On December 3, 2015, the United States Court of Appeals, 11th Circuit, decided the case of Kevin Prescott v. Seterus, Inc., 635 Fed. Appx. 640, 2015 U.S. App. LEXIS 20934 (11th Cir. Fla. 2015) and held that the inclusion of estimates or anticipated costs that have not yet been incurred, in a payoff or reinstatement letter, is a violation of the FDCPA

In this case, the mortgagor, Kevin Prescott, defaulted and thereafter requested a reinstatement letter. He was provided with a letter “good through September 27, 2013,” which included an estimate of anticipated attorney’s fees that had not been incurred as of the date of the letter but were anticipated to be incurred prior to the “good through date” of September 27, 2013. The mortgagor paid the full amount demanded on September 26, 2013, and one week later, the mortgagor filed a lawsuit claiming that the inclusion of estimated attorney’s fees in the letter was a violation of the Fair Debt Collection Practices Act (FDCPA). A few weeks later, the mortgage servicer did, in fact, refund the entire estimated legal fees they had collected because they had not been incurred prior to reinstatement. 

The trial court found for the mortgage servicer and granted summary judgment in its favor, but the 11th Circuit Court of Appeals reversed, holding that the mortgagor was not obligated to pay estimated fees since the mortgage did not require payment of any expenses other than those that were actually incurred. Therefore, since there was no express provision contained in the mortgage authorizing the payment of estimated fees, the mortgage servicer was not entitled to demand or receive them and their demand, for monies they were not entitled to receive, was a violation of the FDCPA!

It is important to note that the payoff letter specifically disclosed that the amounts anticipated to be incurred were estimates for costs that had not yet been incurred, however, the court held that the FDCPA violation was not based on a failure to disclose that these amounts were estimates of costs that had not yet been incurred, but that the mortgage servicer simply had no right to demand them! Furthermore, the fact that the servicer intended to refund the estimated amounts and actually did so was irrelevant to the court’s analysis—the violation was the demand for the unauthorized amounts and for requiring payment of monies not due as a condition to reinstatement.

Finally, notwithstanding the clause in the mortgage that provided for the lender to “take such action as lender may reasonably require to assure that lender’s interest in the property and rights under the Security Agreement and mortgagor’s obligation to pay the sum secured by the Security Agreement shall continue unchanged”, the court held that, since the least sophisticated consumer would not have understood this language, the fees were not authorized and the servicer demanding them, as a condition to reinstatement, was, indeed, a violation of the FDCPA. 

The least sophisticated consumer test is the standard used in FDCPA cases to determine whether or not a consumer ought to have understood what was contained in any particular notice. The courts have consistently held that the least sophisticated consumer is one who is on the “low side of reasonable capacity.” It protects consumers and those who only “possess a rudimentary amount of information about the world.”

The problem this creates for servicers, who are called upon to provide payoff or reinstatement letters that look to the future, is that between the date the letter is sent, and the date the letter is “good through”, expenses can be incurred, but the servicer is not allowed to include those charges or any “estimate” in the payoff or reinstatement letter!  Some Servicers have already reacted to this dilemma by shortening the “good through” date to as little as fifteen days.  

Another case to consider when creating templates for payoff and reinstatement letters is Avila v. Riexinger Associates, LLC, 2016 U.S. App. LEXIS 5183, 2016 WL 1104797 (2d Cir. 2016), decided by the U.S. Court of Appeals, 2nd Circuit, on March 22, 2016, which held that the least sophisticated consumer would not be aware of the fact that the amount due in the payoff letter might increase as a result of interest, legal fees, process servers, and things of similar nature. Avila requires specific “Safe Harbor” language to be included in the letter that provides a disclosure to the consumer that the amounts due may increase between the time the letter is issued and the payoff or reinstatement is paid.

Combining these two cases, it would appear that the prudent course of conduct to avoid FDCPA violations caused by payoff or reinstatement letters including expenses anticipated to be incurred between the date of the letter and time of actual payment would be to provide such letter containing only the amounts that are due as of the date the letter is sent (or any prior date) and a “bold disclaimer” warning that the amount may increase as a result of interest, legal fees, process servers, and things of similar nature and requiring the borrower to contact the servicer for a more updated figure when they are ready to actually pay or reinstate their mortgage.

If you have any questions or comments, please contact me at peter.roach@roachlawfirm.com.

Peter Roach

Peter T. Roach & Associates, P.C.