When is it ok to contact the borrower, as the holder of a NPN?

28 Replies

I'm very new to the idea of investing in notes generally, and I have a question regarding non performing notes specifically: 

I feel like I heard/read somewhere that it's not legal (or not ethical?) to directly contact the borrower of a non performing note to attempt to get the note re-performing. Is what I think I heard/read accurate? If so, how does one indirectly/legally contact the borrower to try to get the note re-performing. 

If it's not accurate, is there any nuance to how one should/shouldn't contact a borrower that I should consider? Or is it totally fine to contact the borrower as the new holder of the note?

Thanks in advance for any guidance/help.

Is it an owner occupied consumer loan? Or a loan to an investor for investment property?  If consumer, with all the new regs in place for consumer loans I wouldn't contact the borrower directly.  There are certain notices and disclosures required and the laws are quite specific about collection attempts.  I'd contact a servicer and/or a foreclosing trustee service and have them get the ball rolling. 

Thanks for the response K. Marie. It's an owner occupied consumer loan. Where could I learn more about the required notices and disclosures?

What it sounds like is a confused statement that was told to you.  It is usually not 'allowed' to make any contact with a borrower prior to your ownership of the mortgage.  So during any purchase cycle including due diligence the Seller usually prohibits the Buyer from trying to make contact.  Standard stuff.

Once you are officially the Mortgagee (owner) then you have the right to contact the borrower.  Occupancy (Owner Occupied/Non Owner Occupied) is of no consequence in that matter.  

Kristine Marie Poe statement makes it seem like an investor loan or Non Owner Occupied loan, might be OK to contact or even perhaps is not afforded the same protections to some degree.  I think if left with no refinement a reader may get the wrong impression from the statement.  

We must be careful not to create false ideas of exclusions or exclusivity with loans based on Occupancy.  The train of thought is more like, all loans are protected with focus on Primary Residence or Owner Occupied.  Non Owner Occupied loans or loans made for investment purposes are not excluded from the protections, they are afforded the protection but Primary gets more of an emphasis.  

So, you can make the same wrong statement or do the same wrong thing to both types of loans.  In many cases they are both protected in the same fashion.  For instance, Dual Tracking, forbidden via Dobb Frank is forbidden for all loans regardless of Occupancy.  

I agree with KMP, you should use a Mortgage Servicing Company.  I think investors should use them for ALL loans not limited to Primary Residence loans.  

In regards to learning the disclosures required.  I don't think there is a place where you can just sit and read all things required.  Requirements are broad as the reasons the requirements are in place is vast.  For instance, requirements for lack of insurance.  There is guidance from regulations on what the message to the borrower can say and how it must be treated.  (Same for all Occupancy)  Notice of Acceleration and Default has requirements.  (Same for all Occupancy)  Monthly reporting statements.  (Same)  

I guess one could say Servicing the loan is really one big set of notices and disclosures and literally at every turn there are requirements governing what is being put on notice and disclosed.  

It is also important to note, when you become the Mortgagee (Note Owner) you can contact the borrower.  The underlying idea there is make sure you are making contact within all the governing regulations which include but are not limited to Fair Debt Collection, Dobb Frank amendments to Regulation X and Regulation Z.

Originally posted by @Dion DePaoli :

It is also important to note, when you become the Mortgagee (Note Owner) you can contact the borrower.  The underlying idea there is make sure you are making contact within all the governing regulations which include but are not limited to Fair Debt Collection, Dobb Frank amendments to Regulation X and Regulation Z.

I don't understand how the average note holder/buyer could possibly be in compliance when contacting a consumer borrower on a NPN . Once the note is non-performing, the lender has to make all the correct debt collection disclosures, and onerous things like having an 800 number for the borrower to make contact. I'm pretty sure it would be impossible for me to get it right. Hence using the servicer. Serving costs used to seem to me like an added expense for a small convenience. Now I feel I get more service than I pay for.

I haven't yet used servicing for any of my seller carry back to investors, only for a couple of consumer loans.  If one of my investor borrowers defaulted I doubt I'd make more than one call to find out what's going on.  I'd turn it over to servicing or a foreclosing trustee at that point.  

