Not-for-Profit Servicing Program: Challenges

Presented in Servicing a National Portfolio

NCHER Legal MeetingFebruary 8, 2013

Arthur J. RotatoriKelly Lipinski

Topics

• State Nonprofit Corporation Qualification

• Additional Trade Names

• Third-Party Servicer/Collection Agency License Issues

• Substantive Conduct Requirements

• Recent Developments

“Doing Business” in States

• State Nonprofit Corporation Act– Formation of domestic nonprofits– Authority for foreign nonprofits to

conduct business• Certificate of Authority issued by

Secretary of State before a corporation may “conduct business”, “transact business”, or “conduct affairs” in a state.

“Doing Business” in States

• Interstate Commerce– United States Constitution prohibits states

from regulating corporations engaged in interstate commerce

– However, if the activity occurs with enough frequency (i.e., re-characterized as intrastate commerce), the nonprofit must qualify to do business in the foreign state

– Relationship of state licenses– Online commerce

“Doing Business” in States

• The most important implication is access to courts– Will nonprofit corporation engage in

litigation in another state?• If required, courts typically grant a stay

while corporation takes corrective action– However, Delaware, Kansas, New York,

and Oklahoma prohibit a person from maintaining an action until properly qualified

“Doing Business” in States

• If a corporation is not “doing business” in a state, the certificate of authority is not required

• Potential penalties for failure to qualify when required:– Civil fines (every state other than Alabama,

Pennsylvania, and Virginia)– Criminal convictions for a corporation’s

officers and directors (e.g., California and Maryland)

“Doing Business” in States

• How to know whether business activity is “doing business”?– Definition is written in the negative– States identify activities that are not

“doing business”– Non-exhaustive list

• Distinction between “doing business” for qualification and taxation purposes

Washington Nonprofit Corporations Law

• A foreign corporation is not considered to be conducting affairs in Washington by reason of carrying on in Washington any one or more of the following activities:– (1) Maintaining or defending any action or suit or any

administrative or arbitration proceeding, or effecting the settlement thereof or the settlement of claims or disputes.

– (9) Securing or collecting debts or enforcing any rights in property securing the same.

– (10) Transacting any business in interstate commerce. Wash. Rev. Code § 24.03.305.

Illinois Foreign Corporations

• A foreign corporation is not considered to be transacting business in Illinois by reason of carrying on in Illinois any one or more of the following activities:– (1) maintaining, defending, or settling any

proceeding. 805 Ill. Comp. Stat. § 5/13.75• Activities that are not excluded: 1) creating

or acquiring debt or 2) securing or collecting debt

State Qualification Considerations

• Take an inventory of business activities– Presence: interstate v. intrastate activity– Services rendered: servicing/collection,

marketing, credit, etc.– Access to courts: enforce rights– Frequency: regularly or one-off

• Depending on whether non-profit is tax-exempt, plan for tax filing obligations

Registration of Trade names

• Corporate name attached to corporate records and filed with Secretary of State registration

• Primary name may not be available in foreign jurisdictions or nonprofit may prefer to use a d/b/a or “fictitious name”

Third-Party Servicer and Collectors: Context

• Fair Debt Collection Practices Act– Conduct

– Consumer Financial Protection Bureau

• Overlay of state regulation– Documentation requirements

– Statute of limitations

– Licensing

State Licensing Frameworks

• Considerations:– Asset

– Status of consumer’s account• Charged-off v. delinquent

– Allocation of responsibilities

Unsecured Loans

• Uniform Consumer Credit Code– Ten states

• Consumer lending laws

• Loan characteristics– Dollar amount

– Finance charge

• Duplicative licensing

Unsecured Loans

• Kansas Uniform Consumer Credit Code:– Take assignments of andand directly or indirectly,

including through the use of servicing including through the use of servicing contracts contracts or otherwise, undertake collection of payments from debtors arising from supervised loans; or

– Take assignments of andand directly or indirectly, including through the use of servicing including through the use of servicing contracts contracts or otherwise, enforce rights against debtors arising from supervised loans. Kan. Stat. § 16a-2-301(2).

Third-Party Servicers

• Collection agency/debtor collection laws– Thirty-four states license collection agencies

• Scope– Collecting for another person

– Collecting for oneself

– Status of account• Delinquent v. default

– Activities rendered

Third-Party Servicers

• Lack of specificity concerning the status of an account– “An obligation for the payment of money or

its equivalent and a sum or sums owed, due or asserted to be owed or due to another, for which a person is employed to demand payment and collect or enforce such payment”

– “Any obligation for the payment of money or thing of value arising out of any agreement or contract, express or implied.”

