The U.S. Court of Appeals for the Fourth Circuit recently ruled that a mortgage servicer violated the Maryland Consumer Debt Collection Act (MCDCA) by charging a $5 convenience fee to borrowers for monthly payments made by phone or online.
In Alexander v. Carrington Mortgage Services, LLC, the plaintiffs filed a class action complaint against Carrington, their mortgage servicer, challenging the convenience fees in which they alleged that the servicer had violated Section 14-202(11) of the MCDCA by engaging in conduct that violates the Fair Debt Collections Practices Act (FDCPA) (Sec. 14-202(11) Claim) and Section 14-202(8) of the MCDCA by attempting to enforce a right with knowledge that the right does not exist (Sec. 14-202(8) Claim). With regard to the Sec. 14-202(11) Claim, the plaintiffs argued that the servicer violated the FDCPA provision that prohibits a “[t]he collection of any amount (including any interest, fee, charge or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”
The district court dismissed the MCDCA claims, finding that the servicer was not a “collector” for purposes of either of the MCDCA claims. As to the Sec. 14-202(11) Claim, it also held that the servicer was not a “debt collector” under the FDCPA, the plaintiffs’ choice to make on-line payments was “permitted by law,” and the convenience fees were not “incidental” to the plaintiffs’ mortgage debt. As to the Sec. 14-202(8) Claim, the district court held that the servicer had the “right” to collect the convenience fees, since the mortgage documents did not expressly prohibit the fees and the plaintiffs voluntarily chose to make on-line payments.
In reversing the district court, the Fourth Circuit first found that the servicer was a “collector” under the MCDCA which defines a “collector” as “a person collecting or attempting to collect an alleged debt arising out of a consumer transaction.” Among the servicer’s arguments rejected by the Fourth Circuit was its argument that the plaintiffs had to show that the servicer was also a “debt collector” under the FDCPA to establish a violation of Sec. 14-202(11). The Fourth Circuit then held that the servicer’s imposition of the convenience fee qualified under the FDCPA as the collection of an “amount” that was “incidental” to the plaintiffs’ mortgage debts. It also held that the convenience fees were not “permitted by law.” In so holding, the Fourth Circuit rejected the servicer’s argument that a fee is “permitted by law” so long as there is no express legal prohibition. It also rejected the servicer’s argument that under common law contract principles, the convenience fees were “permitted by law” by virtue of the plaintiffs’ manifestation of assent in the online clickwrap agreements. According to the Fourth Circuit, for a fee to be “permitted by law,” it must be expressly permitted or authorized by law.
The Fourth Circuit also reversed the district court’s dismissal of the plaintiffs’ Sec. 14-202(8) Claim. According to the Fourth Circuit, in charging the convenience fees, the servicer had asserted rights that do not exist for purposes of Sec. 14-202(8) because such fees are prohibited by Sec. 14-202(11).
In their complaint, the plaintiffs also alleged that by violating the MCDCA, the servicer had violated the Maryland Consumer Protection Act (MCPA) which makes an MCDCA violation a per se violation of the MCPA. Having held that the servicer had violated the MCDCA by engaging in conduct that violated the FDCPA, the Fourth Circuit also reversed the district court’s dismissal of the plaintiffs’ derivative MCPA claim.
The Fourth Circuit’s decision could lead to similar lawsuits challenging convenience fees charged by mortgage servicers and other consumer financial services providers under the debt collection laws of other states that broadly apply the FDCPA’s prohibitions to first-party collections and other persons engaging in collection activity who are not “debt collectors” under the FDCPA. In addition, the CFPB has placed a spotlight on a wide array of fees charged by mortgage servicers and other providers of consumer financial services with its announcement last week that it was launching an inquiry into “junk fees.” As a result, mortgage servicers and other providers should expect many of their fees to also receive increased scrutiny from state regulators and attorneys general as well as from plaintiffs’ lawyers.
On February 17, 2022, from 2:30 p.m. to 3:30 p.m. ET, Ballard Spahr will hold a webinar, “The CFPB’s Inquiry into “Junk Fees”: What It Means for Consumer Financial Services Providers.”
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