Alston & Bird Consumer Finance Blog

Mortgage Servicing

District Courts Split on Convenience Fees Under Debt Collection Laws

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A&B ABstract:

In a number of recent decisions, district courts have split on the issue of whether a mortgage servicer violates the Fair Debt Collection Practices Act (“FDCPA”) and related state debt collection statutes by charging a borrower a convenience fee for making a mortgage payment over the phone, interactive voice recording system (“IVR”).

FDCPA Sections 1692(f) and 1692a

Section 1692(f) of the FDCPA prohibits a debt collector from using unfair or unconscionable means to collect any debt, and enumerates specific examples of prohibited conduct.  Such conduct includes the “[c]ollection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement created the debt or permitted by law.  15 U.S.C. § 1692f(1).

The FDCPA defines “debt collector” as “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” 15 U.S.C.A. § 1692a(6).  Among other things, the term “debt collector” does not include “any person collecting or attempting to collect any debt owed or due . . . to the extent such activity . . . concerns a debt which was originated by such person” or “concerns a debt which was not in default at the time it was obtained by such person….”  Id.

Overview of Convenience Fees

In addition to offering consumers several no-cost options to make a timely monthly mortgage payment, many servicers also offer borrowers a means to make an immediate payment on their mortgage by phone, IVR, or the Internet.  Servicers who make such services available to their customers may charge a fee, often referred to as a “convenience fee,” in connection with this service.  In a wave of recent cases, borrowers who have elected to use such payment methods and consequently incurred convenience fees have sued their mortgage servicers, alleging that the convenience fees violated the FDCPA.  Frequently, these borrowers also allege that the convenience fees violated other state consumer protection statutes, breached the express terms of their mortgage agreements, and ran afoul of common law.

Recent Decisions

This year, numerous courts across the country have ruled on loan servicers’ motions to dismiss convenience claims asserted by borrowers.  A clear split has now emerged regarding the viability of plaintiffs’ legal theories.

Some Courts Dismiss Plaintiffs’ FDCPA Claims, Finding Plaintiffs’ Allegations Concerning Convenience Insufficient to State a Violation of the FDCPA

Many courts, largely in district courts in Florida, have dismissed borrowers’ claims for failure to state a claim under the FDCPA and related state acts.  According to these courts, a convenience fee is neither a “debt,” nor is it properly characterized as “incidental” to the mortgage debt itself.  Moreover, these courts have also rejected the argument that the servicer is “debt collector” under the FDCPA unless the loan was in default when the borrower became obligated to pay the convenience fee.

One of the key decisions in this recent line of cases in Turner v. PHH Mortgage Corp. No. No. 8:20-cv-00137-T-30SPF (Feb. 24, 2020 M.D. Fla.).  There, PHH charged Turner for making mortgage payments via telephone or online.  Turner alleged those convenience fees violated the FDCPA, and its Florida counterpart, the Florida Consumer Collection Practices Act (“FCCPA”).  PHH responded by moving to dismiss those claims.  The court agreed with PHH, concluding that the convenience fees were not debts owed another as contemplated by the acts.  Further, the court found that even if the fees were debts, PHH’s optional payment services had separate convenience fees that originated with PHH—not with Turner’s mortgage.

Additionally, the court relied on the fact that when Turner became obligated to pay the convenience fees, she was not in default in her obligation to pay it.  Thus, according the court’s analysis, PHH was not acting as a debt collector under the acts because (1) the debt was not in default and (2) the debt originated with PHH.  A number of other courts have since dismissed the borrowers’ claims under similar reasoning, often citing Turner’s analysis as persuasive.  See, e.g. Estate of Derrick Campbel. V. Ocwen Loan Serv., LLC, No. 20-CV-80057-AHS, slip op. at 5 (S.D. Fla. Apr. 30, 2020); Reid v. Ocwen Loan Serv., LLC, No. 20-CV-80130-AHS, 2020 U.S. Dist. LEXIS 79378 (S.D. Fla. May 4, 2020); Bardak v. Ocwen Loan Serv., 2020 U.S. Dist. LEXIS 158874 (M.D. Fla. Aug. 12, 2020).

