District Court (Cal.) Says “Pay-to-Pay” Fees Were Subject to the Rosenthal Act as “Due and Owing” Under the AG’s Opinion, But Did Not Violate the Act Because the Fees Were Permitted By Law and the Deed of Trust

In Mariscal v. Flagstar Bank, FSB, No. ED CV 19-2023-DMG (SHKx), 2021 U.S. Dist. LEXIS 171374, at *4-8 (C.D. Cal. Sep. 9, 2021), Judge Gee dismissed, a second time, the Plaintiff’s Rosenthal Act Class Action challenging a mortgage company’s “pay-to-pay” fees.

The fee itself need not be a debt, as long as it is connected to the collection of a debt—in this case, the mortgage payment. See Torliatt v. Ocwen Loan Servicing, LLC, No. 19-CV-04303-WHO, 2020 U.S. Dist. LEXIS 68159, 2020 WL 1904596, at *4 n.2 (N.D. Cal. Apr. 17, 2020) (holding the debt at issue was the underlying mortgage loan, not the convenience fee); see also Lindblom v. Santander Consumer USA, Inc., No. 1:15-CV-990-LJO-BAM, 2016 U.S. Dist. LEXIS 61960, 2016 WL 2841495, at *4 (E.D. Cal. May 9, 2016) (whether the convenience fee was a debt was not the pertinent issue).  As a separate issue, courts—including courts in this District—are split as to whether a pay-to- pay fee is or must be “incidental to the principal obligation” in order to be actionable under section 1692f of the FDCPA. See, e.g., Flores v. Collection Consultants of Cal., No. SA CV 14- 0771-DOC (RNBx), 2015 U.S. Dist. LEXIS 92732, 2015 WL 4254032, at *10 (C.D. Cal. Mar. 20, 2015) (finding that convenience fees are a fee for service separate from the principal obligation, and therefore are not actionable); Simmet v. Collection Consultants of Cal., No. CV 16-02273-BRO (PLAx), 2016 U.S. Dist. LEXIS 199525, 2016 WL 11002359, at *5 (C.D. Cal. July 7, 2016) (collecting cases and rejecting argument that pay-to-pay fee was a separate agreement unrelated to underlying debt). Recently, the court in Thomas-lawson v. Carrington Mortg. Servs., LLC, No. CV 20-07301-ODW (Ex), 2021 U.S. Dist. LEXIS 65841, 2021 WL 1253578 (C.D. Cal. Apr. 5, 2021), discussed this split and persuasively reasoned based on the statutory text that the Simmet approach was more correct and consistent with the majority of courts opining on the subject:  “The FDCPA provision upon which Plaintiffs rely, § 1692f(1), prohibits “[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.” 15 U.S.C. § 1692f(1) (emphases added). It is clear from the statute’s plain language that an “amount” collected does not need to be “incidental to the principal obligation” to violate § 1692f(1). See Simmet, 2016 U.S. Dist. LEXIS 199525, 2016 WL 11002359, at *6 (“‘Any amount’ includes, but is not limited to, charges ‘incidental’ to the underlying debt.”). Thus, despite Flores and the cases that have followed its reasoning, this Court concludes that a fee can violate § 1692f(1) even if it is not incidental to the principal obligation. 2021 U.S. Dist. LEXIS 65841, [WL] at *5. This Court agrees. The pay-to-pay fee need not be consumer debt or even incidental to the consumer debt to be actionable under the FDCPA.  2. Due and Owing Defendant next argues that even if the mortgage payments are considered the debt, they too are not “consumer debt” because they were not “due and owing.” The Court granted Defendant’s MTD1 on these same grounds. MTD1 Order at 6. Plaintiff had argued that they made at least one payment during the “grace period” between the payment’s due date and the date at which the late fees began to accrue. Id. at 5. Under the reasoning of Sanders v. LoanCare LLC, 2019 U.S. Dist. LEXIS 20900, 2019 WL 441964, at *3 (C.D. Cal. Feb. 1, 2019), if Plaintiffs had made a mortgage payment after the due date but during the grace period, they would have incurred a consumer debt under the Rosenthal Act. The Court ultimately dismissed Plaintiffs’ prior complaint, however, because it was unable to determine based on the provided mortgage statements alone whether the payment Plaintiffs identified was made before or after the due date. MTD1 Order at 5-6.  Plaintiffs now specifically allege that they paid the pay-to-pay phone service fee with a number of grace period mortgage payments throughout 2019. SAC at ¶ 26. Defendant does not dispute that Plaintiff’s allegations in the SAC would, under Sanders, be sufficient to establish that Plaintiffs incurred a consumer debt. Rather, Defendant argues that Sanders was incorrectly decided. See MTD2 at 16-17. Defendant points to language in official guidance issued by California’s Attorney General that interprets the phrase “due and owing” to refer to “debts that have become delinquent, making them subject to collection.” 85 Cal. Op. Att’y Gen. 215, 2002 WL 31440180, at *3 (2002) (emphasis added). Defendant argues that because it does not technically consider debt to be delinquent during the grace period, Plaintiff’s debt was never “due and owing.”  The Court disagrees and finds the analysis in Sanders persuasive and consistent with the Attorney General’s opinion. The Attorney General used the term delinquent merely to describe a debt that is past due, and more specifically to contrast past due payments from payments that have not yet become due. See id. (“[T]he Act applies to debts that have become delinquent, making them subject to collection. In contrast, credit card obligations that are “current,” prior to becoming delinquent and before the date at which payment is required, are not subject to the Act’s requirements.”) (emphasis added). The Sanders court came to the same conclusion. See 2019 U.S. Dist. LEXIS 20900, 2019 WL 441964, at *3 (“The Attorney General’s construction of debts that are “due and owing” can thus be read as [*8]  referring to debts for which payment is immediately or past due.”).  Defendant cites Burris v. HSBC Bank USA, Nat’l Ass’n, 2014 U.S. Dist. LEXIS 206087, 2014 WL 12772260 (C.D. Cal. Dec. 19, 2014), to support its assertion that the payments must be classified by the debt collector as delinquent for a debt to be considered “due and owing.” MTD2 at 16. But Burris is distinguishable—there the payments were made after the defendant sent the billing statement but prior to the actual due date. See 2014 U.S. Dist. LEXIS 206087, 2014 WL 12772260, at *6. Burris does not address whether payments are due and owing during grace periods following the due date. Moreover, Burris actually supports the conclusion that the key benchmark is the due date. See 2014 U.S. Dist. LEXIS 206087, [WL] at *6 (“[B]ecause the payment was made two weeks before the listed due date, the Plaintiff’s account was not ‘due or owing.'”). Accordingly, Plaintiffs have sufficiently alleged that they made mortgage payments after their due dates, and thus had consumer debt that was “due and owing.”

But, since the Court found that the fee was both permitted by law and by the deed of trust, charging the fee did not violate the Rosenthal Act.