Waivers of Consumer Claims: Balancing Traditional Compliance Concerns With Special Assets Recovery

Issues of regulatory compliance and special assets/loan recovery have always overlapped. For example, defenses arising from TILA disclosures (or lack thereof) and rights of rescission have been commonplace in foreclosure proceedings during the past several years. However, with the passing of the Dodd-Frank Act and its implementing regulation, there is more overlap than ever. There are now servicing regulations which govern how a servicer must interact with a consumer in default.

Thus, when it comes to consumer regulations, there are two different compliance concerns: (1) meeting the expectations of the servicer’s respective regulatory agencies (“traditional compliance”); and (2) being prepared for litigation with the consumer (“consumer litigation”). If a consumer feels that he or she has been wronged by the servicer’s failure to comply with a particular regulation, that individual consumer may be able to bring a lawsuit against the servicer and recover damages. The consumer could also raise the issue as a defense in a foreclosure action or other action to recover on the loan. Therefore, compliance is not only significant for a servicer from a traditional compliance perspective, but also from a loan recovery perspective.

How a servicer complies with consumer regulation from the traditional compliance perspective and from the consumer litigation perspective should, in theory, be the same. Judges in consumer litigation apply the statutes, the implementing regulations, and cases interpreting those laws. Judges are required to consider any official commentary or interpretation by the regulatory agencies when applying such law. Thus, a servicer should not experience a different outcome in its regulatory exam than it does in a court of law. Unfortunately, there are some inconsistencies forming in this area.

One of the areas of inconsistency relates to the practice of requiring a consumer to waive all defenses and claims against a servicer as a part of a loan workout. On the one hand, in the consumer litigation context, it is a longstanding principle of law that such a waiver is fully enforceable. As recently as October, 2013, a federal court applied this longstanding law to find that a servicer was not liable for a violation of Regulation B, because the consumer had signed a waiver of all of her claims against the servicer.[1] On the other hand, in the CFPB’s Winter 2013 Highlights[2], the CFPB noted that it found the practice of requiring blanket waivers in all loan modifications to be unfair and deceptive. The CFPB took issue with the way waivers were presented to all consumers as a part of a loan workout in a “take or leave it fashion.” Meaning, the consumers’ individual circumstances were not evaluated when the servicer required the waiver, and the waivers were not negotiated as a part of a bona fide dispute. The CFPB’s recommendation was for the servicer to immediately cease use of such blanket waivers and to notify all customers who may have signed the waiver that it was not enforceable. This could lead to significant consequences with the consumer. Moreover, the fact that the CFPB has issued a statement that it finds blanket waivers of liability to be a potential unfair and deceptive practice creates exposure to servicers as a UDAAP risk.

So the question then becomes, should a servicer require a waiver of defenses when doing a loan workout in special assets or not? The practical considerations remain the same from the standpoint of special assets collection. Without a waiver, if there are legitimate existing claims (or even if there are not legitimate ones), lengthy and expensive litigation could ensue if the consumer defaults under the terms of the workout agreement. On the other hand, the exposure to a servicer for a UDAAP violation is great. So how do you reconcile the two competing concerns? The likely reconciliation comes from the CFPB’s description of the “take it or leave” waiver. The problem that the CFPB seemingly identified was that the consumers were not evaluated on individual circumstances. The consumers may not have even been aware of potential claims that they had against the servicer. The CFPB felt that it was unfair and deceptive to require a boilerplate waiver, likely found among the many other boilerplate terms in a modification agreement, without discussing the reason and need for the waiver with the consumer. It could be reasonable to interpret the CFPB’s statement that it would allow a waiver in certain circumstances where a bona fide dispute is being negotiated with the consumer. For instance, if there is ongoing litigation and a consumer has raised a Regulation B, TILA, or other regulatory defense, it might be reasonable for the servicer to negotiate with the consumer a loan modification subject to a waiver of those defenses.

The question remains as to whether blanket waivers should be included as boilerplate in all workout documents. In the consumer loan context, servicers should be aware of the CFPB guidance and evaluate internally the risk of UDAAP concerns with the risk of not obtaining a waiver from the consumer.

Footnotes:

[1] Ballard v. Bank of America, N.A., 734 F.3d 308 (4th Cir. 2013) (“Bank of America well may have violated ECOA by requiring Mrs. Ballard to sign as an unlimited guarantor without first determining that her husband was not creditworthy. We need not, however, definitively resolve that question because Mrs. Ballard’s claim fails for another reason—she waived it.”)

[2] http://www.consumerfinance.gov/reports/supervisory-highlights-winter-2013/

Sarah Lindquist Pape

Website | Email | Linkedin

Phone: 407-563-4335

Fax: 407-425-2747

My practice includes the representation of financial institutions, banks, insurance companies, business owners and other corporate clients. I have a growing and focused practice dedicated to helping financial institutions navigate the complex and expanding area of government regulation and compliance with federal and state laws. This includes working with financial institutions to prepare best practices policies, procedures, and forms, as well as advising financial institutions as to avoiding litigation. When necessary, I will also represent those same institutions in court. I enjoy keeping current with the news and issues that affect banks and financial institutions in their business, and sharing that information along with my thoughts on the issue from a legal perspective based upon my experience.

My firm, Zimmerman, Kiser, & Sutcliffe, P.A.* is a full-service law firm located in Orlando, Florida. Established in 1984 and consistently recognized as one of the largest firms in Central Florida, our firm maintains a respected reputation within the southeast U.S. business and legal community. Our more than 30 attorneys provide comprehensive legal representation in an extensive range of practice areas including corporate, tax, real estate, litigation, banking and financial institutions, structured finance, bankruptcy & creditors’ rights, estate planning & probate, and workers’ compensation.

http://www.zkslawfirm.com

About Sarah Lindquist Pape

Website | Email | Linkedin
Phone: 407-563-4335
Fax: 407-425-2747

My practice includes the representation of financial institutions, banks, insurance companies, business owners and other corporate clients. I have a growing and focused practice dedicated to helping financial institutions navigate the complex and expanding area of government regulation and compliance with federal and state laws. This includes working with financial institutions to prepare best practices policies, procedures, and forms, as well as advising financial institutions as to avoiding litigation. When necessary, I will also represent those same institutions in court. I enjoy keeping current with the news and issues that affect banks and financial institutions in their business, and sharing that information along with my thoughts on the issue from a legal perspective based upon my experience.

My firm, Zimmerman, Kiser, & Sutcliffe, P.A.* is a full-service law firm located in Orlando, Florida. Established in 1984 and consistently recognized as one of the largest firms in Central Florida, our firm maintains a respected reputation within the southeast U.S. business and legal community. Our more than 30 attorneys provide comprehensive legal representation in an extensive range of practice areas including corporate, tax, real estate, litigation, banking and financial institutions, structured finance, bankruptcy & creditors’ rights, estate planning & probate, and workers’ compensation.

http://www.zkslawfirm.com
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