Some Courts Find that Borrowers’ Allegations Concerning Convenience Fees Are Sufficient to State a Claim Under the FDCPA

A number of other courts across the country, from California to Florida to Texas, have concluded that a borrower does state a claim for violation of the FDCPA (or an equivalent state statute) by alleging that the borrower was charged a convenience fee in connection with a mortgage payment made over the phone, IVR, or Internet.

In contrast to the decisions discussed above, these courts find that the convenience fee is “incidental” to the mortgage debt under FDCPA section 1692f(1).  These courts have rejected the servicers’ arguments that convenience fees are not incidental to the mortgage because they arise from separate services and obligations voluntarily undertaken by the borrower.  They have found instead that, regardless of the fact that the payment method is optional, it is still incidental to the mortgage debt because the servicers only collect convenience fees when borrowers make debt payments.  See, e.g., Glover v. Owen Loan Servicing, LLC, 2020 U.S. Dist. LEXIS 38701 (S.D. Fla. Mar. 2, 2020).

Similarly, the court in Glover further found that the convenience fees were not permitted by Florida law because the court could not identify any statute or law expressly permitting such fees, nor were they explicitly allowed by the mortgage agreement.  A number of other courts have employed similar reasoning and refused to dismiss borrowers’ convenience fee claims under the FDCPA or corollary state statutes.  See, e.g., Torliatt v. Ocwen Loan Serv., No. 19-cv-04303-WHO, 2020 U.S. Dist. LEXIS 141261 (N.D. Cal. Jun. 22, 2020) (refusing to dismiss claims under the Rosenthal Fair Debt Collection Practices Act—California’s equivalent of the FDCPA—and California’s Unfair Competition Law); Caldwell v. Freedom Mortg. Corp., No. 3:19-cv-02193-N (N.D. Tex. Aug. 14, 2020) (refusing to dismiss plaintiffs’ claims under the Texas Debt Collection Act).

Takeaway

There is a growing split among district courts regarding whether a borrower who is charged a convenience fee has a viable claim under the FDCPA.  This division is particularly acute within the Eleventh Circuit, and is one unlikely to be resolved in the Court of Appeals any time soon.  So, for the foreseeable future, we expect to see more lawsuits where borrowers seek to take advantage of the current state of legal uncertainty around convenience fees.

NYDFS Issues Guidance to Mortgage Servicers Regarding Assessment of Registration Fees

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A&B ABstract:

On September 1, 2020, the Deputy Superintendent of the New York Department of Financial Services (“NYDFS”), issued guidance (the “Guidance”) to New York State regulated mortgage lenders and servicers (collectively referred to as “Servicers”) regarding fees paid to register mortgages in default. The Guidance reminds Servicers of the restrictions on fees and charges set forth under Part 419 of the Superintendent of Financial Services Regulations (“Part 419”) and directs Servicers to reverse and/or refund and credit registration fees impermissibly charged to New York borrowers and to create a log of all borrowers who were either charged, or paid any registration fee to a Servicer.

Part 419 Fee Restrictions

In December 2019, the NYDFS finalized amendments to Part 419, nearly 10 years after its initial adoption. Part 419, which sets forth business conduct requirements for mortgage loan servicers operating in the state, was amended to include expansive obligations that, in certain instances, exceed obligations under the Consumer Financial Protection Bureau’s mortgage servicing rules.

Under Section 419.5 of the amended regulations, servicers may only collect certain specified types of fees from a borrower, subject to certain conditions.  Such fees include attorney’s fees, late and delinquency fees, and property valuation fees.  In addition, a servicer may collect a fee if it is for a service that is actually rendered to the borrower, reasonably related to the cost of rendering that service, and is: (1) expressly authorized and clearly and conspicuously disclosed by the loan instruments and not prohibited by law; (2) expressly permitted by law and not prohibited by the loan instruments; or (3) not prohibited by law or the loan instruments and is for a specific service requested by the borrower that is assessed only after disclosure of the fee is provided and the borrower expressly consents to pay the fee in exchange for the service.

NYDFS Guidance

The Guidance indicates that the NYDFS has become aware that “certain counties, cities and other municipalities in New York State, by ordinance or otherwise, are requiring mortgage lenders and servicers…to register mortgages declared to be in default…with the county, city or other municipality in which the real property is situated” and that some Servicers have charged borrowers, or collected from their account, the fee for such registrations.

