A is not a "set in the model" (A is not in the domain of the model, even though all of its members are). More precisely, for no such set A there exists x in M such that A = R−1[x]. So M satisfies the axiom of regularity (it is "internally" well-founded) but it is not well-founded and the collapse lemma does not apply to it. References Lemmas Lemmas in set theory Wellfoundedness