In Williams v. PennyMac Loan Services, LLC, the Middle District of North Carolina once again refused to let a mortgage servicer wriggle out of Pay-to-Pay fee litigation at the pleading stage. The Court denied PennyMac’s Rule 12(b)(6) motion in a detailed opinion that should feel very familiar to anyone who has been watching this line of cases develop since Alexander v. Carrington and, closer to home, Custer v. Dovenmuehle.
The Holding (Short Version)
Borrowers plausibly stated claims under both the NCDCA and NC UDTPA where PennyMac allegedly charged “optional” debit-card and phone-payment fees not affirmatively authorized by the mortgage. The servicer’s attempt to outsource the fee to a “third-party processor” did not save it, at least at the pleading stage.
The Court accepted as plausible that:
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The fees were incidental to the debt (no mortgage payment, no fee).
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“Legally entitled” means affirmatively authorized, not merely “not expressly prohibited.”
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PennyMac could be liable for fees charged by its vendor under basic agency principles.
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Allegations of excessive fees, double-charging (on top of servicing compensation), and persistence after notice sufficed to allege unfairness and deception.
Nothing necessarily groundbreaking — but that’s exactly the point.
Why This Matters in Chapter 13 Practice
1. Pay-to-Pay Fees Don’t Magically Become Lawful in Bankruptcy
Mortgage servicers often behave as if the filing of a Chapter 13 petition cleanses questionable fee practices. It doesn’t. If a fee is not affirmatively authorized by the note, deed of trust, or applicable law outside bankruptcy, it doesn’t become collectible simply because the debtor is now paying through a plan.
Williams reinforces what bankruptcy practitioners already know: “Optional” does not mean lawful, especially when the borrower cannot choose their servicer and is effectively steered into fee-bearing payment methods.
2. TFS Bill Pay and the Quiet Irony
Many Chapter 13 Trustees now require or strongly encourage debtors to use TFS Bill Pay to submit plan payments. From a trustee-administration perspective, this makes sense: predictability, automation, and fewer bounced checks.
But Williams underscores a quiet irony:
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Trustees push debtors toward no-fee, court-sanctioned payment systems to ensure compliance.
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Mortgage servicers, meanwhile, monetize borrower compliance by charging fees for electronic or telephonic payments — even when those methods are cheaper to process than paper checks.
If trustees can run an entire Chapter 13 system without charging debtors “convenience fees,” servicersICO-funded servicers will have a hard time persuading courts that their own Pay-to-Pay fees are benign or necessary.
3. The Post-Klemkowski Servicer Panic
Williams also sits in the broader context of the wildly terrified response by mortgage servicers to In re Klemkowski and the MDNC’s briefly proposed Local Form plan provision that would have required servicers to:
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Allow debtors access to their online mortgage accounts, and
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Permit direct online payments during Chapter 13.
That opinion and the local plan provision were ultimately both withdrawn — not because it was wrong, but because servicers reacted as if the court had proposed to nationalize their IT departments.
The fear was never really about cybersecurity or operational burden. It was about control:
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Control over how payments are made,
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Control over which channels generate fee income, and
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Control over borrower access to real-time account information that might expose errors, suspense abuses, or unauthorized charges.
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Punishing debtors for filing bankruptcy.
Williams shows that courts are increasingly skeptical of that control narrative.
Commentary: The Through-Line Is Access and Transparency
Taken together, Williams, Alexander, Custer, and Klemkowski reflect a consistent judicial instinct:
Debt collection systems should not be designed to extract revenue from the act of compliance itself.
Whether it’s:
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Charging a fee to make a payment,
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Blocking online access during bankruptcy, or
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Forcing borrowers into friction-laden payment methods,
courts are recognizing that these practices are not neutral “choices.” They are leverage.
For Chapter 13 practitioners, the takeaway is practical:
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Scrutinize Pay-to-Pay fees just as closely as post-petition charges under Rule 3002.1.
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Don’t accept “third-party vendor” explanations at face value.
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And remember: if trustees can run TFS Bill Pay without skimming compliance fees, servicers can too.
The servicers may be terrified. The law, increasingly, is not sympathetic.
To read a copy of the transcript, please see:
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