$28 Million FTC Settlement with Bear Stearns/EMC Mortgage has Significant Impact on ARM Industry

The recent settlement between the FTC and Bear Stearns/EMC Mortgage appears to have broad implications for the accounts receivable management industry. EMC Mortgage is the mortgage loan servicing unit of Bear Stearns which is now owned by JPMorgan Chase. So what does a mortgage loan servicing company have to do with debt buyers, issuers and collection agencies? Everything when the FTC defines both Bear Stearns and EMC Mortgage as a debt collector.

FTC Division of Financial Practices Associate Director Peggy Twohig was quoted recently stating “recordsetting enforcement activity is on the horizon” for the industry. The EMC Mortgage case may provide a roadmap to areas where the FTC will focus when investigating industry members. Understanding these issues and taking appropriate preventative measures now can reduce the risk of the FTC showing up on your organization’s doorstep.

The following is information regarding the settlement in a question and answer format. In compiling this information, we have spoken with a number of ACA and DBA members and the Federal Trade Commission. In addition, I have added my own interpretations based on spending the last six years focused on data compliance and security issues as well as the last two years immersed in the ARM Industry working with Clients in the industry. Bottom line: This may be the most important regulatory action to impact the ARM industry since the passage of the Fair Debt Collection Practices Act (FDCPA).

Where can I get a copy of the complaint and settlement documentation?

The complaint, settlement and press release announcing the settlement can be found at the following website: http://www.ftc.gov/os/caselist/0623031/index.shtm. We believe it is in the best interest of all members of the industry to read these documents.

Who is EMC Mortgage and why is this settlement important to the ARM Industry?

The FTC stated in the complaint that EMC Mortgage and Bear Stearns are debt collectors under FDCPA. (Important Note: JPMorgan Chase inherited EMC with the purchase of Bear Stearns. The settlement only applies to mortgages purchased by Bear Stearns prior to the merger with JPMC.)

The FTC in its complaint made little distinction between Bear Stearns and EMC Mortgage. EMC is a subsidiary of Bear Stearns. The FTC went even further in the complaint.

Bear Stearns directs, controls, formulates, or participates in the acts or practices alleged in this complaint. Defendant EMC acts in the interests, and is the alter ego, of defendant Bear Stearns.

What is interesting is that Bear Stearns is a bank. And the perception has been banks are exempt from FDCPA. However, there appears to be exceptions as alleged in this compliant.

Defendants play a prominent role in the secondary market for residential mortgage loans by acquiring, servicing, and selling large volumes of such loans. In recent years, during the explosive growth of the mortgage industry, defendants acquired and securitized loans at a rapid pace, paying inadequate attention to the integrity of consumers’ loan information and to sound servicing practices. As a result, in servicing consumers’ loans, defendants neglected to obtain timely and accurate information on consumers’ loans, made inaccurate claims to consumers, and engaged in unlawful collection and servicing practice.

Defendants operate a vertically integrated mortgage business, which includes the acquisition and servicing of residential mortgage loans, and the packaging of those loans into mortgage backed securities ("MBS") for sale to investors. EMC is the mortgage servicer for many of the loans acquired by defendants. Bear Stearns’ employees are primarily responsible for the acquisition of loans, such as the identification, bidding, and negotiation of deals, although frequently EMC is listed as the purchaser and subsequent seller on MBS documents. In many instances, after the defendants have acquired loans and EMC has begun servicing them, Bear Stearns packages the loans into MBS. After the loans have been packaged into MBS and sold on the secondary market, EMC often continues to service the loans pursuant to servicing agreements. In some instances, EMC also retains a residual ownership interest in the loans.

What did EMC do wrong?

Two issues are important to note. Most of the issues identified by the FTC were not mortgage specific. Rather, many would apply to any type of consumer debt. Second, the first area covered here is focused on the data integrity. Here are some of the highlights.

Made collection calls without verification of information provided to EMC by the seller of the debt instrument. Specifically, “EMC makes these early collection calls and sends collection notices to consumers before it has obtained complete loan information from the seller and before it has conducted quality control and other data integrity checks to ensure the accuracy of the representations it makes to borrowers." Further, “In numerous instances, EMC has lacked a reasonable basis for its representations to borrowers, because it failed to obtain accurate and complete information about the consumer’s loan account before making the representation. Despite indications that loan data obtained from prior loan servicers and loaded onto its servicing system was likely inaccurate or unverified, EMC nonetheless used that data to make representations to borrowers about their loans. As a result, defendants have made inaccurate claims to consumers and engaged in unwarranted collection practices.”
Did not work to resolve client disputes
Did not forward to credit bureaus updated information regarding the account
Excessive phone calls, threatening phone calls, and failure to disclose purpose of the call.
Charged for fees not allowed for under the mortgage contract (i.e., inspections)
Charged fees in violation of state law.
Charged loan modification fees which added to balances and did not provide a new truth in lending form.
Misrepresented fees to consumer in violation of contract and state laws
Collected amounts they were not authorized to collect under the loan agreement (including interest, fees, expenses, etc.).
No providing Truth in Lending statement to consumers when applicable fees were added to the loan balance.

I recently had a conversation with one of the FTC attorneys directly involved in the case. The attorney – and I am paraphrasing – stated there is an expectation by consumers, when being contacted by any entity collecting a debt, that the information which is being communicated to them or about them through any channel to any party is accurate.

Actions taken as a result of the failure to keep and communicate accurate information (including validation of the accuracy of the data before any data is exchanged with any third party including the debtor) is considered “false or misleading and constitute deceptive acts or practices” and is therefore an “unfair trade practice” under Section 5 of the FTC Act. The data integrity issue is not only an FDCPA violation and which only applies only to entities which meet the FDCPA definition of a “debt collector.” Rather it’s much broader in scope. It appears it will apply to any entity – including issuers, debt buyers, debt collectors, mortgage servicers – which use the information for the collection of a debt – regardless of whether the debt is charged off, delinquent, etc.