Alston & Bird Consumer Finance Blog

State Law

California Enacts Debt Collector Licensure Law

By ,

A&B Abstract:

On September 25, California Governor Gavin Newsom signed into law Senate Bill 908, which, in part, enacts the California Debt Collection Licensing Act (“Act”). Effective January 1, 2022, the Act will require the licensure of persons that engage in debt collection in California with California residents.   Notably, the Act also applies to entities collecting debt on their own behalf.  The Act’s requirements are in addition to those arising under the California Rosenthal Fair Debt Collection Practices Act (the “Rosenthal Act”), which regulates the practices of debt collectors.

A New Licensing Obligation

The Act provides that “[n]o person shall engage in the business of debt collection in this state without first obtaining a license [from the California Department of Financial Protection and Innovation (“DFPI”), which succeeds the Department of Business Oversight effective January 1, 2021].”

What is debt collection and who is a debt collector?

The Act defines “debt collection” as “any act or practice in connection with the collection of consumer debt.”

“Consumer debt” is defined as “money, property, or their equivalent, due or owning, or alleged to be due or owing, or alleged to be due or owing, from a natural person by reason of a consumer credit transaction,” and specifically includes mortgage debt and “charged-off consumer debt” as defined in Section 1788.50 of the California Civil Code.

“Debt collector” means any person who, “in the ordinary course of business, regularly, on the person’s own behalf or on behalf of others, engages in debt collection.” The term includes any person, “who composes and sells, or offers to compose and sell, forms, letters and other collection media used or intended to be used for debt collection.” The term also includes a “debt buyer” as defined in Section 1788.50 of the California Civil Code.

Exclusions

The Act contains several exclusions from both its licensing obligation and the Act’s substantive provisions. Notably, the Act excludes from its scope, depository institutions, which is defined to include FDIC-insured out-of-state state-chartered banks, licensees under the California Financing Law, licensees under the California Residential Mortgage Lending Act, licensees under the California Real Estate Law, and a trustee performing acts in connection with a nonjudicial foreclosure, among others. Additionally, the Act does not apply to debt collection regulated by California’s Student Loan Servicing Act (Cal. Fin. Code §§ 28000 et seq.).

However, it should be noted that the Act authorizes the Commissioner of the DFPI to take action against those exempt from the Act, for violations of the Rosenthal Act (Cal. Civ. Code §§ 1788 et seq.) or the California Fair Debt Buying Practices Act (Cal. Civ. Code §§ 1788.50 et seq.).  Such actions may include, after notice and an opportunity for a hearing, ordering the person to (1) desist and refrain from engaging in the business of further continuing the violation, or (2) pay ancillary relief, which may include refunds, restitution, disgorgement, and payment of damages, as appropriate, on behalf of a person injured by the conduct or practice that constitutes the subject matter of the assessment.

California Debt Collector Application

Persons wishing to obtain a California Debt Collector License must submit an application to the DFPI. Among other requirements under the Act, applicants must submit:

  • A completed license application signed under the penalty of perjury;
  • An application and an investigation fee; and
  • A sample of the initial consumer debt validation letter required by 15 U.S.C. § 1692g that the licensee will use in correspondence with California consumers.

The DFPI has not yet released an application for this license. However, the Act authorizes the DFPI to require that applications be submitted through the NMLS.  We anticipate the DFPI will require that applications be submitted and processed through the NMLS.

Duties of Debt Collector Licensees

The Act imposes express duties on licensed debt collectors. Specifically, all licensed debt collectors must: (1) develop policies and procedures reasonably intended to promote compliance with the Act; (2) file any required reports with the Commissioner; (3) comply with the provisions of the Act and any regulation or order of the Commissioner; and (4) submit to periodic examination by the DFPI as required by the Act and any regulations promulgated thereunder.

Licensees must also maintain a surety bond in a minimum amount of $25,000.  The Commissioner is authorized to require licensees to submit bonds, riders, and endorsements electronically through the NMLS’s electronic surety bond function.

Additionally, each licensee will be required to pay an annual fee, representing the debt collector’s “pro rata share of all costs and expenses reasonably incurred in the administration of [the Act], as estimated by the commissioner, for the ensuing year and any deficit actually incurred or anticipated in the administration of [the Act] in the year in which the annual fee is levied.”

