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2.10.2 Property Inspection Fees

Most standard mortgage contracts authorize lenders to do and pay for whatever is necessary to protect the value of the property securing the loan and the lender’s rights in the property.167 To the extent that a lender’s actions include the payment of money, such funds generally become additional secured debt.168 Servicers and lenders point to this language to justify a variety of property inspection and preservation fees.

Property inspection fees are charged to borrowers for inspections (usually drive-by) to determine the physical condition or occupancy status of the mortgage property. Inspections are frequently ordered automatically by the servicer’s software system once the loan is placed in default status.169 Once the inspection is complete, inspection reports are uploaded to the servicer’s system by the property inspection vendor. Rarely, if ever, does anyone at the mortgage servicer review the report, calling into question whether such inspections are actually necessary.170 While the amount charged for property inspections tends to be relatively small, the repetitive nature of the fee can result in charges to the borrower’s account of several hundred dollars.

Repeated inspections done weekly or monthly when the servicer is in contact with the homeowner, knows the property is occupied, and has no reason to be concerned about the condition of the property protect neither the property value nor the lender’s rights in the property.171 This view is consistent with industry standards embodied in both the Fannie Mae and Federal Housing Administration (FHA) servicing guidelines, as well as with various consent orders between regulatory agencies and mortgage servicers.172 Fannie Mae’s servicing guidelines instruct servicers to inspect properties securing delinquent mortgages, unless the servicer is in contact with the borrower and is working with the borrower to resolve the delinquency.173 Similarly, property inspections are not required for mortgage loans when the borrower is a debtor in bankruptcy and is performing under a chapter 13 plan.174 FHA regulations authorize visual inspections only when (i) the property is abandoned or vacant, or (ii) after default and failure to reach the borrower by telephone within forty-five days of the due date, to determine whether the property is abandoned or vacant.175

Courts have found that property inspections without advance notice to the borrower do not comply with the underlying mortgage loan contract.176 When the servicer cannot, or does not, provide information to substantiate the reason, amount, and nature of the inspection charges, homeowners may claim that the collection of such fees constitutes a breach of contract.177 Advocates litigating the reasonableness of property inspection fees should request copies of the actual inspection reports. In many instances, the reports themselves show inspection of the wrong property (for example, listing houses of a different color or construction type, or including pictures of another property) or that the inspection was not actually performed (for example, identical photos used in several reports notwithstanding a change in seasons).

Courts have held that property inspection fees may be unfair or fraudulent if the fees contain undisclosed mark-ups.178 Other claims based on the unreasonable or unnecessary nature of repeated inspections, such as unjust enrichment, UDAP, FDCPA,179 and racketeering have met with mixed results.180

Property inspection fees are distinguishable from property protection costs incurred to preserve the value of the property.181 Courts have given lenders wide discretion to charge property protection fees, but those fees must be actually incurred182 and necessary to preserve the value of the property or the lender’s rights in the property.183 Most courts have also held that such fees must be reasonable.184 Legitimate expenses may include amounts reasonable and necessary to winterize a home, to replace or repair locks, restore utilities, and the like.185

Footnotes

  • 167 {162} See Single-Family Fannie Mae/Freddie Mac Uniform Instrument ¶ 9 (Jan. 2001).

  • 168 {163} See id.

  • 169 {164} See Huyer v. Wells Fargo & Co., 295 F.R.D. 332 (S.D. Iowa 2013) (alleging indiscriminate ordering of drive-by property inspections; certifying class for injunctive relief, RICO, and UDAP claims), later decision at 314 F.R.D. 621 (S.D. Iowa 2016) (approving $25 million settlement); Young v. Wells Fargo & Co., 671 F. Supp. 2d 1006 (S.D. Iowa 2009) (alleging that servicer’s computer system ordered drive-by property inspections, that no one at the servicer reviewed inspections, and that such inspections were unreasonable); In re Stewart, 391 B.R. 327 (Bankr. E.D. La. 2008) (describing automated nature of property inspections), aff’d, 2009 WL 2448054 (E.D. La. Aug. 7, 2009), vacated in part on other grounds, 647 F.3d 553 (5th Cir. 2011).