I think we are saying the same thing. Use a servicer (all the time). I am adding to that statement that the idea that is arising around NOO being "OK" to not put with a servicer is not a proper idea. Those loans have much of the same protections as loans secured by primary residence. Just because a loan is secured by an investment property does not mean it is excluded on much of the same regulations that govern residential loans.

In my experience with notes, we always send everything in writing and disclose the borrower's rights, but I never allow a borrower to start re-preforming again I like the foreclosure route.


Joe Gore

Originally posted by @Dion DePaoli :

For instance, requirements for lack of insurance.  There is guidance from regulations on what the message to the borrower can say and how it must be treated.

 Can you point me to the regs regarding how to handle lack of insurance?  The servicing company I use said they discontinued that service, they felt the liability was too high.  Do you know a servicing company that does include insurance tracking as part of their service?  I end up handling it myself, pretty informally I might add.  I originate non-consumer loans, but it's sounding like that doesn't matter.

@Dion DePaoli  some clarification based on some things I was told in my information gathering as I would like to work with notes in the near future.

A borrower has certain legal rights and protections, which you've mentioned. Some of these revolve around the disclosures and notices they must receive.

A lender (or note holder) has certain legal responsibilities with noticing and disclosing. A lender also has certain rights as the owner of that note to pursue asset recovery within those legal bounds, whether through foreclosure, deed in lieu, short sale approval, loan modification, workout plans....and others I'm likely not aware of. This is a true statement correct?

So that being said, this is where my question comes in. I have heard and would like your educated opinion on the following "action". 

After purchasing a NPN and having it boarded with a licensed servicer, they send the required notices and disclosures. You are now/have remained compliant with what you are legally bound to (correct?) at least initially. Now can you as the note holder attempt to make contact yourself? As long as that contact is limited to just attempting to get the borrower to acknowledge the problem and begin working through it, basically get them to become proactive in looking at their options and deciding what if anything they can do about it are you still compliant and legally able to make that contact?

The way this was "presented" was you would maybe send a letter or call just stating you are the note holder and need them to make contact with XXX to begin working toward a solution. Would you still be compliant in this situation assuming all the appropriate notices were sent by the servicer?

Originally posted by Kristine Marie Poe:
  Serving costs used to seem to me like an added expense for a small convenience.  Now I feel I get more service than I pay for.

Servicers have a cost schedule depending on the service provided, you may not feel that way once the loan goes into default.

Originally posted by Account Closed:
Originally posted by @K. Marie Poe:
  Serving costs used to seem to me like an added expense for a small convenience.  Now I feel I get more service than I pay for.

Servicers have a cost schedule depending on the service provided, you may not feel that way once the loan goes into default.

Yeah, I know that $25/mo isn't buying me much. Just collecting and dispersing payments, and year end statements.  I recently paid off a foreclosing trustee service for a loan I took over in default so I'm aware of how those fees add up.  Some seemed pretty excessive.  I objected to $700 in legal fees that I felt weren't directly related to foreclosure and they took them off the bill. Instead of being elated, it made me wonder about the validity of the other charges.  :)

Kristine Marie Poe undefined

$25/mo!! Wow, I'm only paying $15/mo, got you beat! :) Of course that's nothing compared to the over $6k in trustee and legal fees I paid foreclosing on a $35k second over a period of a year and a half. Fortunately there is equity to cover all those costs when this saga finally comes to a conclusion. Funny thing is, I'm easy to work with, borrower could have saved a ton of money had he simply picked up the phone when I called and tried to work things out, oh well, people are people, all you can do is try.

Originally posted by Account Closed:
Originally posted by @Dion DePaoli:

For instance, requirements for lack of insurance.  There is guidance from regulations on what the message to the borrower can say and how it must be treated.

 Can you point me to the regs regarding how to handle lack of insurance?  The servicing company I use said they discontinued that service, they felt the liability was too high.  Do you know a servicing company that does include insurance tracking as part of their service?  I end up handling it myself, pretty informally I might add.  I originate non-consumer loans, but it's sounding like that doesn't matter.

