Last month, the United States Court of Appeals for the Eleventh Circuit issued a 60-page opinion which addressed claims brought by borrowers, Johnnie and Adrian Marchisio (the borrowers), against servicer Mortgage Services, LLC (the servicer) for various statutory and contractual violations committed by the servicer while servicing the Marchisios’ first and second mortgages. Marchisio v. Servicer Mortgage Services, LLC.
The borrowers took out two mortgage loans to purchase property and defaulted on both loans in 2008. The servicer filed an action seeking to foreclose both mortgages, which lawsuit was later resolved through a deed-in-lieu of foreclosure entered in December 2009.
Pursuant to the parties’ agreement, the borrowers surrendered the property and the servicer “agreed to report to the credit reporting agencies … that the mortgage was discharged with a zero balance owed.” However, more than two years later the bank still had not reported the discharge, instead it “resumed its debt collections efforts” reporting the borrowers’ debt as delinquent. As a result, in July 2012, the Marchisios filed a federal action (first action) alleging Mortgage Servicing’s failure to timely report the pertinent settlement terms violated the Fair Credit Reporting Act (FCRA) and the Florida Collections Act (FCA).
The filing of the first action prompted the servicer to partially correct its misreporting. The lender sent an automated universal dataform (AUD) to the reporting agencies requesting they “update the first loan to reflect that it had a zero balance.” However, the servicer continued to misreport a delinquent balance due on the second mortgage.
Ultimately, in January 2013, the parties reached a settlement agreement with regard to the second mortgage wherein the servicer paid the borrowers $125,000 and agreed to “report the second loan as having a zero balance as of December 9, 2009… as soon as reasonably possible, but in any case within 90 days.” In exchange, the borrowers dismissed the first action. The settlement noted that time was of the essence, which has the legal effect of a hard default on the 91st day.
Despite the parties’ settlement agreement and the borrowers’ dismissal of the first action, the servicer continued to send inaccurate reports to credit agencies in February, March, and April 2013. The reports reflected the borrowers’ second mortgage was not paid off and had a past due balance exceeding 120 days. Only after the borrowers complained to the servicer about these inaccurate reports did the company submit an AUD to the credit agencies requesting “they update the second loan to show a zero balance.” Notably, the servicer did not send this AUD until April 25, 2013 – two days after the deadline for doing so under the settlement agreement. Additionally, according to the borrowers, the servicer continued to make collection calls wherein they threatened to foreclose due to an allegedly unpaid “balloon balance” on the second mortgage.
In August 2013, the borrowers moved to enforce the settlement agreement which resulted from the first action, but the district court declined to exercise jurisdiction. In November 2013, they disputed the servicer debt with the credit agencies. In their written dispute they described the litigation history between them and the servicer, the resulting settlement, and the final agreement, which indicated the borrowers owed nothing on the first or second mortgages.
Pursuant to the requirements of the FCRA (codified at 15 U.S.C. § 1681i(a)(1) and (2)),the credit agency notified the servicer about the dispute and the servicer conducted an investigation. As part of its investigation, an employee of the servicer consulted the “Fiserv database” which was supposed to house all relevant information regarding the loans serviced by the company. Notwithstanding, the Fiserv database did not have any information regarding the 2013 settlement agreement. The servicer’s representative reported back to the credit agencies that its prior reports were accurate and confirmed the borrowers owed a balloon payment on the second loan.
To further complicate matters, near the end of 2013, the servicer’s insurance vendor (Southwest) sent the borrowers letters on the servicer’s letterhead informing them that force-placed fire insurance would be placed on their property if they did not obtain their own insurance. When the borrowers failed to purchase fire insurance for a property they no longer owned, Southwest purchased it for them, billed them, and then tried to collect payment by sending notices on the servicer’s letterhead.
Ostensibly left with no other options for resolving the dispute, the borrowers filed a second federal action (second action) against the servicer in January 2014, “alleging breach of the settlement agreement entered in the first action and violations of the FCRA and the Florida Collections Act.” Regarding the FCRA claim, the borrowers alleged that the servicer violated the act by failing to conduct a reasonable investigation upon learning that the borrowers disputed the credit reports, which included the balloon balance on the second mortgage. As to the FCRA claim, the borrowers argued the collection calls and notices regarding force-placed insurance constituted violations of the FCRA because the servicer attempted to enforce a debt that they knew did not exist. See Fla. Stat. § 559.72[KW2] .
The second action finally prompted the servicer to issue an AUD to the credit agencies requesting they “delete from [the borrowers’] credit reports any reference to a balloon-payment obligation.” The servicer also canceled the force-placed fire insurance. Despite this corrective action, litigation ensued and both parties moved for summary judgment. The district court entered summary judgment in the borrowers’ favor on their FCRA claim finding the servicer “failed to conduct a reasonable investigation” of the dispute filed with the credit agency and that such failure was willful. The court awarded statutory damages of $3,000 but “ruled that Plaintiffs were not entitled to any damages for emotional distress or as punitive damages” as a matter of law. As to both the FCA claim and the breach of contract claim the district court entered summary judgment in the servicer’s favor. The district court awarded $94,000 in attorneys’ fees to the borrowers. Both parties appealed to the Eleventh Circuit.
