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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.

Copyright © by Ballard Spahr LLP

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About this Author

Fanaselle, Attorney, Real Estate, debt Collections
Attorney

Daniel C. Fanaselle focuses his practice on consumer finance litigation, with particular experience in mortgage-related litigation. Mr. Fanaselle regularly represents lenders and servicers in contested foreclosure, collection, and credit card-related litigation, as well as affirmative lawsuits brought by consumers in state and federal court.

Mr. Fanaselle has experience representing clients in cases involving claims and defenses under the Fair Debt Collections Practices Act, Real Estate Settlement Procedures Act, Truth in Lending Act, Telephone...

215- 864- 8358
Joel Tasca financial institutions lawyer,  consumer class action attorney Ballard Spahr
Partner

Joel E. Tasca has defended banks and other financial institutions in consumer class and individual actions for over twenty years. These cases have arisen out of residential mortgage loans, credit card accounts, and an array of other consumer financial services.  Many of these suits have been brought under federal consumer protection laws such as the Fair Credit Reporting Act, the Telephone Consumer Protection Act, the Truth in Lending Act, and the Real Estate Settlement Procedures Act, as well as under state unfair, deceptive, or abusive acts and practices statutes.

Litigation against banks and other financial institutions is more prevalent than ever.  Consumer plaintiffs' attorneys have sprouted like weeds, and many have devoted themselves to an ongoing search for vulnerabilities in the business practices of financial institutions. This trend is set to increase in the future as rapid advancements in technology and an exponential increase in available consumer data usher in changes to financial institutions' business practices, and cause plaintiffs' attorneys to ponder new theories of potential liability.

In this environment, it is critical for financial institutions' outside litigation counsel to have the vision to identify vulnerable business practices up front so that clients can take action to minimize risks and avoid litigation altogether. When litigation does occur, outside counsel must approach each case with flexibility to reach fast and efficient resolution when stakes are low, and scale up to fight aggressively when stakes are high or when a message must be sent to plaintiffs and their counsel.

Areas of Practice include: 

  • Litigation. 
  • Privacy & data security. 
  • Class action litigation. 
  • Consumer financial services. 
  • Mortgage banking. 
  • Virtual currency. 
215-864-8188