A servicer of mortgage payments violated Maryland and federal law by charging borrowers a monthly $5 “convenience fee” for payments made online or by telephone rather than by check when this charge was not mentioned in their mortgage documents, a federal appeals court ruled Wednesday.
Carrington Mortgage Services LLC’s disclosure of the charge to consumers before receiving online or telephonic payments does not excuse the violation of the statutory ban on collecting fees “not expressly authorized by the (mortgage) agreement creating the debt or permitted by law,” the 4th U.S. Circuit Court of Appeals stated in its published decision.
The 4th Circuit’s 3-0 ruling reversed Senior U.S. District Judge Richard D. Bennett’s dismissal of claims two Marylanders brought as part of a class-action lawsuit against Carrington, alleging the company’s fee violated the Maryland Consumer Debt Collection Act, the Maryland Consumer Protection Act and, by extension, the federal Fair Debt Collection Practices Act.
Bennett said Carrington was essentially a loan servicer and not a “debt collector” under Maryland law. The Baltimore federal judge added that the convenience fee was permitted under the FDCPA — which the Maryland statutes incorporate — because the controversial charge was prohibited neither by the mortgage documents nor by law.
But the 4th Circuit called it “plain that, by collecting borrowers’ monthly payments, Carrington is collecting a debt” under Maryland law.
The appeals court added that the documents’ and law’s silence regarding convenience fees does not make them valid. The FDCPA’s goal of protecting consumers requires that the documents and law expressly permit such a fee, which they do not, the court stated.
“This protects consumers from later add-ons in the way of various fees, preventing them from being blindsided down the road,” Judge J. Harvie Wilkinson III wrote for the 4th Circuit.
“While bargaining power is certainly not equal between lender and borrower at the outset, there is at least some element of notice as to the terms of the original agreement,” Wilkinson added. “Yet consumers have no say in choosing their debt collectors, and they may well be over a barrel at that later point in time. To allow debt collectors to subsequently modify the terms of the original agreement as they see fit, based solely on the mere absence of legal prohibition, would thus frustrate the FDCPA’s goals.”
The 4th Circuit also criticized Carrington’s argument that it should not be punished for providing consumers the convenience of paying online or over the phone for a fully disclosed and modest fee. The court said “the inconvenient truth” is that these paperless payment options are more beneficial to Carrington than to the consumer.
The processing fees for checks can run between $1 and $4, while the fee for each online transaction is about 50 cents, the court said, citing a 2015 report by the Association for Financial Professionals.
“Nothing we have said prevents Carrington from extending this payment option to consumers,” Wilkinson wrote. “If it does so, however, it must do so without the imposition of a statutorily prohibited convenience fee.”
Phillip R. Robinson, an attorney for the plaintiffs, hailed what he called “a sweet win” for consumers faced with invalid fees by debt collectors.
“We now have 4th Circuit precedent,” Robinson said of the federal appellate court whose published decisions govern Maryland, Virginia, West Virginia and the Carolinas.
“I just think it’s a fantastic decision for consumers in Maryland and elsewhere,” added Robinson, of Consumer Law Center LLC in Silver Spring.
Carrington’s attorney, Fredrick S. Levin, did not immediately return telephone and email messages Wednesday seeking comment on the 4th Circuit’s decision and any plans to appeal. Levin is with Buckley LLP in Santa Monica, California.
Wilkinson was joined in the opinion by Judges Robert B. King and Albert Diaz.
The 4th Circuit rendered its decision in Ashly Alexander; Cedric Bishop, On behalf of themselves individually and similarly situated persons v. Carrington Mortgage Services LLC, No. 20-2359.
Alexander, a Baltimore resident, initiated the litigation by suing Carrington in state court. Carrington had the case moved to federal court in August 2020 based on the diversity of citizenship between the Maryland plaintiff and the Delaware-based corporate defendant and an amount in controversy exceeding $5 million for a class action of more than 100 members.
Bishop, a Gaithersburg resident, was added as a named plaintiff when the case was in U.S. District Court.
Bennett dismissed the lawsuit in December 2020, prompting the plaintiffs’ appeal to the 4th Circuit.