizations with retained servicing rights. All that said, the FDCPA's remedies are pretty weak, but I don't see why FDCPA wouldn't apply to most third-party servicers.

I'm with you on HUD. When Congress created it in 1965, it was with the express goal of providing “a decent home and a suitable living environment for every American family.” 42 USC 5301.

So, Katie and I had a little sidebar. Here's what we learned. The 803(6)(F)(3) exclusion is read by courts to protect most mortgage servicers. The exclusion refers to debts that are not in default when "obtained." The FDCPA doesn't define "obtained." Some courts, like the 5th Circuit, have read it to mean "assigned." There, is however, no assignment of the mortgage to the servicer; there can't be because no one has authority to assign it, and an assignment would ruin the securitization's bankruptcy, tax, and accounting attributes.

But, the legislative history of the FDCPA has a very clear statement that it isn't meant to apply to mortgage servicers. The Senate Report on the FDCPA, S. REP. 95-382, P.L. 95-109, 1977, states "Finally, the committee does not intend the definition [of debt collector] to cover the activities of ...mortgage service companies and others who service outstanding debts for others, so long as the debts were not in default when taken for servicing..." Strange way to express such exclusion in the legislative language, but the legislative history is pretty clear.

It's hard to fathom the policy for such an exclusion--servicers do not have the reputational constraints as creditors--if anything servicers want to be bad asses to impress investors. To wit, Fairbanks Capital's "Combat Collection" techniques.

All of this helps explain something that has puzzled me before: why special default servicers are rarely used in consumer debt securitizations, even though they are common in business debt deals. Too much FDCPA risk for special default servicers--they don't have any way to know if the account is accurate, etc.

Bottom line: the lack of applicability of the FDCPA to servicers is pretty ridiculous.

Schlosser v. Fairbanks was a good FDCPA case if I remember correctly.

Beyond that, the lack of applicability of FDCPA to servicers has always boggled me as well. One thing that stands out that I have yet to get a solid answer on, though, is: Why would FDCPA NOT apply to ANY entity that identifies themselves as a "debt collector"? Debt collection miranda is fairly boilerplate on most servicer communication these days from what I understand. I'm looking at it right now on my **monthly statement** from Fairbanks/SPS - "You are hereby notified that this statement is an attempt to collect a debt. All information obtained will be used for that purpose."

If a corporate/business entity actually goes as far as identifying THEMSELVES as a debt collector then why would not applicable state and/or federal law also recognize them as such?

The reality of life is Congress has been fully content to live with the collateral damage that servicers bring about because foreclosure has always been viewed as a borrower-caused problem. As has been demonstrated in court cases, it's all-too easy to flush through some percentage of profitable and deliberately manufactured defaults along with the legitimate ones.

The Fairbanks and EMC settlements had no lasting effect on the opportunists. the amounts paid were simply part of the cost of doing business and these companies now have deeper pockets than they've ever had before.

Until borrowers have the right to chose who services their loan, there will always be companies who will take advantage of situations.

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