  • 170 {165} See, e.g., Porter v. Fairbanks Capital Corp., 2003 WL 21210115 (N.D. Ill. May 21, 2003) (plaintiff’s sufficiently alleged FDCPA violation by claiming that broker’s price opinion was not “necessary to the protect the value of the Property”); In re Zunner, 396 B.R. 265 (Bankr. W.D.N.Y. 2008) (broker’s price opinion in preparation for foreclosure was not allowable charge to protect mortgage holders’ interest in property). But see Walker v. Countrywide Home Loans, Inc., 121 Cal. Rptr. 2d 79 (Cal. Ct. App. 2002).

  • 171 {166} In re Taylor, 2013 WL 1276507 (Bankr. N.D. Miss. Mar. 27, 2013) (disallowing, among other things, property inspection fees, and questioning the need for inspections); In re Stewart, 391 B.R. 327 (Bankr. E.D. La. 2008) (automatically generated property inspections conducted on wrong property, and even when conducted on correct property, were never reviewed by servicer), aff’d, 2009 WL 2448054 (E.D. La. Aug. 7, 2009), vacated in part on other grounds, 647 F.3d 553 (5th Cir. 2011); Dollens v. Wells Fargo Bank, 356 P.3d 531 (N.M. Ct. App. 2015) (affirming punitive damages award for unreasonable property inspections). See also Gewecke v. U.S. Bank, 2011 WL 4538083 (D. Minn. June 6, 2011) (mag.; denying motion to dismiss breach-of-contract claim when borrower alleged that lender charged for unreasonable property inspections; loan history showed seventeen inspections, each costing $15), adopted by 2011 WL 4538088 (D. Minn. Sept. 28, 2011); In re Jones, 366 B.R. 584 (Bankr. E.D. La. 2007), aff’d in relevant part, 391 B.R. 577 (E.D. La. 2008) (when servicer presented no evidence concerning its policy guidelines on inspections and could not state any reasons why continuous monthly property inspections were necessary, particularly when inspection reports showed little or no change in the property’s condition from month to month and gave lender no cause for concern, property inspections were unreasonable). But see Mendez v. Bank of Am. Home Loans Servicing, L.P., 840 F. Supp. 2d 639 (E.D.N.Y. 2012) (dismissing breach-of-contract claim because contract did not require property inspection fees to be reasonable); In re Hight, 393 B.R. 484 (Bankr. S.D. Tex. 2008) (rejecting homeowner’s general objection and finding property inspection a proper means of ensuring that property is not depreciating).

  • 172 {167} See Consent Oder for a Civil Money Penalty, In the Matter of EverBank, Docket No. AA-EC-2015-106 (Office of the Comptroller of the Currency Jan. 4, 2016), available at www.occ.gov; 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 defendants violated FTC Act by charging borrowers for default services, such as property inspections and title reports, that in some instances were not reasonable and appropriate under the mortgage agreement); Stipulated Final Judgment and Order As to Fairbanks Capital Corp., United States v. Fairbanks Capital Corp., Fairbanks Capital Holding Corp., & Thomas D. Basmajian, File No. 032 3014 (D. Mass. 2003), available at www.ftc.gov.

  • 173 {168} See Fannie Mae Single-Family Servicing Guide, at D2-2-10 Requirements for Performing Property Inspections (Apr. 10, 2019), available at www fanniemae.com.

  • 174 {169} See id.

  • 175 {170} 24 C.F.R. § 203.377.