Third-Party Servicers

• Debt collectors are broadly defined– An person who collects debts incurred in

[state] from debtors located in [state] by means of interstate communications, including telephone, mail or facsimile or any other electronic method, from the debt collector's location in [state].

– Any person who, in the ordinary course of business, regularly, on behalf of himself or herself or others, engages in debt collection.

Third-Party Servicers• Massachusetts

– Separately regulate “debt collectors” and “third party loan servicers”

– “Third party loan servicer” is a person who uses an instrumentality of interstate commerce or the mails in any business the principal purpose of servicing a loan directly or indirectly, owed or due or asserted to be owed or due another.

– “Servicing” is receiving a scheduled periodic payment from a borrower pursuant to the terms of a loan, including amounts for escrow accounts, and making the payments to the owner of the loan or other third party of principal and interest and other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the servicing loan document or servicing contract.

Third-Party Servicers

• Key Elements– Performing services for another person

– Primary business purpose

– Conducting business through interstate means

Third-Party Servicers

• Substantive conduct requirements applicable even if a license is not required– California: Rosenthal Fair Debt

Collection Practices Act

– New York: Debt Collection Procedures

– North Carolina: Debt Collection Practices

Third-Party Servicers• Massachusetts Attorney General Debt Collector

Regulations, Mass. Code Reg. tit. 940 §§ 7.01 et seq.– Applicable to creditors and their agents– A debt is an obligation that is more than 30 days past due– There is no servicer exemption, student loan exemption,

or bank exemption• The Attorney General regulations do not establish a

license requirement, but impose significant conduct requirements– Debt validation notice– Restricts number of calls, including text messages, to two

in seven day period– Written disclosure every six months

Third-Party Servicers

• Massachusetts Attorney General’s January 24, 2013 Guidance with Respect to Debt Collection Regulations– Unsuccessful attempts by a creditor to reach a

debtor via telephone may not constitute initiation of a communication if the creditor is unable to reach the debtor or leave a message

– With respect to revolving accounts, where status of the debt often fluctuates, a validation notice is not required each time the account is 30 days past-due

Planning and Management

• Consider portfolio characteristics and assess current status– Identify deficiencies and budget lead time

• Ensure adequate documentation, or access to documentation

• Once licensed, ongoing obligations– Renewals, changes in business activity, and

personnel

• Address statutory and regulatory amendments– Licensure and conduct

Recent Developments

• City of Chicago Municipal Ordinance– Amended regulated business to include

“debt collectors”– A person who in the ordinary course of

business, on behalf of himself or others, regularly engages in debt collection

– It does not include a person exempt from registration as a debt collector pursuant to Illinois Collection Act

– Effective on January 27, 2012

Recent Developments

• Debt collection is any act or practice in connection with the collection of consumer debt– Creditors?

– Servicers?

– Debt buyers?

• Validation requirement

Recent Developments

• Federal Financial Institutions Examination Council proposed guidance on activities conducted via social media

• Rules would apply to banks, savings associations, and credit unions, as well as nonbank entities supervised by the CFPB and state regulators– State agencies that adopt the guidance will expect

the entities that they regulate to use the guidance in their efforts to ensure that their risk management and consumer protection practices adequately address the compliance and reputation risks raised by activities conducted via social media.

Recent Developments

• What is social media?– A form of interactive online communication

in which users generate and share content through text, images, audio and/or video

– Microblogging (Facebook, Twitter, etc.)– Forums, blogs, customer review websites

(Yelp)– Photo and video sites (Flickr, Youtube,

etc.)

Recent Developments

• How social media is used:– Marketing– Providing incentives– Facilitating applications for new accounts– Inviting feedback from the public– Engaging with existing or potential

customers (responding to complaints, pricing, etc.)

Recent Developments

• Rules are not intended to impose additional obligations– Instead, understand potential

compliance and legal risks as well as reputation and operational risks

• Covered persons are expected to manage potential risks involved with social media

Recent Developments

• A covered person that has chosen not to use social media should still be prepared to address the potential for negative comments or complaints that may arise within the many social media platforms described above and provide guidance for employee use of social media– Complaints about servicer’s coordination

with loan holder• Risk management program

Enforcement Issues

• Statute of limitations– Prohibition on initiating an action when

“reasonably should know” barred by statute of limitations

• North Carolina

– Obligation to inform consumers• New Mexico• Massachusetts

• Documentation and verification obligations

Vendor Management

• CFPB Policy Statement on Third-Party Vendor Management.

• Even if a business is a passive debt buyer and uses a third-party collection agency to collect or enforce rights, a covered person subject to CFPB supervision should have processes in place to adequately monitor and manage third-party providers.

Questions?