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2.10.1 Overview

One of the most difficult problems facing a borrower attempting to sort out a servicer’s accounting is the piling on of fees. Servicers charge a variety of fees ranging from the ubiquitous late payment fee to phone payment fees and fax fees for payoff statements. For loans in default, a panoply of fees are charged by servicers, including property inspection fees, broker’s price opinion costs, foreclosure fees and costs, attorney fees, and the catch-all fee category labeled “corporate advances.” With respect to any of these fees, servicers may only charge them to the borrower if they are authorized by both the contract and applicable state law.156 Even when fees are authorized, they should be limited by reasonableness and the duty of good faith and fair dealing.157 Assuming that the fees charged by the servicer are authorized and reasonable, servicers are generally not permitted to apply borrowers’ payments to fees before applying the payment to principal, interest, and escrow amounts that are due.158

Determining whether fees are necessary and reasonable is complicated by the fact that mortgage servicers frequently outsource many servicing functions. Third-party vendors offer a variety of products to mortgage servicers, such as document preparation (for example, billing statements, notices of default, bankruptcy proofs of claim, and assignments), mailing services, monitoring services (for example, real estate tax and insurance monitoring), property inspections, broker’s price opinions, and loss mitigation review. Historically, servicers performed these functions in-house, and the costs for such services were considered general operating expenses. With the outsourcing of this work came the ability to generate additional revenue by passing these costs onto borrowers. To further maximize profits, many servicers outsource these functions to divisions, subsidiaries, or affiliates.159 Marking up the cost of services provided by third-party vendors is another way to increase servicer revenue.160 Alternatively, the servicer may receive a kickback from the third-party vendor.161 For these reasons, mortgage servicers may have an incentive to order services provided by third-party vendors more than may be necessary and reasonable.162

Even when the fees are not collectable from the borrower, servicers may benefit from this outsourcing by being able to recover out-of-pocket expenses from investors under the terms of applicable pooling and servicing agreements. By contrast, the servicer’s general overhead and labor costs are not considered reimbursable expenses.163

Third-party vendors are typically agents of the mortgage servicer, potentially making the mortgage servicer liable for any wrongful conduct by the vendor. Servicers may attempt to distance themselves from the improper conduct of these service providers by calling them independent contractors and disclaiming an agency relationship.164

Claims that can be made for overcharging of fees include:

  • • Breach of contract;
  • • Breach of the implied covenant of good faith and fair dealing;
  • • Conversion;
  • • Unjust enrichment;
  • • Negligent servicing;
  • • Unfair and deceptive acts and practices (UDAP);165 and
  • • Fair Debt Collection Practices Act (FDCPA) claims.166

The subsections that follow provide more detail on the fees frequently charged by servicers that may be subject to challenge.

Footnotes

  • 156 See, e.g., Morris v. PHH Mortg. Corp., No. 0:20-cv-60633 (S.D. Fla 2020) (class action alleging servicer charged fees to make payments by phone or online in violation of loan contract).

  • 157 {152} See § 5.6, infra.

  • 158 {153} See § 2.4, supra (discussing payment application). See also McAdams v. Citifinancial Mortg. Co., 2007 WL 141128 (M.D. La. Jan. 16, 2007) (payments allowed to be applied only to interest and principal, not to late fees; in summary judgment motion, construed contract against party who prepared it: the lender).

  • 159 {154} See Weiner v. Ocwen Fin. Corp., 2015 WL 4599427 (E.D. Cal. July 29, 2015) (describing affiliation between Ocwen as mortgage servicer and Altisource as an affiliated default service provider); In re Stewart, 391 B.R. 327 (Bankr. E.D. La. 2008) (entity which provided broker’s price opinions was a corporate division of servicer, and the true cost incurred by the servicer for broker’s price opinions was $50, not the $125 charged to the borrower), aff’d, 2009 WL 2448054 (E.D. La. Aug. 7, 2009), vacated in part on other grounds, 647 F.3d 553 (5th Cir. 2011).

