The Mortgage Controls: Mortgagors' Dispute Regarding Alleged "Excessive" and "Unreasonable" Property Inspection Fees Fails to State a Claim Under FDCPA
In a recent decision, a federal court in the Southern District of New York (SDNY) dismissed a putative class action complaint alleging, among other things, that a mortgage servicer violated the Fair Debt Collection Practices Act (FDCPA) by charging improper property inspection fees after the mortgagors defaulted on their mortgage loans. The plaintiffs claimed that the charges were "excessive," "[un]reasonable," and "[in]appropriate," and alleged that they were frequently assessed when property inspections had not been conducted. Thus, the plaintiffs argued that the servicer "knowingly misrepresented" the charges as "lawful," "reasonable," "legitimate," and "proper," when it "knew that the inspections were not necessary to maintain or protect the properties."
While the court found that the defendant was not a "debt collector," it held that the claim would fail even if the servicer were subject to the FDCPA because the terms of the mortgage agreements expressly permitted the lender to charge property inspection fees in the event of a default. Therefore, the servicer could only be found liable if the FDCPA imposed a duty to disclose "that the fees were not reasonable and Plaintiffs were therefore not obligated to pay." The court held that the FDCPA imposes no such duty, and found persuasive the reasoning in another recent decision from the SDNY, which addressed the same argument (that the defendant "fail[ed] to disclose that the assessed [property inspection] fees were unnecessary") in the context of a civil RICO claim. In that case, the court found that the plaintiff was unable to satisfy RICO's misrepresentation requirement because, as with the recent case, the underlying mortgage agreement "explicitly authorize[d] property inspections." Accordingly, the claim was governed by the terms of the mortgage and plaintiff’s dispute of those terms – and if meritorious, the defendant's "failure to 'concede breach of contract liability'" – did not "create additional causes of action." Applying this reasoning, the court concluded that the defendant did not make any false or misleading statements regarding the property inspection fees, because it "label[ed] them for what they were" – and the plaintiffs' belief that the fees were excessive or unreasonable – even if justified – did not render them actionable under the FDCPA.
The court's findings (while largely dicta) are notable because, despite numerous recent appellate court decisions involving post-default fees, few courts have specifically addressed "whether charging mortgagors for allegedly unreasonable . . . fees in the event of default . . . amounts to an FDCPA violation." By affirming that that the terms of the mortgage control, the court clarified that mortgage servicers (even if they qualify as "debt collectors") do not run afoul of the FDCPA by assessing default-related fees and costs that are permitted under the terms of the mortgage – even if the consumer finds them to be "excessive" or "unreasonable." Notably, however, the court left open the possibility of a viable FDCPA claim based on "concealed or inflated" property inspection fees. And while the distinction between "excessive" and "inflated" fees may be debatable, the latter term seems (at least under this court's reasoning) to suggests an element of scienter or willfulness on the part of the servicer. This comports with the court's reference to the standard applied under RICO and suggests the fee assessed by the servicer must misrepresent – rather than merely misapply – the terms of the mortgage.