The U.S. Court of Appeals for the Fourth Circuit recently reversed the dismissal of a putative class action alleging that a mortgage servicer's fee to borrowers who paid monthly mortgage bills online or by phone was illegal.
A copy of the opinion is available at: Link to Opinion
The appeal arose from a class action suit brought by two borrowers ("Borrowers") against a mortgage servicer ("Servicer") for charging a $5 convenience fee for payment of monthly mortgage bills online or by phone. Borrowers alleged that the fees supposedly violated the Maryland Consumer Debt Collection Act (MCDCA) and the Maryland Consumer Protection Act (MCPA).
Borrowers' mortgage loans were both transferred to Servicer for servicing. The loans provided the method of payment of paying by mail. In addition to the free pay-by-mail option, Servicer also gave Borrowers the choice to make payments online or by phone for a $5 convenience fee.
Borrowers opting to pay online had to press an "I agree" button after reviewing the terms and conditions for the service, and then select "Continue" after manually inputting the payment amount and seeing the convenience fee displayed. Borrowers both paid their mortgages online using this method, paying the convenience fee at least 9 times each.
Borrowers brought a class action suit against Servicer alleging two violations of the MCDCA: supposedly engaging in conduct that violates the federal Fair Debt Collection Practices Act (FDCPA), Md. Code Ann., Com. Law § 14-202(11), and allegedly attempting to enforce a right with knowledge that the right does not exist, id. § 14-202(8).
Borrowers also alleged two violations of the MCPA; an unfair-and-deceptive practices claim and a derivative claim based on the supposed MCDCA violations.
Servicer moved to dismiss. The trial court granted the motion and dismissed Borrowers' claims. This appeal followed.
The Fourth Circuit first looked at Borrowers' allegations under MCDCA – that is, by charging its convenience fees, Servicer engaged in conduct in violation the FDCPA.
The Appellate Court reversed the trial court's dismissal of this MCDCA claim, finding that Servicer was a "collector" who charged an "amount" that was not "expressly authorized by the agreement creating the debt or permitted by law" in violation of the FDCPA. See 15 U.S.C. § 1692f(1).
The Fourth Circuit first found that Servicer was a collector under the MCDCA, as Servicer was "a person collecting or attempting to collect an alleged debt arising out of a consumer transaction." MD. Code. Ann., Com. Law § 14-201(b).
Servicer offered three arguments against this position. First, Servicer argued that there was a difference between passively accepting payments as a servicer and enforcing payment obligations of defaulting borrowers. However, the Fourth Circuit found that "[r]eading additional exemptions into a remedial statute limits the possibility of remedies beyond what the Legislature intended," Andrews & Lawrence Pro. Servs. v. Mills, 223 A.3d 947, 968 (Md. 2020), and declined to accept this argument.
Servicer next argued Borrowers were required to challenge a "method of collection" and not simply the validity of the fees. However, the Fourth Circuit held that, although "it is not inaccurate to say that [the MCDCA] deals with methods of debt collection, it is more accurate to describe the statute as regulating the conduct of a person while engaged in debt collection." Chavis v. Blibaum & Assocs., P.A., 2021 WL 3828655, at *11 (Md. Aug. 27, 2021). The Appellate Court found that as Servicer was collecting a debt, the means by which they choose to do that did not make them any less of a collector.
Servicer also argued that even if it were a collector under the MCDCA, Borrowers must also show that it was a "debt collector" under the FDCPA to establish a Statute 14-202(11) violation. However, the Fourth Circuit found the broader definition of the MCDCA controlling, finding that it was not displaced by the federal definition. The Appellate Court relied on the fact that the Maryland legislature in enacting the MCDCA specifically chose not to incorporate the FDCPA's narrow definition of "debt collector" but chose only to include the FDCPA's "substantive provisions."
The Fourth Circuit next held that Servicer's convenience fees qualified as an "amount" charged under the FDCPA, 15 U.S.C. § 1692f(1). Servicer argued that the FDCPA only prohibits fees that are "incidental" to the mortgage debt, and that the convenience fees at issue arose from a separate agreement to provide an easier way for Borrowers to make payments that was not addressed in the mortgage loan agreement.
The Fourth Circuit disagreed, ruling that the FDCPA's use of the term "any amount" was not limited to only charges that are incidental to the principal obligation. Thus, the Court found the convenience fees at issue an "amount" under the FDCPA, 15 U.S.C. § 1692f(1).
Finally, the Fourth Circuit concluded that Servicer's convenience fees were not "permitted by law", because this term in the FDCPA requires affirmative sanction or approval. Servicer argued that because Borrowers manifested assent after full disclosure and in the separate online agreements, common principles of contract law applied rendering the fees "permitted by law." However, the Fourth Circuit disagreed, ruling that this reasoning would make the prong permitting amounts "expressly authorized by the agreement creating the debt" superfluous.
The Fourth Circuit thus held that Servicer was a collector who charged an amount not expressly authorized by the agreement creating the debt or prohibited by law, in violation of the MCDCA.
The Appellate Court also reversed the dismissal of Borrowers' derivative MCPA claim and vacated the dismissal of the § 14-202(8) claim because the dismissal was predicated on the trial court's view of the MCDCA's definition of "collector" and Borrowers' voluntary assent which the Appellate Court found was in error.
The Appellate Court remanded this claim to allow the trial court's further consideration of that claim.
However, the Fourth Circuit affirmed the trial court's dismissal of the standalone MCPA claim alleging "unfair, abusive, or deceptive trade practices" as Borrowers claim was a "threadbare recital of the elements of the cause of action" rather than a "plausible claim for relief." Aschcroft v. Iqbal, 556 U.S. 662, 678, 679 (2009).
Ralph T. Wutscher
Maurice Wutscher LLP
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