The United States Court of Appeals for the Fourth Circuit ruled on Wednesday that borrowers can pursue a class action lawsuit against Carrington Mortgage Services regarding the fees it applied when collecting payments online or by phone.
The plaintiffs – Ashly Alexander and Cedric Bishop – brought the case in September 2020, alleging that the mortgage servicer violated Maryland’s debt collection and consumer protection statutes by illegally charging $5 for monthly payments online or by phone.
In an unanimous decision, the Fourth Circuit stated that Carrington’s fees qualified as an amount that could only be charged if it was expressly “authorized by the agreement creating the debt or permitted by law.”
According to Hassan Zavareei, a partner at Tycko & Zavareei LLP who represents the plaintiffs, this is the first appellate court decision to address that mortgage servicers may not charge fees for payments made online or by phone.
“If we prevail in this case, Carrington will no longer be able to turn payment processing into an illegal profit center,” Zavareei said to HousingWire.
The attorney will return the case to the district court to begin the litigation.
HousingWire sent a message seeking comment to Carrington, but it was not returned.
Plaintiff Alexander took out a mortgage to purchase a property in Baltimore, Maryland, in 2005. It required all payments in “cash, check or money order” at a PO Box in Dallas, Texas, or a different place if required by the note holder. Carrington became the servicer in 2017.
The other plaintiff, Bishop, refinanced his property in Gaithersburg, Maryland, in 2010, with the contract saying payments should be made at an address in Irvine, California, or other places as the lender designated in writing. Carrington started to retain Bishop’s loan payments in 2018.
According to the lawsuit, the servicer gave borrowers the option to make payments free via mail – or online or by phone with a $5 convenience fee. Both borrowers opted to pay their bills online by pressing an “I Agree” button after reviewing terms and conditions on the company’s website. They each paid the fee at least nine times in 2018 and 2019.
In December 2020, the United States District Court of Maryland dismissed borrowers’ claims because plaintiffs have failed to allege that Carrington is a debt collector. Instead, the company is a creditor who “step into the shoes of the original mortgagee,” according to the decision.
The lower court said the borrowers’ argument that their deeds of trust did not expressly grant the servicer the right to collect such a fee does not mean such a fee is prohibited. Also, they mentioned the fact that borrowers agreed with the fee online.
However, the Fourth Circuit rejected the company’s argument that fees were permitted by law when borrowers agreed with terms and conditions on their website. In their decision, the judges wrote debt collectors should not be able to modify the terms of a contract because “consumers have no say in choosing their debt collectors, and they may well be over a barrel at that later point in time.”
The court mentioned an industry publication that found that the cost to debt collectors of accepting checks by mail was between $1 to $4, whereas online and phone transactions often cost just $0.50.
Kristen Simplicio, another partner from Tycko & Zavareei LLP representing the plaintiffs, said the case involves only Maryland borrowers. Still, others are pending nationwide against Carrington (one in federal court in California, currently on appeal before the Ninth Circuit Court of Appeals) and other mortgage servicers.
“We believe there are hundreds of thousands of borrowers trapped in arrangements with different loan servicers across the country, and who are forced to pay unlawful fees when they pay their mortgages over the internet or by phone.”