May 2, 2016
by Steven J. Flynn
McCalla Raymer, LLC
USFN Member (Georgia)
Graham H. Kidner
Hutchens Law Firm
USFN Member (North Carolina, South Carolina)
Lee S. Perres
Pierce & Associates, P.C.
USFN Member (Illinois)
Recent federal court decisions have sent mixed messages to the financial services industry regarding the legality of including estimated fees and costs in communications submitted to borrowers — in connection with the payoff or reinstatement of consumer loans, as well as in judicial proceedings seeking to collect on consumer debts.
Courts sitting in the Third Circuit (comprised of Delaware, New Jersey, Pennsylvania, and the District of the Virgin Islands) have issued a line of decisions that appear to support a commonsense approach to the issue: inclusion of estimated fees and costs in reinstatement correspondence (and in judicial filings seeking to collect on consumer debts) will not violate the Fair Debt Collection Practices Act (FDCPA), provided the communication or filing conspicuously identifies those estimated fees and costs as not yet having been actually incurred as of the date of the correspondence or filing.
See Kaymark v. Bank of America, N.A., 783 F.3d 168, 175 (3d. Cir. 2015) (holding that inclusion in verified foreclosure complaint of estimated fees and costs, which had not yet been incurred by law firm as of the date complaint was filed, violated FDCPA, but noting that complaint “did not convey that the disputed fees were estimates or imprecise amounts”); McLaughlin v. Phelan Hallinan & Schmieg, LLP, 756 F.3d 240 (3d. Cir. 2014) (correspondence from law firm to debtor violated FDCPA where attorneys’ fees and costs included in amount claimed to be due and owing from debtor had not yet been incurred, and where such fees and costs were not identified in correspondence as being estimated); Stuart v. Udren Law Offices, P.C., 25 F. Supp. 3d 504, 511 (M.D. Pa. 2014) (inclusion of estimated attorneys’ fees and costs in payoff statement sent by law firm to borrower did not violate 15 U.S.C. § 1692e, where such fees were clearly marked in correspondence as being “anticipated” and where payoff statement notified borrower that such anticipated fees and costs were “not yet due, but may become due during the time period set forth in [the payoff statement]” (alteration supplied)); and Beard v. Ocwen Loan Servicing, LLC, 2015 WL 5707072, at *7-8 (M.D. Pa. 2015) (loan servicer, law firm, and law firm employee violated the FDCPA by transmitting reinstatement quote to borrower that included fees and costs not yet incurred where reinstatement quote did not clearly and conspicuously notify the borrower that such fees and costs were merely “anticipated,” and had not yet been incurred as of the date reinstatement quote was transmitted).
Late last year, the Eleventh Circuit Court of Appeals weighed in on the issue of the propriety of including “estimated” attorneys’ fees and costs in reinstatement and payoff quotes to borrowers with its unreported decision in Prescott v. Seterus, Inc., 2015 WL 7769235 (11th Cir. Dec. 3, 2015). The Eleventh Circuit is comprised of Alabama, Florida, and Georgia. In Prescott, the Court of Appeals appeared to adopt a “bright-line” approach to the issue, holding that the inclusion of “estimated” attorneys’ fees in a reinstatement quote provided to the borrower violated two provisions of the FDCPA — despite the fact that the fees and costs in question were clearly marked as “estimated” and were listed in a separate section of the letter labeled “Estimated Charges Through 9/27/2013.”
In reversing the trial court’s grant of summary judgment to the loan servicer on the borrower’s FDCPA claims, the appellate court held that the inclusion by the loan servicer of 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.” (Alteration supplied.) The court reasoned that the inclusion of estimated fees in the reinstatement quote violated 15 U.S.C. § 1692f(1) because the terms of the borrower’s security instrument did not obligate the borrower to pay estimated fees, but required the borrower to pay only those attorneys’ fees that were actually incurred by the lender up to the time that the reinstatement quote was provided to the borrower.
In Prescott, Seterus made use of the Fannie Mae/Freddie Mac Florida uniform mortgage instrument, likely the most widely-used mortgage document in Florida (with similar versions in wide use across the country). The Prescott court also determined that the inclusion by the servicer of estimated attorneys’ fees and costs in the reinstatement quote provided to the borrower violated 15 U.S.C. § 1692e(2)(B), which prohibits debt collectors from making the false representation of any “compensation which may be lawfully received by any debt collector for the collection of a debt.” The court explained that the loan servicer could not lawfully receive the estimated fees from the borrower under the terms of the borrower’s security instrument because those fees had not yet actually been incurred at the time the reinstatement quote was provided to the borrower.
Citing the “least sophisticated consumer” standard utilized to evaluate claims brought under the FDCPA, the Eleventh Circuit also determined that the least sophisticated consumer would not have understood the terms of his or her security instrument to require the payment of “estimated” or “anticipated” fees and costs in order to reinstate the borrower’s loan. Further, the court held that the loan servicer was not entitled to escape liability under the FDCPA based upon a “bona fide error” defense, as the loan servicer’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 the loan servicer on the borrower’s claim under the Florida Consumer Collections Practices Act.)
