Seventh Circuit holds that charging inspection fee does not breach mortgage contract

In Leszanczuk v. Carrington Mortgage Services, LLC, 21 F.4th 933 (7th Cir. Dec. 28, 2021), the borrower challenged the legality of a $20.00 property inspection fee that her loan servicer charged following her default. She claimed that because her property was occupied the fee could not be charged. The district court dismissed the complaint and Seventh Circuit affirmed.

The subject mortgage was insured by the Federal Housing Administration (“FHA”) of the U.S. Department of Housing and Urban Development (“HUD”). A HUD regulation, 24 CFR § 203.377, provided that the lender is responsible for monthly property inspections after the borrower has defaulted on the loan and vacated the property.

The borrower was occupying the property for the relevant time. Following her default, the loan servicer conducted a visual drive-by inspection of the property and charged the borrower $20.00 for the inspection. The borrower brought a class action case for breach of contract and under Illinois’s consumer fraud statute. She contended the servicer breached the mortgage contract, and committed consumer fraud, when it charged her the $20.00 inspection fee. It knew, or should have known, that she occupied the property and § 203.377 prohibited it from charging the fee.

The district court dismissed the complaint finding that the fees a lender may charge under the contract were not limited by § 203.377. It also concluded that charging the fee was not an unfair practice because it did not offend public policy and was not oppressive.

On appeal, the borrower argued that paragraph 8 of the mortgage, which states that “Lender may collect fees and charges authorized by the Secretary [of HUD]” evinces an intent to incorporate § 203.377 into the mortgage. As such, the mortgage prohibits inspection fees if the property was not vacant. The Seventh Circuit found that paragraph 8’s reference to “fees and charges authorized by the Secretary” does not demonstrate an intent to make § 203.377 enforceable under the mortgage, which does not even mention fees. In other paragraphs of the mortgage, in fact, the lender is expressly allowed to charge an inspection fee as a “necessary” expenditure to protect the value of the property after default. Paragraph 8 did not indicate the lender may collect only fees and charges authorized by the Secretary. Rather, it conveys that the lender may, but does not have to, collect additional fees that are permitted by the Secretary.

The Court also found the lender’s conduct did not amount to consumer fraud. The regulation itself does not mention fees and the interpretive letter from HUD, HUD Mortgagee Letter 81-26, which the borrower cited, did not persuade otherwise. The purpose of the Letter was to establish that lenders may be reimbursed by HUD for performing mandatory inspections. It did not discuss whether lenders may demand reimbursement from the borrower for performing other inspections. Nor did Chapter 9 of HUD’s Administration of Insured Home Mortgages Handbook (4330.1), which describes the lender’s responsibility to inspect, preserve, and protect the property, support the borrower’s theory. It provided that if the lender knew the borrower occupied the property, charges for inspection fees were not appropriate and may not be charged to the borrower. But this provision was superseded by a parallel provision which only addresses mandatory inspections and did not mention whether inspection fees are prohibited when the borrower continues to occupy the property. Finally, HUD Mortgagee Letter 10-18, titled “Update of Property and Preservation Requirements and Cost Reimbursement Procedures,” did not aid the borrower’s argument either because it merely outlined inspection requirements but did not purport to limit fees for inspections. In short, the Court concluded that the policy underlying § 203.377 is to impose obligations on mortgagees to protect the value of the property in the case of default, not to protect mortgagors from unnecessary fees.

Finally, the Court found that the inspection fee was not oppressive or caused her substantial injury either. The mortgagor did not plausibly allege that she had little alternative except to pay the $20.00 fee. She was already in default when the fee was assessed and she was not threatened with foreclosure for failing to pay the fee. Furthermore, she could not explain how a fee that was permitted by the mortgage could be oppressive when she did not argue she did not freely enter into the mortgage or that the mortgage was unconscionable. Therefore, the inspection fee did not offend public policy and was not oppressive for purposes of her ICFA claim.


  • James Noonan

    Jim is a founding partner of Noonan & Lieberman. Jim has more than 25 years of experience in civil litigation on behalf of creditors, servicers, business and real estate owners.

Download Related Document