  • 160 {154} See United States ex rel. Grubea v. Rosicki, Rosicki & Assocs., P.C., 318 F. Supp. 3d 680 (S.D.N.Y. 2018), reconsideration denied, 319 F. Supp. 3d 747 (S.D.N.Y. 2018) (qui tam allegations involving improper markup of foreclosure-related fees); Weiner v. Ocwen Fin. Corp., 2015 WL 4599427 (E.D. Cal. July 29, 2015) (borrower sufficiently stated fraud, RICO, and UDAP claims with respect to marked-up default servicing fees); Ellis v. JP Morgan Chase & Co., 950 F. Supp. 2d 1062 (N.D. Cal. 2013) (borrowers stated claim for unjust enrichment and fraud, but not RICO, based of servicer’s alleged practices of failing to notify borrowers of mark-ups and assessing fees for unnecessary services); Bias v. Wells Fargo & Co., 942 F. Supp. 2d 915 (N.D. Cal. 2013) (alleging RICO violations based on enterprise between servicer, subsidiaries, affiliates, and vendors to mark up default-related fees); Morales v. Countrywide Home Loans, Inc., 531 F. Supp. 2d 1225 (C.D. Cal. 2008) (mark up of fees for tax services and flood certifications did not violate RESPA); Complaint, Fed. Trade Comm’n v. Countrywide Home Loans, Inc., No. 10-4193 (C.D. Cal. filed June 7, 2011), available at www.ftc.gov (alleging that Countrywide marked up default services by as much as 100%).

  • 161 {156} See, e.g., Kenty v. Bank One, Columbus, 1992 WL 170605 (S.D. Ohio Apr. 23, 1992) (when bank charges higher premium on force-placed insurance than it actually pays, excess is interest; thus, if bank received kickbacks or rebates from premium charged to consumer’s account when crediting that account, that constitutes interest), aff’d in part, rev’d in part, 92 F.3d 384 (6th Cir. 1995) (though excessive premium may be interest, usury cap not applicable by virtue of state law and most-favored-lender statute). See generally National Consumer Law Center, Unfair and Deceptive Acts and Practices § 9.5.10 (9th ed. 2016), updated at www.nclc.org/library.

  • 162 {157} See Ellington Credit Fund, Ltd. v. Select Portfolio Servicing, Inc., 837 F. Supp. 2d 162 (S.D.N.Y. 2011) (granting in part and denying in part servicer and trustee’s motion to dismiss in action brought by investors alleging among other things that servicer improperly marked up default-services fees); Young v. Wells Fargo & Co., 671 F. Supp. 2d 1006 (S.D. Iowa 2009) (denying motion to dismiss RICO claim when borrowers alleged that servicer and default-services provider systematically charged unwarranted, improper, and unreasonable property inspection and late fees).

  • 163 {158} See Larry Codell, Karen Dynan, Andreas Lehnert, Nellie Liang, & Eileen Mauskopf, Fed. Reserve Bd. Fin. & Econ. Discussion Series, Div. of Research & Statistical Affairs, Working Paper No. 2008-46, The Incentives of Mortgage Servicers: Myths and Realities 17 (2008).

  • 164 {159} See § 11.4, infra (discussing agency principles and choosing defendants). See also Santoro v. Altisource Solutions, 2016 WL 6023171 (D. Or. Oct. 11, 2016) (discussing agency principles with respect to providers of residential property inspections).

  • 165 {160} See Jamison v. Bank of Am., 194 F. Supp. 3d 1022 (E.D. Cal. 2016) (borrower stated UDAP claim when bank charged $5 fax fee for payoff statement even though she did not request that the statement be sent by facsimile).

  • 166 {161} See Cortellessa v. Uden Law Offices, P.C., 2016 WL 4554539 (E.D. Pa. Sept. 1, 2016) (attempt to collect non-itemized corporate advances may violate FDCPA); Manrique v. Wells Fargo Bank, 1116 F. Supp. 3d 1320 (S.D. Fla. 2015) (borrower sufficiently stated FDCPA and state debt collection claims when payoff statement allegedly included improper fees).