Lembeck v. Arvest Central Mortgage Co.

Background

Valerie Lembeck alleged that Arvest Central Mortgage Co., her mortgage servicer, violated California law by charging her and other borrowers a $5 fee to make monthly mortgage payments through an automated telephone system. Arvest moved to dismiss the complaint.

The central issue was whether the fee violated Section 1692f(1) of the federal Fair Debt Collection Practices Act, as incorporated into California’s Rosenthal Act. That provision prohibits collecting an amount incidental to the principal debt unless the amount is expressly authorized by the agreement creating the debt or permitted by law.

Court’s Analysis

The court held that the phone-payment fee was incidental to the mortgage payment. It reasoned that the fee was connected to the underlying debt because borrowers incurred it to make their mortgage payments, and there would be no reason to pay it without the obligation to make those payments.

The court rejected Arvest’s arguments that the fee was for an optional expedited payment service, that the mortgage contract did not specify telephone payments, and that borrowers could use other payment methods without a fee. Those facts did not remove the fee from the statutory category of amounts incidental to the principal obligation.

The court also rejected Arvest’s argument that a separate agreement made when a borrower used the telephone system authorized the fee. The court stated that the separate agreement itself was unlawful because it imposed an incidental fee prohibited by Section 1692f(1). The fee therefore had to be expressly authorized by the underlying mortgage agreement or permitted by a state or federal law or regulation, and the court found that no such law existed.

The court likewise held that Lembeck stated a claim under California Civil Code § 1788.14(b), which prohibits collecting from a debtor the debt collector’s fee or charge for services or expenses incurred in collecting a consumer debt, except as permitted by law. Because the fee charged for the telephone collection service was not permitted by law, that claim survived.

The court further concluded that Lembeck’s breach-of-contract and California Unfair Competition Law claims survived. The court reasoned that the fee was unlawful under the Rosenthal Act and therefore constituted unlawful conduct under the Unfair Competition Law. It also concluded that collecting the fee violated a deed-of-trust provision prohibiting fees expressly prohibited by applicable law.

Ruling

Judge Vince Chhabria denied Arvest’s motion to dismiss as to Lembeck’s claims based on the Rosenthal Act, breach of contract, and the Unfair Competition Law. The court granted the motion to dismiss as to Lembeck’s claim under California Civil Code § 1788.13(e), which concerns false representations that a consumer debt may be increased by fees that cannot legally be added to the existing obligation.

The court found that Lembeck had not alleged that Arvest represented that the telephone fee could increase the underlying debt. The court dismissed that claim with leave to amend and required any amended complaint to be filed within 14 days of the ruling.