Following the Prescott decision, one concern is the adoption of a “one-size-fits-all” approach that fails to recognize, firstly, that Prescott is an unreported decision impacting only three states; and, secondly, some other states either require the inclusion of estimated fees by statute or the state’s judges insist on the provision of payment quotes to include estimated fees and costs for the “good through” date.
Another concern is distinguishing between an “estimated” expense and an “incurred” expense, which may at first appear to be straightforward, but is not. A fee or cost may be incurred and known; estimated, but not yet incurred; or, incurred but still estimated (e.g., because the precise amount is not known until the invoice is delivered or the vendor has confirmed the expense amount). Moreover, the decision in Prescott hinged on the agreement between the lender and borrower as contained in the security instrument. While this language is uniform to all security instruments for GSE-backed loans, other security instrument forms are in use that may contain different terms with respect to the collection of fees and costs.
Federal versus State
While avoiding the practices found to be unlawful in Prescott will protect debt collectors from liability in Alabama, Florida, and Georgia, following Prescott in other states may well land a debt collector in hot water. In Illinois, for example, state law requires payoff demand statements to be valid for “the lesser of a period of 30 days or until the date scheduled for judicial sale.” The statute specifies that the payoff demand statement “shall include ... estimated charges (stated as such) that the mortgagee reasonably believes may be incurred within 30 days from the date of preparation of the payoff demand statement.” This presents a Hobson’s choice: violate federal law and risk an FDCPA lawsuit, or violate state law and risk sanctions from the court that may also impact the foreclosure case.
It is possible that federal law may preempt state law in such conflict situations, but that would require a judicial decision in the requisite jurisdiction — the resolution of which would likely take a number of years as the case proceeds through the appeals process.
While servicer and law firm behavior may change following Prescott, borrower conduct will not. The typical borrower does not contact the law firm for updated figures before tendering payment and usually tenders payment at the end of the “good through” period. As Prescott informs us, both the provision of a payment quote containing estimated charges that have not been incurred, and accepting that payment, constitute a violation of the FDCPA in at least three states. The contrary may be true in three other states, and the issue is open for decision in most of the rest.
Some state laws may require the inclusion of estimated fees and costs in payment quotes. If servicers or law firms provide payment quotes with “good through” dates but without estimated charges, they need to be aware of the “Groundhog Day” phenomenon. That is, the borrower is provided with a payment quote with a “good through” date, the borrower tenders payment on the last day, the tender is rejected as “short” because there are now new “actual” charges to add to the quote, a revised quote is provided with an extension to the “good through” date, and then this process repeats itself.
One solution may be for servicers that do not qualify as debt collectors to take over the payment quote process, because they could then provide estimated fees without risking violating the FDCPA. Note, however, that the CFPB may still use the powers granted to it under the Dodd-Frank Act to pursue financial service providers for unfair, deceptive, or abusive acts or practices even if the provider is not subject to the FDCPA. [12 U.S.C. § 5536(a)(1)(B)].
Alternatively, a state-by-state approach needs to be worked out. Local requirements and customs can be taken into account when providing payment quotes, with the statements drafted so as to minimize FDCPA exposure while simultaneously making a reasonable effort to follow the local requirements.
Prescott requires servicers and their law firms to rethink the entire approach to providing payoff or reinstatement quotes. Some specific points for deliberation are conveniently listed below.
“PAYOFF AND REINSTATEMENT QUOTES – SOME SPECIFIC POINTS FOR CONSIDERATION”
• Is the only “safe” quote one that simply presents the actual amount due as of the date of the quote, with no estimated fees and no “good through” date?
• If a court can determine that a payment quotation that carefully delineates estimated charges is a violation of the FDCPA because it misleads the “least sophisticated consumer,” then does a quote specifying an amount due and a “good through” date (e.g., 30 days hence) also mislead the consumer because his tender of that amount is met with a new demand several hundred, or thousand, dollars higher?
• In many situations, servicers are not debt collectors with respect to their delinquent borrowers. Following foreclosure referral, in most jurisdictions it is likely the law firm would be considered a debt collector when communicating with delinquent borrowers, exposing the firms to possible FDCPA liability. Providing payoff and reinstatement quotes is not properly a part of the foreclosure referral, but has become a task passed on to the law firms. To avoid or limit their legal risks, law firms may decide to forego their involvement in the providing of payment quotations.
• Servicers may want to take over the activity of communicating payment quotes to borrowers. They can then control the entire process and manage the risks associated with it.
• It may be necessary, in those states where it is even possible, to put the foreclosure on hold when providing a payment quote so as to (hopefully) avoid incurring new fees and costs.
• Before providing the payment quote, to the extent of being feasible and appropriate, servicers may wish to make any then-due corporate advances (e.g., for taxes or insurance), as well as necessary property inspection and preservation payments.
• Alternatively, servicers may be able to block any corporate advances or other payments for the “good through” period, provided that doing so would not result in any adverse situation or violate an investor or insurer requirement.
• If servicers continue providing “good through” dates, it may be necessary for them to do one or both of the following: provide short “good through” periods (e.g., 5 days) and absorb any advances, fees, and costs incurred during the “good through” period, including legal fees and costs.
• Will servicers guarantee to pay law firms for all of the fees and costs that are ultimately incurred? Even if a servicer agrees, for whatever reason, to accept a short tender?
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Spring 2016 USFN Report