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Financial Services Law Insights and Observations

States urge CFPB to prohibit mortgage servicers from charging convenience fees

State Issues State Attorney General CFPB Mortgages Mortgage Servicing Fees Consumer Finance

State Issues

On April 11, a coalition of state attorneys general, led by Illinois Attorney General Kwame Raoul, announced that they are urging the CFPB to prohibit mortgage servicers from charging convenience fees, which the AGs also referred to as “junk fees” or “pay-to-pay” fees. As previously covered by InfoBytes, the CFPB announced an initiative to reduce “exploitative” fees charged by banks and financial companies and requested comments from the public on fees that are associated with consumers’ bank accounts, prepaid or credit card accounts, mortgages, loans, payment transfers, and other financial products that are allegedly not subject to competitive processes that ensure fair pricing. In the letter, the AGs expressed their support for the Bureau’s request for information on the various fees imposed on consumers generally, but called attention to a specific type of fees imposed by mortgage servicers – the “pay-to-pay fees” – which, notwithstanding that consumers can pay using numerous free mechanisms, the AGs find to be “unfair and abusive” to consumers. The AGs called the fees “particularly insidious in the mortgage industry” because, unlike other markets in which such fees are imposed, “homeowners have no choice in their mortgage servicer.” Because of the nature of the secondary mortgage market, homeowners’ expectations of entering into a long-term relationship with their originating institution are misplaced and they cannot know in advance or determine which company will service their loans – even if they choose to refinance. The AGs also warned that the choice to make payments by an alternative method with no fee (such as online or by check instead of over the phone) may be illusory in the face of pending payment posting deadlines and threatened late fees. In such scenarios, the AGs asserted that the convenience fee operates as an alternative late fee “cheaper, but with a shorter grace period, and in contravention to the contractual terms in most mortgages that outline the specific amount and timing” of late fees. The AGs also took umbrage to mortgage servicers charging fees for the very service they are expected to perform, stating that “[t]he most basic function of a mortgage servicer is to accept payments. The concept that a servicer ought to be able to impose an additional charge for performing its core function is fundamentally flawed.”

Ultimately, the AGs suggested that the Bureau prohibit mortgage servicers from imposing convenience fees on consumers, but, alternatively, the AGs encouraged the Bureau to prohibit servicers from charging convenience fees that exceed the actual cost of processing a borrower’s payment. Furthermore, the AGs requested that the Bureau require servicers to fully document their costs supporting the imposition of convenience fees.

The same day, a group of AGs from 16 Republican-led states released a letter, arguing that more federal oversight would be “duplicative or unwarranted,” given that states already regulate many fees for consumer financial products and services. According to the letter, the AGs noted that “state legislatures and regulators have carefully weighed consumer protection interests and the open and transparent operation of markets in a manner intended to deliver the maximum benefit to the interests of their states,” and argued that they “are much better positioned to understand and assess the diverse interests of their states.” In addition, the letter argued that the Bureau has “limited authority to regulate” fees in consumer financial services markets. The AGs mentioned that the Bureau “may seek to use its authority to prohibit unfair, deceptive or abusive acts or practices to regulate fees,” but considered it “unclear” “that fees disclosed in accordance with state or federal law, in some cases authorized by state law, and agreed to by a consumer in writing constitute ‘unfair, deceptive or abusive’ fees, notwithstanding the CFPB’s characterization of some fees as ‘not meaningfully avoidable or negotiable” at the time they are assessed.’” The letter further characterized the Bureau’s approach as “uncooperative,” “top-down,” and “an unfounded expansion of its authority” that may infringe upon state law.