On October 20, a mortgage servicer filed a complaint in the U.S. District Court for the Northern District of New York against New York Attorney General Letitia James and NYDFS Acting Superintendent Kaitlin Asrow, each sued in her official capacity. The servicer seeks a declaration that 3 NYCRR § 419.5(b) violates the Due Process Clause of the Fourteenth Amendment, both on its face and as applied to the servicer. That provision of the state’s mortgage servicing rules allows a servicer to collect a fee only if the fee is for a service “actually rendered” to the borrower and “reasonably related to the cost of rendering that service.” According to the complaint, NYDFS has never defined that standard in the rulemaking record, its published FAQs, or its industry letters (previously covered by InfoBytes here). The complaint also alleges that NYDFS and the attorney general’s office declined the servicer’s repeated requests for a compliance benchmark.

According to the complaint, the fees at issue are optional charges for expedited payments. Until July 1, 2025, the servicer charged $7.50 for automated-phone payments, $7.50 for online payments (waived for borrowers enrolled in paperless billing), and $17.50 for live-agent payments. It has since eliminated the automated channel fees and reduced the live-agent fee to $12.50, a fee it still charges. The complaint alleges that NYDFS told the servicer in 2021 that the rule was not intended to regulate its profits. According to the complaint, the defendants later took the position that the fees violated the rule because “indirect costs” included in them were not “reasonably related” to the service. The servicer further alleges that the defendants have threatened enforcement under N.Y. Banking Law § 44 and Executive Law § 63(12). The threatened actions, according to the complaint, would seek restitution of all such fees collected since October 2019, even though compliance was not required until June 15, 2020. They would also seek civil penalties of up to $15,000 per day and an end to the fees.

The complaint, which seeks declaratory relief, a permanent injunction barring enforcement of the rule against the servicer based on the fees at issue, and attorneys’ fees, asserts three counts under 42 U.S.C. § 1983: (i) as applied, the rule authorizes arbitrary and discriminatory enforcement; (ii) as applied, the rule fails to provide fair notice; and (iii) the rule is unconstitutionally vague on its face.