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. On the other hand, in the CFPB’s Winter 2013 Highlights, 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.
 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.”)
Sarah Pape is a Shareholder in the firm’s commercial litigation practice group. Sarah’s practice includes the representation of financial institutions, banks, insurance companies, construction contractors and subcontractors, business owners and other corporate clients. Sarah has extensive experience working with her clients to resolve their business disputes efficiently and effectively, as well as taking those matters to trial when necessary. Sarah's representative cases include business debt collection, foreclosures and workouts, construction contract and construction lien disputes, breach of contract actions, landlord-tenant issues, employment cases, and a variety of real property matters such as partition actions and quiet title actions. Sarah is admitted to practice in all state and federal courts in Florida, including the federal bankruptcy courts, where she has represented both creditors and trustees in all aspects of Chapter 7, 11, and 13 cases. In addition, Sarah has a growing practice dedicated to helping financial institutions navigate the complex and expanding area of government regulation and compliance with federal and state laws.
Sarah has received the designation of Super Lawyer, Rising Star, in the 2009, 2010, 2011, and 2013 Super Lawyer Magazine, being counted among the elite 2.5% of Florida's attorneys under 40 years of age or in practice for less than 10 years, to receive this honor. In 2012 Sarah was recognized by the Orlando Business Journal Women Who Mean Business as a Woman to Watch.
As someone who grew up in Central Florida and played golf on her high school team, Sarah is proud to have been a member of the founding board of directors for The First Tee of Central Florida. The First Tee of Central Florida impacts the lives of local youth by providing educational programs that build character and instill live-enhancing values through the game of golf. Sarah is also committed to giving back to her community by dedicating a portion of her time and practice of law to pro bono legal representation, including representation of children as a Guardian ad Litem through the Legal Aid Society of the Orange County Bar Association. Sarah has been awarded the Legal Aid Society's Certificate of Appreciation in recognition of her exceptional degree of service and commitment to her legal aid clients.