Licensees are also required to file an annual report with the Commissioner, on or before March 15, that contains all relevant information that the Commissioner reasonably requires concerning the business and operations conducted by the licensee in California during the preceding calendar year, including information regarding collection activity. The report must, at minimum, require disclosure of all of the following:

  • The total number of California debtor accounts purchased or collected on in the preceding year;
  • The total dollar amount of California debtor accounts purchased in the preceding year;
  • The face value dollar amount of California debtor accounts in the licensee’s portfolio in the preceding year;
  • The total dollar amount of California debtor accounts collected in the preceding year, and the total dollar amount of outstanding debt that remains uncollected;
  • The total dollar amount of net proceeds generated by California debtor accounts in the preceding year;
  • Whether or not the licensee is acting as a debt collector, debt buyer, or both; and
  • The case number of any action in which the licensee was held liable by final judgment under the Rosenthal Act (Cal. Civ. Code §§ 1788 et seq.) or the California Fair Debt Buying Practices Act (Cal. Civ. Code §§ 1788.50 et seq.).

Notably, these individual annual reports will be made available to the public for inspection.

DFPI Authority Under the Act

As noted above, the Act grants the Commissioner with broad authority to administer the Act, through investigations and examinations, and to adopt rules and regulations consistent with that authority.

If the Commissioner determines that a person who is required to be licensed under the Act is engaged in business as a debt collector without a license, or a person or licensee has violated any provision of the Act, the Commissioner may, after notice and an opportunity for a hearing, order such person to (1) desist and refrain from engaging in the business of further continuing the violation, or (2) pay ancillary relief, which may include refunds, restitution, disgorgement, and payment of damages, as appropriate, on behalf of a person injured by the conduct or practice that constitutes the subject matter of the assessment.  In addition, the Commissioner has the authority to suspend or revoke licenses issued under the Act.

Takeaway

Effective January 1, 2022, California will require “debt collectors” engaged in the business of debt collection in the state to obtain a debt collection license.  The Act also authorizes the DFPI to enforce the provisions of the Rosenthal Act against “debt collectors,” which the Act defines consistent with the Rosenthal Act.

The Act should be of particular note for persons that service and collect on their own debt, as California joins a growing list of states that require a license for first-party collection activity.  Unlike other state debt collection laws, certain licensees in California may avail themselves of an exemption from the Act’s licensing obligation. Those currently acting as debt collectors in California that do not qualify for an exemption should closely monitor DFPI guidance for the release of application procedures.

Maryland Issues Executive Order Restricting Foreclosure Actions and Prohibiting Evictions During COVID-19 Emergency

By

A&B ABstract: Maryland’s Governor has issued an Executive Order providing that until the COVID-19 state of emergency is terminated: (1) foreclosure sales will only be valid if the servicer had notified the borrower of their rights to request a forbearance, and (2) residential and commercial evictions are prohibited if the tenant can show they suffered a “Substantial Loss of Income.” Similar to Section 4022 of the CARES Act, this Executive Order grants borrowers a right to request a forbearance if they are experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency. Additionally, until January 4, 2021, the Maryland Commissioner of Financial Regulation must discontinue acceptance of Notices of Intent to Foreclose, which effectively prohibits new foreclosure initiations until that date. Moreover, effective January 4, 2021 and until the COVID-19 state of emergency is terminated, Notices of Foreclosure will only be accepted if the lender or servicer certifies that they notified the borrower of their right to request a forbearance.

 

On October 16, 2020, the Governor of Maryland issued an Executive Order (No. 20-10-16-01), which amends and restates a previous Executive Order providing certain relief to tenants and homeowners impacted by the COVID-19 pandemic. This Executive order imposes restrictions on servicers’ ability to conduct foreclosure proceedings, and prohibits evictions where the tenant can show a “substantial loss of income,” during the COVID-19 state of emergency.

Restrictions on Residential Foreclosures

The Executive Order provides that “until the state of emergency is terminated and the catastrophic health emergency is rescinded,” foreclosures sales of “Residential Property” (defined as “real property improved by four or fewer single family dwelling units that are designed principally and are intended for human habitation”) under Maryland’s Real Property law will not be considered a valid transfer of title in the property unless certain requirements are met, depending on the type of loan secured by the property:

  • With respect to a property securing a Federal Mortgage Loan:
    1. at least 30 days prior to sending a notice of intent to foreclose to a borrower, the servicer must send a written notice to the borrower stating the borrower’s right to request a forbearance on the loan under Section 4022(b) of the CARES Act; and
    2. the servicer must comply with all of its obligations with respect to the loan owed to the borrower under the CARES Act or otherwise imposed by the federal government or a government sponsored enterprise.
  • With respect to a property securing a Non-Federal Mortgage Loan:
    1. the servicer must have notified the borrower, in writing, that if the borrower is experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency, the borrower may request a forbearance on the loan, regardless of delinquency status, for a period up to 180 days, which may be extended for an additional period up to 180 days at the request of the borrower;
    2. if the borrower did request a forbearance on the loan, the servicer must have provided such forbearance without requiring the borrower to provide additional documentation other than the borrower’s attestation to a financial hardship caused by COVID-19, and without requiring any additional fees, penalties, or interest; and
    3. during the forbearance period, the servicer must not have accrued on the borrower’s account any fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the loan.