 Regulation X and Dobb Frank would be a good place to start.  In regards to servicing companies and services.  I always like to say, nobody will care more about your loan than you.  I do not understand where liability is from a servicer for enforcing the terms of the documents, which typically includes obtaining proof of insurance yearly.  Or receiving the renewal declaration page each year.  Liability would come in where they are the ones who issue the Lender Placed Insurance, as they may not insure your costs or other similar issues.  

Try looking for a new servicer.  Acqura or Residential Credit Services or BMI might work.  Shop around is my suggestion for best service to cost.  I am not endorsing any of the above.

Originally posted by @Matt Devincenzo :

@Dion DePaoli some clarification based on some things I was told in my information gathering as I would like to work with notes in the near future.

A borrower has certain legal rights and protections, which you've mentioned. Some of these revolve around the disclosures and notices they must receive.

A lender (or note holder) has certain legal responsibilities with noticing and disclosing. A lender also has certain rights as the owner of that note to pursue asset recovery within those legal bounds, whether through foreclosure, deed in lieu, short sale approval, loan modification, workout plans....and others I'm likely not aware of. This is a true statement correct?

So that being said, this is where my question comes in. I have heard and would like your educated opinion on the following "action". 

After purchasing a NPN and having it boarded with a licensed servicer, they send the required notices and disclosures. You are now/have remained compliant with what you are legally bound to (correct?) at least initially. Now can you as the note holder attempt to make contact yourself? As long as that contact is limited to just attempting to get the borrower to acknowledge the problem and begin working through it, basically get them to become proactive in looking at their options and deciding what if anything they can do about it are you still compliant and legally able to make that contact?

The way this was "presented" was you would maybe send a letter or call just stating you are the note holder and need them to make contact with XXX to begin working toward a solution. Would you still be compliant in this situation assuming all the appropriate notices were sent by the servicer?

 Matt the first question seems correct, there is no much to it.  Each of those things, ie foreclosure, DIL, shorting, mean something specific and to some degree have a prescribed way of dealing.  For instance, DIL and foreclosure.  DIL is supposed to be initiated from the borrower to the lender.  The borrower gives the deed in exchange for not being foreclosed.  The spirit of doing it the other way, where lender causes the DIL, can be viewed as unfair, forcing the borrower to surrender their property circumventing foreclosure.  The second example is foreclosure, each state has a predefined manner in which the redemption rights of all interested parties are extinguished.  How notice is given, times to respond, rules on sale and other stuff.  

The idea there is to level the playing field and afford protections to borrowers who may not be wise to ways that less than honest lenders may take advantage of the borrower.

After a loan is purchased, RESPA requires a notice to the borrower for any transfer of servicing and a certain amount of time for the grace period to the borrower to adhere to the change.  So, RESPA says, a borrower must be given at least 15 days prior notice before requiring any changing in payment delivery being made.  That is the required notice, if servicing changes.  

Do not confuse that idea, the transfer of servicing, with ownership.  You can buy a loan and not change servicing companies.  Upon consideration of the sale of the loan, you are the owner.  There is no disclosure for a change in ownership of a loan, only a change in servicing.  As such, when you are an owner of a loan, you have an interest and that is what allows you to pursue the obligations of the borrower.  This idea, also coincides with possession.  So essentially, you can collect as soon as you are the owner of the note.  

Can you make contact with the borrower?  Yes.  Can you force the borrower to pay you before the required 15 days pass for service transfer?  No.  Can you  offer some workout options?  Yes.  You just need to be careful how you go about doing such things.  Borrowers may not be your friend, even if you have the best intentions.  Usually the biggest thing with a borrower is proving you are actually their new Mortgagee and not a wholesaler trying to work with them.  

Originally posted by @Dion DePaoli :
 Usually the biggest thing with a borrower is proving you are actually their new Mortgagee and not a wholesaler trying to work with them.  

