The Fair Debt Collection Practices Act And Convenience Fees

• Published date: 08 August 2022
• Subject Matter: Finance and Banking, Debt Capital Markets, Charges, Mortgages, Indemnities, Financial Services
• Law Firm: Kelley Drye & Warren LLP
• Author: Mr Matthew Luzadder, Becca Wahlquist and Nathan Jamieson

Many creditors and loan or mortgage servicers provide the option to use certain payment methods, such as online or over-the-phone payments, to which they may apply convenience or service fees. Recently, class action plaintiffs have used state laws with a broader definition of "debt collector" than that in the Fair Debt Collection Practices Act to assert that these convenience fees violate the FDCPA's restrictions. This article will discuss a recent, significant Fourth Circuit Court of Appeals ruling regarding the Maryland Consumer Debt Collection Act that, in combination with other cases challenging the imposition of fees, should serve as a warning to creditors and mortgage servicers that impose convenience fees.

Borrowers are frequently offered a number of different payment options for submitting payments, including ACH, mailed paper check, or in-person payments. Creditors and mortgage or other loan servicers may also accept debit cards, or third-party services can be used to facilitate payments via credit card. The servicer is generally responsible for the payment processing costs for such payment methods, unless the cost is paid by the borrower, and thus many servicers may charge borrowers a fee for opting to use these payment methods, rather than sending a check. This additional payment fee is commonly known as a convenience fee, but may also be called a service fee or platform fee.

Historically, because the Fair Debt Collection Practices Act ("FDCPA") applies only to debt collectors, its provisions do not apply to original creditors and would only apply to mortgage or loan servicers when a payment was in default. But state laws have carried FDCPA restrictions to a broader range of companies, as evidenced by a recent Fourth Circuit decision that involved allegations under Maryland's Maryland Consumer Debt Collection Act ("MCDCA") tied to $5 convenience fees that a mortgage servicer charged for online or phone payments. This issue of whether such fees could support MCDCA liability claims (and the FDCPA claims incorporated into the Maryland law) impacts not only mortgage servicers, but also most consumer lenders and companies servicing debt who offer various payment methods with convenience fees.

THE FOURTH CIRCUIT'S JANUARY 2022 ALEXANDER DECISION

In Alexander v. Carrington Mortgage Services, LLC ("Alexander"), Carrington Mortgage Services, LLC ("Carrington") charged borrowers a $5 convenience fee who opted to pay their monthly mortgage payments online or by phone rather than mailing a check to Carrington. ¹ As the Fourth Circuit explained, the court below had erroneously granted Carrington's motion to dismiss, holding that Carrington was neither a "collector" under the MCDCA claim nor a "debt collector" under the FDCPA.² The district court had dismissed all the claims with prejudice after also finding that none of the mortgage documents expressly prohibited the fees and that plaintiffs had voluntarily chosen a payment method that included the $5 convenience fees.

On de novo review, the Fourth Circuit reversed in part, ruling that the plaintiffs' allegations that the convenience fee charged by Carrington violated the MCDCA survived Carrington's motion to dismiss. Alexander found that "it is plain that, by collecting borrowers' monthly mortgage payments, Carrington is collecting a debt" and that "Carrington counts as a 'collector' under the MCDCA."³ Alexander further held that, while the FDCPA's definition of "debt collector" includes a requirement that the debt be in default, the MCDCA's definition has no similar limitation and the MCDCA did not incorporate the FDCPA's narrower definition of "debt collector." ⁴ But more problematic for cases outside of Maryland, the Fourth Circuit had "no trouble in concluding that...