Notably, as discussed in the next section, these requirements appear applicable only to foreclosure proceedings already in progress prior to January 4, 2021 (because the Executive Order effectively prohibits the initiation of new foreclosure actions until that date), and to those initiated between January 4, 2021 and the termination of the COVID-19 state of emergency.

Directives to the Maryland Commissioner of Financial Regulation

The Executive Order also directs Maryland’s Commissioner of Financial Regulation to alter certain practices regarding its processing of residential foreclosures.

Specifically, as of the date of the Executive Order, and until January 4, 2021, the Commissioner is directed to suspend the operation of the Commissioner’s Notice of Intent to Foreclose Electronic System, and to discontinue acceptance of Notices of Intent to Foreclose. This effectively imposes a moratorium on the initiation of new foreclosure actions. Under Section 7-105.1(c) of the Real Property Article of the Maryland Code, as the first step in the foreclosure process, a Notice of Intent to Foreclose is required to be sent to the borrower at least 45 days before an action to foreclose a mortgage can be filed, and a copy of that notice must be submitted to the Commissioner within 5 business days thereafter via the Commissioner’s Notice of Intent to Foreclose Electronic System. (COMAR 09.03.12.02(E)). Citing the Executive Order, the Notice of Intent to Foreclose Electronic System website currently states that “no new [Notice of Intent] submissions will be accepted until January 4, 2021.” As such, this directive effectively prohibits the initiation of new foreclosure proceedings until December 28, 2020 (the earliest date a Notice of Intent can be mailed to the borrower and then submitted to the Commissioner within 5 business days).

Moreover, the Executive Order provides that effective January 4, 2021, and until the state of emergency is terminated and the catastrophic health emergency is rescinded, when a servicer submits to the Commissioner the Notice of Foreclosure required under Section 7-105.2(b) of the Real Property Article of the Maryland Code, the Commissioner must obtain a “certification” from the servicer or secured party that the servicer complied with the Executive Order’s requirement that the borrower be informed of their right to request a forbearance, as discussed above.

Prohibition on Residential and Commercial Evictions

The Executive Order provides that until the state of emergency is terminated and the catastrophic health emergency is rescinded, Maryland courts shall not effect any evictions by giving any judgment for possession or repossession on residential, commercial, or industrial real property, if the tenant can demonstrate to the court, through documentation or other objectively verifiable means, that the tenant suffered a “Substantial Loss of Income.”

The Executive Order defines “Substantial Loss of Income” as follows:

  1. with respect to an individual, a substantial loss of income resulting from COVID-19 or the related proclamation of a state of emergency and catastrophic health emergency, including, without limitation, due to job loss, reduction in compensated hours of work, closure of place of employment, or the need to miss work to care for a home-bound school-age child; and
  2. with respect to an entity, a substantial loss of income resulting from COVID-19 or the related proclamation of a state of emergency and catastrophic health emergency, including, without limitation, due to lost or reduced business, required closure, or temporary or permanent loss of employees.

This prohibition applies to evictions for failure to pay rent under Section 8-401 of the Real Property Article of the Maryland Code, as well as evictions based on a tenant’s breach of the lease under Section 8-402.1 of the Real Property Article of the Maryland Code.

Takeaways

Notably, the forbearances that servicers are required to offer with respect to non-federally backed loans under this Executive Order present forbearance terms and conditions that substantially parallel those offered for federally backed loans under the CARES Act. It is possible that other states will follow suit with Maryland and create similar state mandates effectively applying to non-federally backed mortgages the forbearance rights available for federally backed mortgages under the CARES Act, in addition to state-mandated foreclosure restrictions. We will continue to monitor for such state requirements.

California Department of Justice Releases Post-Finalization Modifications to CCPA Regulations

By

On October 12, 2020, the California Department of Justice (“Department”) released its first set of proposed post-finalization modifications to the California Consumer Privacy Act Regulations (the “CCPA Regulations”).

As many businesses know, the CCPA Regulations were finalized on August 14, 2020.  The Department styled these new modifications as a “Third Set of Proposed Modifications” to the CCPA Regulations, suggesting that it sees them as related to the two rounds of modifications it proposed before the Regulations were finalized.  (You can read our summaries of the key impacts of these prior modifications here (first round of modification) and here (second round of modifications)).