  • 176 {171} In addition to the “do whatever is necessary” clause, servicers may attempt to rely upon the standard clause in many mortgages and deeds of trust dealing with inspections, which typically states that the lender or its agent “may make reasonable entries upon and inspections of the Property . . . Lender shall give Borrower notice at the time of or prior to an inspection specifying reasonable cause for the inspection.” However, servicers normally do not provide any notice to the homeowner of drive-by or curbside property inspections. See Liberty Lending Services v. Canada, 668 S.E.2d 3 (Ga. Ct. App. 2008) (affirming class certification; borrower alleged servicer charged for inspections but failed to provide notice as required by security instrument).

    Additionally, this clause should not be construed to cover inspections when there is no actual entry on the property. See Ladd v. Equicredit Corp. of Am., 2001 WL 1033618 (E.D. La. Sept. 7, 2001) (property inspection provision does not apply to drive-by inspections).

  • 177 {172} Bank of Nova Scotia v. Brooks, 2017 WL 987449 (D. V.I. Mar. 14, 2017) (disallowing unsubstantiated property preservation fees of $4249); Scott v. Fairbanks Capital Corp., 284 F. Supp. 2d 880 (S.D. Ohio 2003) (when homeowners alleged they were unable to obtain substantiation of charges, court construed claim as challenge to whether the charges were actually incurred or were permitted by contract); In re Sacko, 394 B.R. 90 (Bankr. E.D. Pa. 2008) (disallowing fees for property inspection when servicer did not present evidence regarding the nature of charges or why it was necessary to incur these expenses).

  • 178 {173} Daniel v. Select Portfolio Servicing, L.L.C., 159 F. Supp. 3d 1333 (S.D. Fla. 2016) (borrower stated FDCPA and state debt collection law claims based on mark-up of inspection fees); Bias v. Wells Fargo & Co., 942 F. Supp. 2d 915 (N.D. Cal. 2013) (denying servicer’s motion to dismiss RICO and UDAP claims under both unfair and fraudulent prongs). See also Stitt v. Citibank, 942 F. Supp. 2d 944 (N.D. Cal. 2013) (denying motion to dismiss unjust enrichment claim; granting motion to dismiss RICO claim with leave to amend).

  • 179 {174} Rodriguez v. Seterus, Inc., 2015 WL 5677182 (S.D. Fla. Sept. 28, 2015); Grady v. Ocwen Loan Servicing, L.L.C., 2012 WL 929928 (N.D. Ill. Mar. 19, 2012) (denying motion to dismiss FDCPA claim based on the charging of certain fees, including property inspection fees). But see Benner v. Bank of Am., 917 F. Supp. 2d 338 (E.D. Pa. 2013) (dismissing FDCPA claim because fee was authorized under the contract and not prohibited by state or federal law).

  • 180 {175} See, e.g., Kirchner v. Ocwen Loan Servicing, L.L.C., 257 F. Supp. 3d 1314 (S.D. Fla. 2017) (dismissing unjust enrichment, fraud, and UDAP claims); Tadibuono-Quigley v. HSBC Mortg. Corp. (USA), 2017 WL 1216925 (S.D.N.Y. Mar. 30, 2017) (dismissing racketeering and UDAP claims, in part); Ellis v. JP Morgan Chase, 2016 WL 5815733 (N.D. Cal. Oct. 5, 2016) (granting servicer summary judgment on unjust enrichment, UDAP, and state debt collection act claims).

  • 181 {176} See § 2.7, supra.

  • 182 {177} Scott v. Fairbanks Capital Corp., 284 F. Supp. 2d 880 (S.D. Ohio 2003) (costs for protecting mortgaged property may not be charged unless they were actually incurred for the purposes stated in security instrument); Dollens v. Wells Fargo Bank, 356 P.3d 531 (N.M. Ct. App. 2015) (affirming punitive damages award when servicer charged for “dubious preservation work orders” including winterization in July and multiple “grass cut” orders, though property had no grass). See, e.g., In re Stewart, 391 B.R. 327 (Bankr. E.D. La. 2008) (disallowing charges for broker’s price opinions and finding it unlikely several were in fact performed, given that property was under an evacuation order due to Hurricane Katrina); In re Parrish, 326 B.R. 708 (Bankr. N.D. Ohio 2005) (lender has obligation to keep a full and accurate accounting of payments made and charges accrued and should be able to document charges such as inspection fees).