Dion:  Can you explain more what you mean here?  Are you saying borrowers misunderstand that they are being contacted by the new owner of their note?  And confuse the new lender with a buyer?

@Dion DePaoli

@K. Marie Poe 

@Matt Devincenzo 

Great discussion and information. Thank you all!

Matt, your comments/questions expanded on what I was trying to ask, so thanks for keeping this going and helping to flesh it out. 

Dion, I really appreciate the detailed explanations - this has helped me understand a lot, and cleared up the main questions I had. Also, I'll look into Fair Debt Collection, Dodd Frank, Reg X and Reg Z for better understanding (lots of homework there!).

K. marie, thanks again for all the comments and info. Using a servicer seems to be the consensus, and I surely will!

Originally posted by @Dion DePaoli :
Originally posted by @David C.:
Originally posted by @Dion DePaoli:

For instance, requirements for lack of insurance.  There is guidance from regulations on what the message to the borrower can say and how it must be treated.

 Can you point me to the regs regarding how to handle lack of insurance?  The servicing company I use said they discontinued that service, they felt the liability was too high.  Do you know a servicing company that does include insurance tracking as part of their service?  I end up handling it myself, pretty informally I might add.  I originate non-consumer loans, but it's sounding like that doesn't matter.

 Regulation X and Dobb Frank would be a good place to start.  In regards to servicing companies and services.  I always like to say, nobody will care more about your loan than you.  I do not understand where liability is from a servicer for enforcing the terms of the documents, which typically includes obtaining proof of insurance yearly.  Or receiving the renewal declaration page each year.  Liability would come in where they are the ones who issue the Lender Placed Insurance, as they may not insure your costs or other similar issues.  

Try looking for a new servicer.  Acqura or Residential Credit Services or BMI might work.  Shop around is my suggestion for best service to cost.  I am not endorsing any of the above.

 Thanks!  I'll check it out.

Originally posted by Kristine Marie Poe:
Originally posted by @Dion DePaoli:
 Usually the biggest thing with a borrower is proving you are actually their new Mortgagee and not a wholesaler trying to work with them.  

Dion:  Can you explain more what you mean here?  Are you saying borrowers misunderstand that they are being contacted by the new owner of their note?  And confuse the new lender with a buyer?

Yes, exactly. In my experience distressed borrowers get a decent amount of other folks trying to help them. Wholesalers and REI willing to buy or contract the house, etc. Many are also being pestered by credit counseling and loan modification posers. This tends to lead the borrower to be a little suspicious of all new folks trying to contact and deal with them.

So this makes the initial contact a little harder.  The new Mortgagee needs to be in a position to defend their role to the borrower in a manner the borrower understands.  We tend to use the Hello/Good Bye letters and statement of accounts amongst some other tactics to get the borrower on board.  

Bare in mind, this is also aside from what I like to call "Ostrich Syndrome", which is where distressed borrowers stick their head in the sand and do not come up to look around from the stress/pressure of the delinquency or default.  

If I was a betting man, I would wager that most new note investors struggle more than they ever imagined with borrower communication.

Originally posted by @Dion DePaoli :
Originally posted by @K. Marie Poe:
Originally posted by @Dion DePaoli:
 Usually the biggest thing with a borrower is proving you are actually their new Mortgagee and not a wholesaler trying to work with them.  

Dion:  Can you explain more what you mean here?  Are you saying borrowers misunderstand that they are being contacted by the new owner of their note?  And confuse the new lender with a buyer?

Yes, exactly. In my experience distressed borrowers get a decent amount of other folks trying to help them. Wholesalers and REI willing to buy or contract the house, etc. Many are also being pestered by credit counseling and loan modification posers. This tends to lead the borrower to be a little suspicious of all new folks trying to contact and deal with them.

So this makes the initial contact a little harder.  The new Mortgagee needs to be in a position to defend their role to the borrower in a manner the borrower understands.  We tend to use the Hello/Good Bye letters and statement of accounts amongst some other tactics to get the borrower on board.  