While the Department’s new proposed modifications are modest in volume, they contain potentially significant impacts for businesses.  If passed in their current form, the modifications would modify the CCPA Regulations as follows:

(1) Required Offline Opt-Out Notices Would Return: Pre-finalization drafts of the Regulations required businesses that “substantially interact[] with consumers offline” to provide an offline notice to consumers about their right to opt-out of data sales.  However, this requirement was deleted as the Regulations were finalized during review by California’s Office of Administrative Law.

  • The Department’s new proposed modifications would reintroduce the requirement to provide offline opt-out notices whenever a “business … collects personal information in the course of interactions with consumers offline.”
  • As illustrations of how this required offline notice can be provided, the modifications state that “brick-and-mortar store[s]” may provide notice by (a) “printing the notice on the paper forms that collect the personal information” or by (b) posting signage in “the area where the personal information is collected.” Likewise, businesses that collect personal information over the phone may provide notice orally “during the phone call where such personal information is collected.”

(2) The Requirement for “Easy” Opt-Outs Would Return – with Specified Prohibited Practices: Pre-finalization draft of the Regulations required businesses’ methods enabling consumer to make Opt-Out requests to be “easy for consumers to execute and [] require minimal steps.” Again, however, this requirement was deleted as the Regulations were finalized during review by California’s Office of Administrative Law.

  • The Department’s new proposed modifications would reintroduce verbatim the requirements that (a) “[a] business’s methods for submitting requests to opt-out shall be easy for consumers to execute and shall require minimal steps,” and (b) opt-out submission methods cannot “subvert[] or substantially impair[]” consumers’ choice to opt-out.
  • The new proposed modifications contain a list of prohibited opt-out practices, potentially derived from the California Attorney General’s initial experience enforcing the CCPA. For example, businesses cannot:
    • Use confusing double-negative language (e.g., “Don’t Not Sell My Personal Information”),
    • Require consumers to click through or listen to reasons why they should not submit an opt-out request;
    • Require consumers to provide personal information not necessary for the opt-out request; or
    • If a consumer has already clicked on “Do Not Sell My Personal Information,” require the consumer to scroll through a Privacy Policy to locate the opt-out submission form.

(3) Businesses Could Ask Authorized Agents for Proof of their Authority (and Would Not Need to Go to the Consumer): The new proposed modifications would clarify that, when businesses receive a CCPA request from an individual purporting to act as a consumer’s authorized agent, they can require the authorized agent to provide proof it has written permission to act for the consumer. Under the current Regulations, businesses would have to go to the consumer to obtain this proof.

(4) All Notices to Consumers Under 16 Years of Age Would Require Additional Disclosures: The modifications would clarify that any privacy policy directed towards individuals under the age of 16 must meet the CCPA Regulations’ additional information requirements.  Currently, the Regulations imply that these additional information requirements only apply to privacy policies directed at children that are both under 13 (regulated under § 999.330 Regulations) as well as age 13-15 (regulated under § 999.331).  The modifications would clarify that any privacy policy that is directed at any individual under 16 – irrespective of under 13 or age 13-15 – must contain the additional content required under the CCPA Regulations.

A redline showing the proposed changes based on the currently effective regulations is available here.  The proposed modifications are open for public comment until Wednesday, October 28, 2020.

Pennsylvania Court Invalidates Statewide Pandemic Restrictions

By , ,

A&B ABstract:  In County of Butler v. Wolf, a federal court in Pennsylvania struck down as unconstitutional key aspects of the Pennsylvania Governor’s COVID-19 Emergency Order: limitations on the size of indoor gatherings and the “closure of all businesses that are not life sustaining.”  The decision has been appealed, but the breadth of the court’s order is striking and the issue now is whether other courts will follow suit.

Challenges to COVID-19 Restrictions Usually Fail

Federal courts have been hesitant to rule that COVID-19 regulations are unconstitutional.  Notably, the Seventh Circuit recently rejected the Illinois Republican Party’s challenge to the Illinois governor’s executive order limiting physical gatherings for a social event or a political rally but providing an exemption for religious gatherings.  Relatedly, the U.S. Supreme Court recently declined, in a 5-4 decision, to enjoin California’s restrictions on attendance at religious services.

