The U.S. Court of Appeals for the Seventh Circuit recently affirmed the dismissal of a borrower’s complaint alleging that a fee charged by the servicer for a home inspection was a violation of the Illinois UDAP statute and a breach of the mortgage contract.
A copy of the opinion is available at: Link to Opinion
The appeal arises out of a claim brought by a borrower (“Borrower”) against her mortgage servicer (“Servicer”). After Borrower defaulted on her mortgage, Servicer informed her she was in default and conducted a visual drive-by inspection of the property. Servicer charged Borrower a $20 fee for the inspection which was disclosed in her monthly mortgage statement.
Borrower sued Servicer alleging claims for breach of the mortgage contract and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/2 (ICFA), on behalf of putative nationwide and Illinois classes.
Specifically, Borrower alleged that Servicer breached the mortgage agreement by charging the $20 fee when Servicer supposedly knew or should have known that she occupied the property in alleged violation of HUD regulations (24 C.F.R. § 203.377), which Borrower claimed limited the fees Servicer could charge under the contract and was incorporated into the contract. Borrower further alleged that charging the fee was an unfair trade practice under the ICFA.
The trial court granted Servicer’s motion to dismiss, disagreeing with Borrower’s interpretation of her mortgage contract and finding that the fees Borrower could charge were not limited by the HUD regulation. The trial court also found that Servicer did not violate the ICFA as charging the fee did not offend public policy and was not oppressive. Borrower appealed.
The Seventh Circuit held that the mortgage contract did not evince an intent to incorporate § 203.377 or to prohibit inspection fees.
The Appellate Court relied on Illinois law, which holds that “a document is incorporated by reference into the parties’ contract only if the parties intended its incorporation.” 188 LLC v. Trinity Indus., Inc., 300 F.3d 730, 736 (7th Cir. 2002) (citing Wilson v. Wilson, 577 N.E.2d 1323, 1329 (Ill App. Ct. 1991). The Seventh Circuit further stated that the mere reference of the HUD regulations in the mortgage contract was insufficient to demonstrate that the parties intended to incorporate them, in their entirety. Hayes v. M & T Mortg. Corp., 906 N.E.2d 638, 641 (Ill. App. Ct. 2009).
The Seventh Circuit further held that the plain language of the contract did not prohibit Servicer from charging inspection fees. On the contrary, the Court noted, the mortgage contract expressly allowed the Servicer to charge the inspection fee as a “necessary” expenditure to protect the value of the property after default.
Additionally, the Appellate Court ruled that the provision allowing Servicer to collect fees and charges authorized by the Secretary of HUD did not bar Servicer from collecting unauthorized fees. Instead, the Seventh Circuit held this provision merely conveyed that Servicer could, but did not have to, collect additional fees that were permitted by the Secretary.
Thus, the Seventh Circuit held that the trial court properly concluded that § 203.377 is not incorporated in the mortgage agreement and that the contract expressly permitted the inspection fee at issue, and thus ruled that Borrower had failed to state a claim for breach of contract.
Borrower next argued that charging the inspection fee was an unfair practice, in violation of the ICFA.
To determine whether a practice is unfair, the Court considers “(1) whether the practice offends public policy; (2) whether it is immoral, unethical, oppressive, or unscrupulous; [and] (3) whether it causes substantial injury to consumers.” Robinson v. Toyota Motor Credit Corp., 775 N.E.2d 951, 961 (Ill. 2002). “All three criteria do not need to be satisfied to support a finding of unfairness. A practice may be unfair because of the degree to which it meets one of the criteria or because to a lesser extent it meets all three.” Id. (quoting Cheshire Mortg. Serv., Inc. v. Montes, 612 A.2d 1130, 1143–44 (Conn. 1992)).
Borrower contended the fee offended public policy because it violated § 203.337. A practice offends public policy “if it is within at least the penumbra of some common-law, statutory or other established concept of unfairness.” Elder v. Coronet Ins. Co., 558 N.E.2d 1312, 1316 (Ill. App. Ct. 1990) (quoting FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244–45 n.5 (1972)).
Borrower also contended that because HUD Mortgage Letter 81-26 states that no further property inspections are required by HUD and reimbursement would not be allowed once a property is found to be occupied, Servicer could not be reimbursed for the property inspection.
The Seventh Circuit disagreed, ruling that Borrower took this statement out of context, and finding that the purpose of the Letter was to establish that Servicers could be reimbursed by HUD but was silent as to whether a Servicer could demand reimbursement from a Borrower for performing inspections.
The Borrower next referenced Chapter 9 of HUD’s Administration of Insured Home Mortgages Handbook (4330.1), section 9-9(A)(2)(d) which provides, “If there is evidence that the Servicer knew the Borrower was still in occupancy … charges [of inspection fees] are inappropriate and must not be charged to the Borrower or included on a claim for insurance benefits.”
However, the Seventh Circuit held that this section had been superseded, prior to the inspection conducted by Borrower, by a provision which only addressed mandatory inspections and did not mention whether inspection fees were prohibited when the borrower occupied the property.
Finally, Borrower cited to HUD Mortgage Letter 10-18 which outlines “inspection requirements and types of inspections” as set forth in § 203.377 and HUD Handbook 4330.1, but did not purport to limit fees for inspections.
The Seventh Circuit also noted that the purpose of the regulation was to protect the FHA’s interest in property’s once the borrower has defaulted. The Court continued that the policy underlying § 203.377 was to impose obligations on Servicers to protect the value of the property in the case of default, not to protect a Borrower from unnecessary fees. Thus, the Court concluded that the fees did not offend public policy.
Borrower next argued that the fee violated ICFA because it was oppressive in that she was forced to pay the fee in order to bring her mortgage current and avoid default. However, because the inspection fee arose as a result of Borrower already being in default and was allowed by the mortgage contract which Borrower did not claim she was forced to enter into, the Court rejected this argument.
Finally, the Seventh Circuit found that Borrower failed to demonstrate the fee caused her substantial injury.
Under the inquiry the Borrower needed to show the injury was substantial, was not outweighed by any countervailing benefits to consumers or competition that the practice produced and was an injury that consumers themselves could not reasonably have avoided. See Siegel v. Shell Oil Co., 612 F.3d 932, 935 (7th Cir. 2010).
Borrower argued that Servicer’s practice of charging an inspection fee “in the aggregate, causes substantial losses to the public as a whole.” The Court found that even a large loss could not support a claim for unfairness on its own, (Robinson v. Toyota Motor Credit Corp., 775 N.E.2d 951, 961 (Ill. 2002)), and even if Borrower had been stuck paying the fee, the fee was not oppressive. Batson v. Live Nation Ent., Inc., 746 F.3d 827, 834 (7th Cir. 2014).
Thus, the Seventh Circuit concluded that Borrower failed to state a claim under the IFCA.
As the Appellate Court found the trial court correct in its rulings, the Seventh Circuit affirmed the entirety of trial court’s decision.