by Elena A. Lovoy, McGlinchey Stafford
As the leaves begin to change colors and football games fill our calendars, it remains business as usual (or unusual) in residential mortgage lending. Two interesting developments shed light on how far a court may be willing to go (or not go) in determining who may be considered a debt collector indirectly collecting debts for a mortgage lender or servicer and how far some consumers are willing to go to get your bank to approve their residential mortgage loan application.
Tag and you are not it
The Schlafs, homeowners in Illinois, fell behind on the payments due on their Federal Housing Administration (FHA) insured mortgage loan. Green Tree Servicing, LLC (Green Tree), their mortgage servicer, attempted unsuccessfully to contact the Schlafs about their delinquent payments. FHA regulations require servicers, like Green Tree, to inspect a property to determine whether the property is vacant or abandoned once a borrower’s payments are 45 days or more past due and efforts to reach the borrower by telephone within that period have been unsuccessful. To comply with these requirements, Green Tree contracted with Safeguard Property, LLC (Safeguard) to perform property inspections.
Green Tree required Safeguard, as part of every property inspection, to leave a door hanger on the outside doorknob of each home. The door hanger, which was left on the Schalfs’ door after each inspection by Safeguard, included only the telephone number for Green Tree and a request that the homeowners call Green Tree and “be ready to give your account number.” The door hanger did not include any reference to Safeguard, did not identify the Schalfs by name, did not include the amount of the Schalfs’ mortgage debt or past due amounts, and did not include any demand for payment.
The Schalfs filed suit alleging that Safeguard had violated the Fair Debt Collection Practices Act (FDCPA) by failing to include certain disclosures on the door hangers. They alleged that Safeguard had failed to comply with the initial disclosure requirements under the FDCPA, which require debt collectors to disclose certain details about the debt, such as the name of the creditor, the amount owed, and that the debtor has the right to dispute the debt, within five days after the initial communication with the consumer in connection with the collection of the debt. The Schalfs also alleged that Safeguard violated the FDCPA by failing to include the “mini-Miranda warning” in its initial communications (presumably the first door hanger) with them. The Schalfs alleged that the “initial communication” should have disclosed that Safeguard was communicating with them in an attempt to collect the debt and that any information Safeguard obtained would be used for that purpose.
The question facing the court was whether Safeguard’s property inspection activities constituted the indirect collection of the Schalfs’ mortgage debt for Green Tree. The court noted that there are two distinct definitions of “debt collector” under the FDCPA, the “principal purpose” definition and the “regularly collects” definition.
A company that uses mail, telephone calls, or interstate commerce as part of a business that has, as its “principal purpose,” the collection of debts is considered a debt collector under the FDCPA. The court determined that Safeguard did not fit this “principal purpose” test because it provided “numerous” other property inspection and preservation services for Green Tree, such as grass cutting and winterizing services, related solely to protecting properties with delinquent mortgages.
The court also held that Safeguard was not a debt collector under the second definition, which classifies an entity as a debt collector if it “regularly collects or attempts to collect, directly or indirectly, debts that are owed or due or asserted to be owed or due to another.” The court held that to the extent the door hanger was a communication with the homeowners, it was not “in connection with” collecting a debt and that Safeguard’s role in Green Tree’s debt collection process was “too remote and incidental even to be considered ‘indirect’ debt collection.”
The court emphasized that the Safeguard representatives did not have any discretion as to which properties to inspect nor any authority to discuss the mortgage debt with any homeowners. The Safeguard representatives were not given any information about the Schlafs’ debt and “[w]hether to commence collection efforts and the nature of those collection efforts remained exclusively in the hands of Green Tree.” The court compared Safeguard’s role to that of a “messenger” and not that of an indirect facilitator of debt collection. The court further noted that Safeguard’s compensation from Green Tree was not dependent on whether the Schlafs repaid their debt.
The court noted that the relationship between Green Tree and Safeguard was governed by a Master Property Services Agreement that specifically identified the property inspection and preservation services to be provided by Green Tree. This case serves as a good reminder to all banks that your agreements with third-party providers should fully document the services these providers will provide on your behalf. It is also important that the actions of these third-party providers comply with the requirements under these agreements.
Fake employer red flags
On May 24 Fannie Mae issued a Mortgage Fraud Program alert to lenders identifying more than 30 employers that were being listed on loan applications as purported places of employment, but Fannie Mae could not confirm the existence of any of these companies. The purported companies were identified by applicants as being located in the Southern California and Los Angeles County areas, but the fake employment scheme quickly moved north to Silicon Valley and Northern California. Fannie Mae issued a new warning on Aug. 2 identifying 10 additional places of employment that had been identified by applicants, but Fannie Mae could not verify the existence of any of these companies.
Although Fannie Mae has not indicated that this fake employment scheme has moved east, their recent fraud alerts are a good reminder to all residential mortgage lenders to remain diligent in scrutinizing employer information in applications and loan files. Fannie Mae indicated in both alerts that “[p]rudent origination, processing, and underwriting practices should include looking for red flags in the loan documents that raise questions about the transaction” and recommended that lenders “[v]erify that the borrower’s place of employment exists and to obtain documentation.”
Fannie Mae provided a series of red flags that lenders should look for when reviewing applications and loan files for fictitious employers or other potential mortgage fraud issues, including, among others, the following:
Employment (occupation) does not “sensibly” coincide with borrower’s profile (age or experience)
Borrower on current job for short period of time
Prior borrower employment identified as “Student”
Starting salary appears high
Paystub templates are similar for various employers across other loan files
Paystubs lack typical withholdings (e.g., health, medical, 401(k), etc.)
Employer’s purported location cannot be ascertained
Employer identified in Fannie Mae Mortgage Fraud Program alerts
As Fannie Mae noted, if the loan does not make sense, do not make the loan and report any suspicious activity through established channels. See https://www.fanniemae.com/singlefamily/mortgage-fraud-prevention.
Elena A. Lovoy is Of Counsel in the Birmingham office of McGlinchey Stafford and concentrates her practice in banking, mortgage lending and servicing, and consumer financial services regulatory compliance matters at both the federal and state levels. She also assists companies in all industries on data privacy issues, including the management of data breach incidents and responses. She can be reached by email at elovoy@mcglinchey.com or by telephone at (205) 725-6407.