The Guidance reminds Servicers that Section 419.5 of Part 419 “only permits [a servicer] to collect certain specified types of fees from a [borrower], consisting of attorney’s fees, late and delinquency fees, property valuation fees, and fees for services actually rendered to a mortgagor when such fees are reasonably related to the cost of rendering the service to the borrower.” Because a “[r]egistration [f]ee is neither an attorney fee, late or delinquency fee, property valuation fee, or fee for a service rendered to a [borrower],” Servicers are prohibited from charging or collecting such a fee from a borrower under Part 419.

Servicers subject to the requirements of Part 419 who, at any time, collected any registration fees from a borrower, are directed to refund and credit the full amount of such registration fees to the account of the borrower. If the registration fee was charged to a borrower’s account, but was not collected, the Servicer must remove and reverse any and all registration fees charged to the borrower’s account.

Finally, Servicers are directed to create a log of all borrowers that were either charged, or paid any registration fee to the servicer “at any time.” The log must contain details of the full amounts of the registration fees, whether such fees were collected or charged, and the date(s) the full amounts of collected registration fees were refunded and credited to or, in instances where the fee was charged but not collected, removed and reversed from borrowers’ accounts.  The Guidance indicates that the NYDFS plans to inspect the log during its next examination of Servicers.

 Takeaway

The Guidance is a reminder to Servicers to ensure compliance with the fee restrictions under the amended Part 419 regulations.  Servicers should review their portfolio of New York loans to ensure borrowers who paid, or were charged, a registration fee are provided appropriate remediation, as the NYDFS has already flagged this as an issue that will be scrutinized in upcoming servicing examinations.

A&B Attorneys Address “The Impact of COVID-19 on Mortgage Servicing Rights and Servicing Advances”

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On August 11, a multidisciplinary group of Alston & Bird lawyers hosted the webinar “The Impact of COVID-19 on Mortgage Servicing Rights and Servicing Advances.”  Participants were Karen Gelernt and Katrina Llanes, Finance practice partners; Matthew Mamak, Corporate Transactions and Securities practice partner; and Nanci Weissgold, Financial Services & Products practice partner.

The webinar addressed the impact of COVID-19 on servicers generally, focusing on servicing rights, servicing advances, implications of the CARES Act, and forbearance moratoriums. Additional topics included: (1) the approaches of Ginnie Mae, Fannie Mae and Freddie Mac to financing servicing advances, and servicing rights; (2)  industry consolidation; and (3) how M&A transactions in this sector will need to address additional concerns arising from changes brought about by COVID-19 and the government responses to the pandemic and resulting economic stressors.

Please click here to listen to the playback and here to view the presentation.

 

House Financial Services Committee Subcommittee on Oversight and Investigations Holds Hearing on Mortgage Servicers and CARES Act Implementation

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A&B Abstract:

 On July 16, 2020, the U.S. House Committee on Financial Services’ (the “Committee”) Subcommittee on Oversight and Investigations (the “Subcommittee”) held a hearing to discuss mortgage servicers and their implementation of the Coronavirus Aid, Relief, and Economic Stability Act (“CARES Act”). On May 4, 2020, Chairwoman of the Committee, Maxine Waters, sent a request for information (“RFI”) to eleven servicers, requesting information on their forbearance procedures and overall compliance with the CARES Act. The hearing focused on the data received through the RFI, as well as questions directed to witnesses regarding how COVID-19 has affected vulnerable communities and what additional steps Congress should take to provide borrowers with further relief.

Implementation of the CARES Act

 Subcommittee Chairman, Al Green, opened the hearing by noting that the information received from the eleven servicers in response to the Committee’s RFI indicated that over two million forbearance requests had been received since March 27, 2020.  However, Subcommittee Chairman Green raised concerns that some borrowers may not have been made aware of their right to the full 180 days (plus an additional 180 days) of forbearance provided under the CARES Act. Ranking Member Andy Barr acknowledged that mortgage servicers experienced “hiccups” in implementing the CARES Act’s forbearance and foreclosure provisions, but noted that the data received from the eleven servicers suggested that servicers were generally doing a “good job” in implementing and complying with the CARES Act.

Committee Chairwoman Waters and Subcommittee Chairman Al Green identified areas where servicers struggled to effectively implement the CARES Act’s protections. Specifically, both the Committee’s majority staff memorandum and Subcommittee Chairman Green noted that, in some cases, servicers failed to properly offer or inform borrowers about the full 180-day initial forbearance period available to borrowers under the CARES Act and only offered initial forbearance of 90-days.