On appeal, the Eleventh Circuit made the following rulings:
- Firstly, it affirmed “the district court’s finding of a willful FCRA violation,” surmising it was “obvious that [Servicer] failed to conduct a reasonable investigation of [the Borrowers’] report.” The Court disagreed with the servicer’s argument that the “erroneous verification” that a balloon payment was owed on the second loan “constituted a mere isolated human error that was promptly corrected.” The Court clarified it was not the employee that made the mistake because he “accurately reported what he found in the databases.” The Court explained it was the servicer which “failed to create a reliable system for inputting information regarding the settlement of litigation that might impact the data found on the relevant databases.”
- The Circuit Court concluded the servicer’s system was “unreliable” and that “it was incumbent” on the servicer “to take steps to ensure that news of the terms of the settlement agreement be communicated to those who generate reports to reporting agencies.” The Court surmised “there was a large ‘disconnect’ between [servicer’s] system for debt verification and its ad hoc handling of settlement-related changes to debt obligations” rendering the servicer’s investigation unreasonable for purposes of the FCRA. The Court also concluded the servicer’s conduct was willful because even if unintentional, the servicer “acted in reckless disregard” of its obligations under the FCRA, given its failure to take corrective action despite “the number of times that [Servicer] was put on notice of the false information being reported.” It concluded the servicer’s FCRA violations could support an award for emotional distress and punitive damages and reversed the district court’s grant of summary judgment on those issues “to allow factual development” of those issues at trial.
- Secondly, the Circuit Court reversed the summary judgment for the servicer on the FCA claim finding there to be genuine issues of material fact as to whether the servicer made the debt collection calls and whether the servicer could prove its “bonafide error defense.” The Court concluded the borrowers’ testimony regarding the collection calls, viewed in a light most favorable to the non-movants, was sufficient to withstand summary judgment. The Court also found that the question of whether Servicer “maintained procedures reasonably adapted” to avoid violations of the FCRA was a question for the jury and not properly disposed of on summary judgment.
- Thirdly, the Circuit Court reversed the grant of summary judgment for the servicer on the breach of contract claim. Although the Circuit Court agreed with the district court that “emotional distress damages [were] not cognizable as to the breach of contract claim,” the Court explained the servicer’s failure to timely correct the misreporting on the second mortgage could have resulted in other damages such as “adverse financing terms” in connection with the borrowers’ purchase of two automobiles prior to the servicer correcting its misreporting. The Court surmised the merit of the borrowers’ breach of contract claim and whether the borrowers could establish damages from that breach was to be determined by the jury and not properly disposed of on summary judgment.
- Lastly, the Circuit Court vacated “the award of attorney’s fees to [the borrowers] so that the district court [could] recalculate those fees at the conclusion of the litigation.” The Court remanded the matter for trial and set the floor for a fee award at $94,000 reasoning that the district court had calculated that number, “in part, on the fact the borrowers’ prevailed on only one claim” but they may prevail on additional claims at trial thereby entitling them to additional fees.
This detailed holding provides helpful insights into best practices for servicing a loan in default where the default is resolved through settlement. Below is a list of suggested practices extrapolated from the Circuit Court’s holding:
- SETTLEMENT AGREEMENTS: Ensure those responsible for complying with a settlement agreement understand the terms of the agreement and know what is required for full compliance. Where possible, incorporate clear requirements into an agreement and avoid terms such as “as soon as reasonably possible.” Phrases such as these are subject to interpretation and create confusion and/or conflicting expectations of the various parties. Where deadlines are clearly articulated in an agreement, do not delay in complying and understand that courts will consider “the spirit of the agreement” when evaluating whether a party complied with a particular provision.
- SYSTEM ENTRIES: When settlement is reached, make redundant entries into multiple systems clearly indicating the parties reached a settlement. Create and implement a procedure that details the various steps required when settlement is reached and make the procedure known and understood to the appropriate staff. Include the primary aspects of the settlement agreement in system entries and reference where additional information about the settlement can be obtained. Provide information about the department involved in the settlement negotiations, and the name of at least one point of contact. Have a policy in place to ensure this information is updated in the event of staffing changes. If the specifics of the settlement are to remain confidential, note “CONFIDENTIAL SETTLEMENT REACHED” in all systems. Again, reference a point of contact and where additional information can be obtained.
- CREDIT DISPUTES: Upon receiving notice of a credit reporting dispute, conduct a thorough investigation. This should include the review of system notes and documents, but also a thorough review of the information submitted by the borrower. If there is a discrepancy between the system notes and information from the borrower, especially significant facts that were omitted such as a reference to a lawsuit or settlement, investigate further. Seek assistance from or refer the matter to a litigation specialist within your company. Importantly, you should not reach out to the borrower for clarification until there is confirmation he or she is not represented by counsel.