Bare in mind, this is also aside from what I like to call "Ostrich Syndrome", which is where distressed borrowers stick their head in the sand and do not come up to look around from the stress/pressure of the delinquency or default.  

If I was a betting man, I would wager that most new note investors struggle more than they ever imagined with borrower communication.

Thanks for the additional information.  Just yesterday I was looking at some sample hello/goodbye letters on my servicer's website.  While they seem clear and rather official, I am aware that borrowers in distress are getting a lot of "urgent" communications.  I've bought maybe 6 non performing notes.  They were all vacant, with multiple distresses and usually upside down, so I never expected the borrowers to call to work out a payment plan or anything.  In spite of multiple attempts to get them to contact me, I never heard from any  of them. 

On one note, we were a week from the scheduled trustee's sale and I got calls from 3 different investors who claimed to be working with the borrowers.  I was really worried the property wouldn't sell to a 3rd party at sale. The property was scheduled for tax sale a week following the foreclosure.  If I got it back I'd have to pony up $17K to save it from tax sale.

I told all three investors I was open to a discounted payoff, so please get back to me with an offer.  At that point I would have accepted a huge discount.  I didn't hear from any of the investors before the sale and the property sold with multiple bidders at sale.  Two of the investors called a week after the sale with offers.  I told them they were a little late as I didn't own it anymore.  Lord only knows what the borrowers were told or were offered by these people.

So you're not a betting man?

Originally posted by Kristine Marie Poe:

So you're not a betting man?

 I am no @J Scott in matters of poker.  That is for sure.

Funny about borrowers being hard to get a hold of.  We bought a note last month in Lansing Michigan and when I called (before purchase) to check on taxes i was told that it had been schedule d for tax sale but pulled back because the lender had not been notified.  Because of this I went ahead an paid the taxes once I had the paperwork in hand.

Servicing is scheduled to transfer today and the borrower called me, at home.  Turns out they had been on a payment plan and their payment got returned because no taxes were due.  Had a very nice discussion with the lady and it looks like we have a couple of workout options that we can purse.  

Bob E. MBA, LD Funding, LLC | [email protected] | 909‑353‑3863 | http://www.LDFundingLLC.com

Funny about borrowers being hard to get a hold of. We bought a note last month in Lansing Michigan and when I called (before purchase) to check on taxes i was told that it had been schedule d for tax sale but pulled back because the lender had not been notified. Because of this I went ahead an paid the taxes once I had the paperwork in hand.

Servicing is scheduled to transfer today and the borrower called me, at home. Turns out they had been on a payment plan and their payment got returned because no taxes were due. Had a very nice discussion with the lady and it looks like we have a couple of workout options that we can purse.  

Bob E. MBA, LD Funding, LLC | [email protected] | 909‑353‑3863 | http://www.LDFundingLLC.com

@Bob E.  did you get your note closed here locally ?

If so, can you provide details ?

Original purchase , holding cost, property management fees, how property was purchased , cash or finance purchase , insurance cost, closing fees, sold for , and etc 

Jenkins Ramon, JMWPS Ventures, LLC | [email protected]

@Jenkins Ramon Are you referring to the REO property we sold? If so We purchased for $7,600 and sold for $17,600.

There were about 5k total costs including closing.  I went through a local realtor who has done a lot of work for me so commissions we 2k of the closing cost but she made up for that with the final selling price and it let me share some of our success with the people helping us on the ground locally.  

We are cash buyers so we did not have any carrying costs.  Only held the property for 30 days from wire to wire.  Insurance was around $80 through a local agent suggested by our realtor.

Property was purchased from a hedge fund that had it as an REO.

Hope that answers all your questions.

Bob

Bob E. MBA, LD Funding, LLC | [email protected] | 909‑353‑3863 | http://www.LDFundingLLC.com

@Bob E.  yes

 local realtor who has done a lot of work for me so commissions - yes I know Sonya

( disclaimer : were in the same brokerage ) 

Nice $5000 profit for long distance work within 30 days.

Thank You

Jenkins Ramon, JMWPS Ventures, LLC | [email protected]