Subcommittee Chairman Green noted that he believed the intent of the CARES Act was to ensure borrowers receive the full 180-day initial forbearance period, with the right to shorten forbearance upon request. Additionally, Chairman Green noted that in certain cases servicers advised borrowers that a lump sum repayment would be required at the end of the forbearance period, which could discourage borrowers from taking advantage of the CARES Act’s forbearance protections, and is inconsistent with federal agency guidance prohibiting servicers from requiring a lump sum repayment. That said, Representative Nydia Velazquez acknowledged that a HUD Office of Inspector General report found that the FHA may have provided incomplete, inconsistent data and suggested that additional guidance from the FHA is needed.  A similar sentiment was echoed in the Committee’s majority staff memorandum, wherein the majority staff noted that “Fannie Mae and Freddie Mac have at times provided inconsistent and potentially confusing guidance regarding the CARES Act forbearance protections.”

Witnesses Marcia Griffin, founder and president of Homefree USA, and Donnell Williams, President of the National Association of Real Estate Brokers, acknowledged that servicers’ implementation of the CARES Act has improved since the start of the pandemic, but also noted certain areas for improvement.  For example,  Ms. Griffin and Mr. Williams both noted that servicers experienced a delay in implementing the CARES Act and in providing appropriate training to employees regarding the CARES Act’s protections as well as the post-forbearance loss mitigation options that would be available to impacted borrowers exiting forbearance. Furthermore, Ms. Griffin and Mr. Williams advocated for better training for customer service employees, more support for housing counselors, and more extensive borrower outreach.

Post Forbearance Measures and the Health Economic Recovery Omnibus Emergency Solutions (“HEROES”) Act

Members of the Subcommittee also questioned witnesses regarding what further measures should be taken by Congress to provide additional relief to impacted borrowers to ensure they can remain in their homes after their forbearance ends. Ranking Member Andy Barr noted that the HEROES Act, recently passed by the House, would require automatic forbearance and mandate certain post-forbearance loss mitigation options.  However, both he and Representative Lee Zeldin cautioned that mandating certain loss mitigation options may impact servicers’ ability to work effectively with impacted borrowers, and that it is best for servicers to speak with borrowers to determine the best option available for each borrower. Representative Rashida Tlaib and Subcommittee Chairman Green also indicated that Congress is considering whether to provide additional direct payments to borrowers.  Representative Zeldin noted that while mortgage servicers have a vital role to play in helping impacted borrowers, they cannot shoulder all of the associated financial burden without increased liquidity.

Alys Cohen, Staff Attorney for the National Consumer Law Center, supported providing protections similar to the CARES Act for borrowers with non-federally backed mortgages, including a requirement to provide automatic forbearance.  However, Dr. DeMarco cautioned that automatic forbearance may not be an appropriate tool. Dr. DeMarco indicated that rather than automatic forbearance, borrowers should communicate with their servicers before being put into forbearance so that the servicer and borrower can work together to determine the best path forward. While Ms. Cohen agreed that borrowers should try to speak with their servicers, she noted that more borrowers are missing payments than requesting forbearance.

Representative William Timmons asked witnesses to comment on whether certain temporary policies adopted in response to COVID-19, such as remote online notarization and additional flexibility regarding appraisals, should be made permanent.  Mr. Williams indicated, without specificity, that some of these temporary policies should be made permanent. Dr. Demarco supported extending the temporary flexibility around remote online notarization. Finally, Ms. Cohen noted that there was room for these temporary polices to be made permanent, but that appraisals should remain accurate.

Addressing Racial Disparities

Certain members of the Subcommittee’s majority caucus, including Subcommittee Chairman Green, Committee Chairwoman Waters, and Representative Velazquez highlighted the fact that COVID-19 has had a disproportionate impact on Black and Latinx communities. Of the witnesses, Ms. Cohen and Mr. Williams, in particular, suggested that people of color were less likely to receive a forbearance than their white counterparts. For example, Mr. Williams noted that there is currently a 13% gap between Black and White homeowners who receive forbearance. Ms. Cohen, Ms. Griffin, and Mr. Williams all noted that more communication from the federal government regarding forbearance protections, and additional funding to support Black and Latinx communities, such as funding for legal aid and housing counseling services, would help mitigate some of this apparent disparity.