The cases that have found COVID-19 regulations constitutionally defective have generally fallen into two camps: either the court finds the law is too poorly worded (i.e., unconstitutionally vague), or the application of the law is irrational (i.e., violates due process and/or equal protection).  These problems have usually been fixable once spelled out.  For example, a Wisconsin state court judge ruled in July that Racine’s regulations were unconstitutionally overbroad and vague, but held that the city would “maintain[] its full power to issue a new order addressing COVID-19.”

County of Butler v. Wolf Struck Down COVID-19 Restrictions

Unlike other courts, the U.S. District Court for the Western District of Pennsylvania found broad constitutional violations that could not be easily remedied in County of Butler v. Wolf.  The plaintiffs challenged Pennsylvania Governor Tom Wolf’s COVID-related “emergency” restrictions limiting the number of people permitted to attend gatherings and determining which businesses could remain open, based on whether they are “life-sustaining” in nature.  The challenge was rooted in alleged violations of equal protection, due process, and First Amendment rights.

Constitutional Issues

The court found three constitutional problems with the Governor’s orders.  First, the court held that the gathering limits—25 persons for indoor gatherings, and 250 for outdoor gatherings—violated the First Amendment right to assemble because the attendance caps for assemblies were more restrictive than the 25% or 50% occupancy restrictions on certain businesses.  Further, the court found that the 25-person restriction, and the fact that the restrictions applied equally across all counties regardless of their COVID statistics, was not rationally supported by evidence.

Second, the court held that the temporary closure of certain “non-life-sustaining” businesses violated plaintiffs’ substantive due process rights under the Fourteenth Amendment because it was too broad and harsh to pass constitutional muster, and violated the right to choose one’s profession.  Citing the century-old Supreme Court decision in Lochner v. New York, the court found that the order violated plaintiffs’ economic due process rights.

Finally, the court held that the closure of certain “non-life-sustaining” businesses also violated plaintiffs’ equal protection rights under the Fourteenth Amendment, finding no rational basis for the regulations because some businesses were treated differently than other, similar businesses.  The court illustrated its reasoning with an example that imposing constraints on a “mom-and-pop” hardware store while allowing Walmart to sell the same products would not keep a consumer at home; it would simply send her to Walmart, doing nothing to protect her or others from COVID.  As a result, the court found that the restrictions’ means did not rationally relate to their ends.

Impact of the County of Butler v. Wolf Decision

Governor Wolf has already sought a stay of the decision and filed an appeal to the U.S. Court of Appeals for the Third Circuit.  But even without a stay, the immediate impact of the decision is questionable because the challenged restrictions had, at the time of the court’s decision, already been eased by Governor Wolf as part of the Commonwealth’s phased reopening plan.  This raised questions of mootness that the district court brushed aside, but which are sure to be reviewed on appeal.  Moreover, the ruling does not impact other restrictions that are still in place involving teleworking, a mandatory mask order, and worker and building safety orders.

If the holding is affirmed in the Third Circuit, however, it will become precedential and could impact restrictions in other jurisdictions within the circuit, including New Jersey, Delaware, and the Virgin Islands.  At a minimum, until the Third Circuit decides the case, County of Butler will certainly be advanced as persuasive authority by other challengers in other courts.  Its reasoning and outcome could have far-reaching impacts if adopted elsewhere.

Takeaways

Constitutional challenges to pandemic restrictions are pending in other federal courts.  A federal court in Maine recently heard oral argument on challenges to Maine’s emergency rules, including a claim that the governor’s quarantine requirement is an unconstitutional restriction on people’s right to travel.  That court has not yet issued an opinion.  Other challenges to COVID-19 restrictions are pending in federal district courts across the country, including in Arizona, California, Massachusetts, and New York. County of Butler could influence these decisions.

There are also hints that the U.S. Supreme Court may have interest in considering these types of constitutional challenges.  County of Butler cited Justice Alito’s recent dissent in the Court’s denial of injunctive relief in Calvary Chapel Dayton Valley v. Sisolak.  That case involved a challenge to certain COVID-19 restrictions in Nevada.  Justice Alito’s dissent advocated for a stricter constitutional review of emergency health measures, stating, “we have a duty to defend the Constitution, and even a public health emergency does not absolve us of that responsibility.”  Justice Alito also noted that “a public health emergency does not give Governors and other public officials carte blanche to disregard the Constitution for as long as the medical problem persists.”  

The dissent (which was joined by Justices Thomas and Kavanaugh) signals that at least some members of the Supreme Court are mindful of these constitutional challenges, and may be ready to consider such a case when an appropriate petition for writ of certiorari is filed.  County of Butler could provide that vehicle for Supreme Court review.

District Courts Split on Convenience Fees Under Debt Collection Laws

By

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.