  • 183 {178} See, e.g., Scott v. Fairbanks Capital Corp., 284 F. Supp. 2d 880, 890 (S.D. Ohio 2003); Porter v. Fairbanks Capital Corp., 2003 WL 21210115 (N.D. Ill. May 21, 2003) (complaint sufficiently alleged claim under FDCPA that charges for property preservation services and broker’s price opinions were not permitted under mortgage clause covering costs to protect value of property); Chatman v. Fairbanks Capital Corp., 2002 WL 1338492 (N.D. Ill. June 13, 2002); In re Zunner, 396 B.R. 265 (Bankr. W.D.N.Y. 2008) (broker’s price opinion in preparation for foreclosure was not allowable charge to protect mortgage holders’ interest in property); In re Liberty Constr. & Dev. Corp., 106 B.R. 458, 460 (Bankr. E.D. Va. 1989).

  • 184 {179} See, e.g., In re Jones, 366 B.R. 584 (Bankr. E.D. La. 2007), aff’d in relevant part, 391 B.R. 577 (E.D. La. 2008) (servicer failed to show that property inspections were necessary and reasonable).

    Incredibly, however, one court has stated that such fees need not be reasonable, economical, or fair to the borrower. See Majchrowski v. Norwest Mortg., Inc., 6 F. Supp. 2d 946, 950 (N.D. Ill. 1998). See also Mendez v. Bank of Am. Home Loans Servicing, L.P., 840 F. Supp. 2d 639 (E.D.N.Y. 2012) (dismissing breach-of-contract claim because contract did not require property inspection fees to be reasonable).

    The settlement between the Federal Trade Commission and Fairbanks Capital Corporation strongly supports the view that property preservation fees must be actual, necessary, and reasonable. Specifically, the settlement enjoins Fairbanks from assessing or collecting:

    B. Fees for property inspections, provided that Defendants may impose reasonable fees for property inspections actually performed if: 1) the customer’s loan payment has not been received within forty-five (45) calendar days of the due date; and 2) the inspections are limited to the initial inspections and to additional inspections during the period of delinquency not more frequent than every thirty (30) calendar days and only if the Defendants (a) have been unable to contact the consumer for the previous thirty (30) calendar days or (b) have been able to contact the consumer but have determined that the mortgaged property is vacant;

    C. Fees for broker’s price opinions, provided that Defendants may impose reasonable fee for a broker’s price opinion ordered and actually performed if: (1) the consumer’s loan payment has not been received within sixty-three (63) calendar days of the due date; and (2) the broker’s price opinions are limited to the initial’s broker’s price opinion and additional broker’s price opinions during the period of continued delinquency not more frequent than every six (6) months. . . .

    See Stipulated Final Judgment and Order As to Fairbanks Capital Corp., United States of Am. v. Fairbanks Capital Corp., Fairbanks Capital Holding Corp., & Thomas D. Basmajian, File No. 032 3014 (D. Mass. 2003), available at www.ftc.gov.

  • 185 {180} These types of services are most commonly required for properties that have been abandoned. Servicers will often argue that inspections are necessary to determine if the property is vacant. To the contrary, a telephone call to the borrower will frequently establish that the property is occupied, thereby negating the need for the inspection. For example, HUD regulations governing FHA-insured mortgages state that inspections are permitted only when (1) the mortgage is in default (payment is not received within forty-five days of the due date) and efforts to reach the borrower by telephone during that forty-five-day period have been unsuccessful, or (2) the property is vacant or abandoned. See 24 C.F.R. § 203.377.