Takeaway

The Subcommittee hearing suggested that servicers have been largely effective in implementing the CARES Act and communicating with borrowers, but that additional work is still needed.  Subcommittee Chairman Green, in particular, noted that additional legislation as well as further communication by servicers is needed to ensure all borrowers receive clear and consistent guidance regarding available relief options. As the COVID-19 pandemic continues, it will be interesting to see what further legislation is promulgated to provide additional relief to borrowers facing financial hardship due to COVID-19.

Delaware Governor Issues Order Modifying Restrictions on Residential Foreclosures and Evictions

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A&B Abstract:

On June 30, 2020, Delaware Governor, John Carney, issued a Twenty-Third Modification (the “Order”) to the Declaration of a State of Emergency (the “State of Emergency”), initially issued on March 12, 2020. The Order became fully effective July 1, 2020. The Order addresses a number of issues that impact residential mortgage loan servicers, including restrictions on residential foreclosure and evictions and certain fees or charges, which modifies guidance issued under the Sixth Modification of the State of Emergency (the “Sixth Modification”), which we previously discussed.

Restrictions on Late Fees and Excess Interest for Missed Payments

Under the Sixth Modification, with respect to any missed payment on a residential mortgage occurring during the State of Emergency, no late fee or excess interest could be charged or accrued on the account for such residential mortgage during the State of Emergency. Under the Order, these provisions have been removed in their entirety.

Foreclosure Restrictions

The Order continues to impose restrictions on a mortgage servicer’s ability to initiate or complete a foreclosure action or sale, however, the Order replaces Paragraph C of the Sixth Modification and makes certain other significant changes thereto.

Notably, the Order lifts the stay of deadlines in any action pursuant to paragraphs C.2, C.3, and C.4 of the Sixth Modification.  Paragraph C.2 of the Sixth Modification had extended all deadlines in residential mortgage foreclosure actions, including those related to the Automatic Residential Mortgage Foreclosure Mediation Program established pursuant to § 5062C of Title 10 of the Delaware Code.  Paragraph C.3 prohibited residential properties subject to a residential mortgage foreclosure action, for which a judgment of foreclosure was issued prior to the State of Emergency, from proceeding to a sheriff’s sale until 31 days after the State of Emergency.  Paragraph C.4 prohibited any residential property that was the subject of a residential mortgage foreclosure action, and which was sold at sheriff’s sale, from being subject to an action of ejectment or write of possession until 31 days following the termination of the State of Emergency. The Order lifts these restrictions, unless a court determines that a longer period is needed in the interest of justice.

With the lift of the stay of deadlines, the Order allows a party to act to remove individuals from residential properties, subject to a residential mortgage foreclosure action, where a judgment of foreclosure was issued prior to the declaration of the State of Emergency. However, individuals still cannot act to, and sheriffs, constables, and their agents, cannot remove individuals from their homes unless a judgment of foreclosure was obtained before March 13, 2020. All other provisions of Chapter 49 of Title 10 of the Delaware Code remain in effect in accordance with their terms.

Restrictions on Evictions

Similarly, with respect to evictions, the Order replaces paragraph B of the Sixth Modification and makes significant additional changes thereto.

The Order now provides that actions for summary possession may be filed with respect to any residential unit located within Delaware, but must be stayed to permit the Justice of the Peace Court to determine whether the parties would benefit from court supervised dispute resolution. Previously, no party could bring an action for summary possession for any residential rental unit located in Delaware. Actions that were brought before the State of Emergency, for which no final judgment had been entered, are further stayed.

Sheriffs, constables, and their agents continue to be prohibited from removing individuals from residential properties during the time the Order is in effect, unless a court determines on its own motion, or upon the motion of the parties, that it is necessary in the interest of justice. Additionally, the Order continues to prohibit the charging late fees or interest with respect to any past due balance for any residential unit during the State of Emergency.

Takeaway

The Order makes significant changes to the Sixth Modification to the Declaration of the State of Emergency, which significantly impacts mortgage servicing in Delaware. Servicers should carefully review the Order to fully determine their rights and obligations with respect to Delaware borrowers.