Lawyers for Dorothy Rhue Allen call the fees charged by two banks and a law firm "unfair or unconscionable" and say they violate state and federal consumer-protection laws.
Allen, now 85, had borrowed $40,000 to buy the Deptford, N.J., home in 1976. She failed to make the final $432 payment in 2006 because she was in the hospital, her lawyer said.
"She's just a wonderful little old lady that got sick," lawyer Lewis Adler told The Associated Press on Friday.
Lenders are under scrutiny in New Jersey and across the country for the way they handled foreclosures during the recent real-estate bust. Six lenders - none involved in Allen's case - have been summoned before the New Jersey Supreme Court to fight for the right to stay in the foreclosure business.
The alleged systemic abuses include so-called "robo-signing," in which employees signed hundreds of documents without checking them for accuracy.
In Allen's case, LaSalle Bank and Cenlar Federal Savings Bank, both of Trenton, N.J., filed court foreclosure papers in 2007. Adler's firm asked how much it would take to resolve the problem. The banks, along with a law firm, outlined $5,797 in charges, including nearly $2,400 in legal fees.
According to Allen's lawsuit, those charges are far higher than allowed under federal and state laws, including the Federal Debt Collection Practices Act. For example, court rules limit attorney fees to $15, not the $910 charged; document searches to $75, not $335; and process serving to $175, not $475, the suit said.
"The lenders are sloppy and aggressive, trying to collect every penny," Adler said.
Chad A. Schiefelbein, a lawyer for the defendant banks, declined to comment. LaSalle Bank is now part of Bank of America.
A lawyer representing Fein, Such, Kahn and Shepard, the New Jersey law firm named in the suit, did not immediately return a call for comment.
Allen is now in a nursing home, while a nephew serves as her advocate. The banks stopped foreclosure proceedings after she countersued, and she was able to sell the home in 2008 for $112,000, according to online records.
But that is not the typical outcome.
More than 65,000 foreclosure cases were filed in New Jersey last year, triple the number in 2006. And 94 percent of them were uncontested, often because homeowners could not afford to get legal counsel, state Supreme Court Chief Justice Stuart Rabner said last month.
Few consumers are even aware of the rules surrounding debt collection, Adler said.
"Most of the time, they don't have a lawyer. They don't know what rights they have to fix this," Adler said.
He is seeking class-action stutus for Allen's suit.
A district judge in New Jersey had dismissed the lawsuit on grounds the fee notice was never sent to Allen, but only to her lawyers, and therefore was not covered under consumer-protection laws.
However, a U.S. appeals court in Philadelphia ruled this week that the notice amounted to an indirect communication with Allen, and ordered the district judge to revisit the case. Allen is seeking class-action status.
Federal appeals courts around the country have split on that legal question, setting up the possibility it may someday reach the U.S. Supreme Court.
