January 4, 2016
by Steven J. Flynn
McCalla Raymer, LLC – USFN Member (Georgia)
The Eleventh Circuit Court of Appeals has held, in an unpublished decision, that a loan servicer violated the Fair Debt Collection Practices Act (FDCPA) by including the “estimated” future attorneys’ fees of the law firm retained by the loan servicer to conduct foreclosure proceedings in a letter to the borrower, setting forth the amounts necessary to reinstate the borrower’s loan under the terms of his security instrument. [Prescott v. Seterus, Inc., No. 15-10038 (11th Cir. Dec. 3, 2015)]. (The Eleventh Circuit is comprised of Alabama, Florida, and Georgia.)
On August 1, 2012 the borrower Prescott defaulted on his residential mortgage loan. Seterus began servicing the mortgage on October 1, 2012. Following the borrower’s default, Seterus prepared to initiate foreclosure proceedings against the borrower and retained a law firm “to provide legal services associated with the foreclosure.” The borrower asked Seterus to reinstate his mortgage in August 2013. Under the terms of the borrower’s mortgage, the borrower could reinstate his mortgage under “certain conditions,” including, in pertinent part, by “pay[ing] all expenses incurred in enforcing [the borrower’s] Security Instrument, including, but not limited to, reasonable attorneys’ fees, property inspection and valuation fees, and other fees incurred for the purpose of protecting Lender’s interest in the Property and rights under this Security Instrument ….”
On September 4, 2013 Seterus sent the borrower a letter setting forth a reinstatement balance of $15,569.64 (an amount stated to be good through September 27, 2013), which included the amount of $15 in “estimated” property inspection fees and $3,175 in “estimated” attorneys’ fees. The borrower paid the full reinstatement balance on September 26, 2013 and Seterus reinstated the borrower’s loan. On November 14, 2013 Seterus refunded the $3,175 in estimated legal fees “because those fees were not incurred before Seterus reinstated the mortgage.” Seterus did not refund the $15 in estimated property inspection fees because those fees were incurred by Seterus before the borrower reinstated the mortgage.
The borrower filed suit against Seterus in Florida state court about a week after his loan was reinstated, alleging that the inclusion by Seterus of estimated attorneys’ fees in the September 4, 2013 letter violated 15 U.S.C. § 1692e(2) and 15 U.S.C. § 1692f(1) of the FDCPA and § 559.72(9) of the Florida Consumer Collections Practices Act (FCCPA). Seterus removed the case to the U.S. District Court for the Southern District of Florida; the district court granted summary judgment to Seterus on each of the borrower’s claims for relief.
On appeal, the Eleventh Circuit held that the inclusion by Seterus of $3,175 in estimated attorneys’ fees in the reinstatement balance provided to the borrower violated 15 U.S.C. § 1692f(1), which prohibits a debt collector from using “unfair or unconscionable means to collect or attempt to collect any debt,” including “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.” The appellate court further held that, under the “least sophisticated consumer” standard utilized to review claims under the FDCPA, the least sophisticated consumer would not have believed that he was obligated to pay the estimated legal fees in order to reinstate the borrower’s mortgage under the terms of the borrower’s security instrument.
The Eleventh Circuit also held that the inclusion of estimated attorneys’ fees and costs in the reinstatement balance provided to the borrower constituted a violation of 15 U.S.C. § 1692e, which provides that “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt,” including “[t]he false representation of (A) the character, amount, or legal status of any debt; or (B) any services rendered or compensation which may be lawfully received by any debt collector for the collection of a debt.” The court reasoned that Seterus could not “lawfully receive” the estimated fees and costs from the borrower under the terms of the borrower’s security instrument because these costs had not yet actually been incurred. Further, the court held that Seterus was not entitled to escape liability under the FDCPA based upon a “bona fide error” defense, as Seterus’s inclusion of the estimated attorneys’ fees in the reinstatement balance was not the result of a factual or clerical error. (The Eleventh Circuit also reversed the district court’s grant of summary judgment to Seterus on the borrower’s FCCPA claim.)
The Prescott decision should cause any lender, loan servicer, or law firm that provides reinstatement quotes and/or figures to borrowers to examine its practices and procedures in order to determine whether or not information being provided to borrowers in reinstatement situations could potentially constitute a FDCPA violation (or a violation of any state consumer protection law, such as the FCCPA). The Eleventh Circuit has sent a clear message to the financial services industry that only those fees and costs that are expressly authorized under the terms of the applicable loan documents, and/or applicable law, are to be included in reinstatement quotations.
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