4th Cir.: French v. 21st Mortgage- Insurance Commissions Are not Fees

Summary:

In this unpublished decision, the Fourth Circuit affirmed the dismissal of a putative class action brought by Paul French, who alleged that 21st Mortgage violated Maryland’s Credit Grantor Closed End Credit Provisions (“CLEC”) by retaining a 35% commission on force-placed insurance premiums. Although French paid only the regulator-approved insurance premium (with 21st Mortgage forwarding 65% to the underwriter), he argued the retained portion was an unlawful “fee” under Md. Code Ann., Com. Law § 12-1005(d)(1).

The court, relying on Len Stoler, Inc. v. Wisner, 115 A.3d 720 (Md. Ct. Spec. App. 2015), concluded that because French paid no more than the filed and approved premium rate—and was not charged an additional amount—the retained commission was not a “fee” within the meaning of CLEC. A fee, under Maryland law, must be a separate charge assessed to the borrower, not merely an internal commission split invisible to the consumer.

Commentary

While French limits CLEC claims based on force-placed insurance commissions in Maryland, North Carolina consumer protections offer a slightly different framework—but perhaps not the one borrowers might hope for. In Judge Benjamin Kahn’s decision in In re Paylor, No. 17-80884 (Bankr. M.D.N.C. Mar. 22, 2019), the court squarely held that force-placed insurance premiums are not “fees” under N.C.G.S. § 45-91(1), and therefore not subject to the statute’s 45-day assessment and 30-day notice requirement.

Judge Kahn’s statutory analysis emphasized that “fee,” as used in § 45-91, is a narrow term referring to compensation for services, not to insurance products. Moreover, footnote 8 of the Paylor opinion makes clear that even § 45-91(4)—which requires that “[a]ll fees charged by a servicer must be otherwise permitted under applicable law and the contracts between the parties”—refers only to “fees”, without including other categories such as “charges,” “expenses,” or “costs.” As such, a borrower cannot use § 45-91 to challenge embedded commissions on insurance unless they are separately billed as a “fee.”

However, Bankruptcy Rule 3002.1(c) provides a broader and more debtor-protective mechanism. That rule requires a mortgage creditor to file a formal notice itemizing “all fees, expenses, or charges” that are recoverable against the debtor or the debtor’s principal residence, within 180 days after the cost is incurred. Unlike N.C.G.S. § 45-91, Rule 3002.1 does not limit itself to “fees” narrowly defined, and has been applied to include force-placed insurance, property inspections, and attorney’s fees—so long as the creditor seeks recovery from the debtor.

In short, while French and Paylor may close state law pathways for challenging retained commissions on insurance when no additional cost is passed on to the borrower, Rule 3002.1(c) remains an essential and more expansive federal tool for consumer bankruptcy practitioners. If the servicer seeks to recover the cost—even indirectly—from the debtor’s plan payments or post-discharge balance, then timely notice and itemization are required. And failure to comply with that rule may result in disallowance of the charge entirely.

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