[Congressional Record Volume 145, Number 165 (Friday, November 19, 1999)]
[Extensions of Remarks]
[Pages E2477-E2478]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




              RESIDENTIAL LOAN SERVICING CLARIFICATION ACT

                                 ______
                                 

                          HON. EDWARD R. ROYCE

                             of california

                    in the house of representatives

                      Thursday, November 18, 1999

  Mr. ROYCE. Mr. Speaker, the legislation I am introducing today 
addresses a technical problem that residential loan servicers have 
encountered in complying with the federal Fair Debt Collection 
Practices Act (``FDCPA''). Creditors collecting their own debts are 
already exempt from the FDCPA, which is aimed at regulating the 
practices of independent debt collectors. When a residential loan 
servicer acquires a servicing portfolio, it is generally exempt for the 
FDCPA under the creditor exemption. However, a question arises when 
loans in a portfolio are delinquent at the time they are acquired, 
since the creditor exemption does not apply to debts that were ``in 
default'' at the time the servicer acquired them. This limitation to 
the creditor exemption has created considerable uncertainty in the 
mortgage servicing industry. In order to avoid possible liability, many 
loan servicers have been attempting to comply with the FDCPA by 
applying it to every loan, whether it was delinquent or not, when they 
acquired the servicing rights.
  The disclosures required of debt collectors under the FDCPA, however, 
create particular difficulties for residential mortgage loan servicers. 
In addition to its substantive anti-abuse protections for the debtors, 
the FDCPA requires a debt collector to notify the borrower in the 
initial written or oral communication with the borrower that it is 
attempting to collect a debt and that any information obtained will be 
used for that purpose (the so-called ``Miranda'' warning), requires in 
each subsequent communication to indicate that the communication is 
from a debt collector, and requires that the debt collector provide a 
written debt validation notice within five days after the initial 
communication, which allows the borrower to dispute all or any portion 
of the debt within 30 days. The debt validation provisions also create 
additional complexity for servicing activities due to restrictions or 
making any ``collection'' efforts during the thirty day validation 
period. These informational requirements dictate that the loans subject 
to the FDCPA must get different communications from the servicer 
throughout their maturity, and thus require that the loans be 
identified and specially designated, creating additional costs without 
any additional protections or benefits provided to the borrowers.
  Moreover, consumers are not well-served when the servicer feels 
compelled to make the FDCPA's disclosures. Residential mortgage

[[Page E2478]]

loan servicers are generally not true debt collectors even if they may 
be deemed to be a ``debt collector'' under the FDCPA with respect to a 
small percentage of their loans. A separate set of rules in the Real 
Estate Settlement Procedures Act requires servicers of first lien loans 
to provide notices related to the borrower's right when servicing is 
transferred. The special FDCPA notices may convey the misleading 
impression that the loan has been referred to a traditional, 
independent debt collector, when, in fact, all that has happened is 
that the servicing rights have been transferred from one servicer to 
another--often as part of a larger portfolio of performing loans.
  As an alternative to following the special procedural requirements of 
the FDCPA, some servicers decline to accept any delinquent loans. When 
an acquiring loan servicer takes this approach, the perverse result may 
be that the holder of the servicing rights who no longer wishes to 
service these loans may subject these delinquent loans to more 
aggressive collection action than would otherwise take place if the 
acquiring servicer had been willing to accept those loans.
  The legislation I am proposing here today is intended to address the 
problems created when the FDCPA's procedural requirements are applied 
to residential mortgage loan servicers. The legislation would apply 
only to first lien residential mortgage loans that are acquired by bona 
fide loan servicers, not professional debt collectors. It would exempt 
them only from the ``Miranda'' notice and the dept validation 
provisions of the FDCPA.
  Importantly, all of the substantive protections under the FDCPA would 
continue to apply to any loan as to which the servicer is not exempt as 
a creditor. These provisions will allow residential mortgage loan 
servicers to treat the few loans subject to the FDCPA in the same way 
they treat all other loans and will thus reduce unnecessary 
administrative costs incurred identifying and separately handling these 
accounts. In addition, once a servicer is considered a ``debt 
collector'' under the FDCPA, the borrower would have a right to request 
a ``validation statement''--a statement of the amount necessary to 
bring the loan current and to pay off the loan in full as of a 
particular date.
  I think it is also important to note that this proposed legislative 
clarification has the full support of the Federal Trade Commission, the 
agency with enforcement jurisdiction over the FDCPA. As a matter of 
fact, the FTC has consistently gone on record in its Annual Report to 
Congress as supporting legislative clarification in this area. The 
FTC's 21st Annual Report to Congress provides as follows:
  Section 803 (6) of the FDCPA sets forth a number of specific 
exemptions from the law, one of which is collection activity by a party 
that ``concerns a debt which was not in default at the time it was 
obtained by such a person.'' The exemption was designed to avoid 
application of the FDCPA to mortgage servicing companies, whose 
business is accepting and recording payments on current debts. (March 
19, 1999 Report)
  The report then goes on to make specific recommendations to Congress:
  The Commission believes that Section 803 (6)(F)(iii) was designed to 
exempt only businesses whose collection of delinquent debts is 
secondary to their function of servicing current accounts. . . . 
Therefore, the Commission recommends that Congress amend this exemption 
so that its applicability will depend upon the nature of the overall 
business conducted by the party to be exempted rather than the status 
of individual obligations when the party obtained them.
  I am pleased that several of my colleagues on the House Banking and 
Financial Services Committee, namely Reps. Jack Metcalf (WA) and Walter 
Jones (NC), are also sponsoring what I hope will be bipartisan 
legislation to clarify the FDCPA as it applies to residential loan 
servicers. Mr. Speaker, I hope we can move early in the next session to 
address this issue in both Committee and on the House floor.

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