The Price of Stupidity – or How to Really Screw Up Servicing a Loan

August 19, 2019 by Paul J. Sievers, Esq.

In April 2019, the Eleventh Circuit Court of Appeal issued a lengthy ruling eviscerating Carrington Mortgage Services, LLC (“CMS”) for a litany of idiocies perpetrated upon a Florida couple.

A complete recitation of CMS’ buffoonery consumes the Court’s 60-page opinion and provides a veritable “how not to” treatise of easily avoidable violations of the Fair Credit Reporting Act.

The decision stems from first and second mortgages on borrowers Johnnie and Adrian Marchisio’s home. Both loans went into default in 2008. CMS filed a foreclosure action against the couple and later settled for a deed-in-lieu of foreclosure in 2009. While the Marchisos thought their problems were ending, a ten-year odyssey was just beginning.

The Marchisios surrendered the property, and, pursuant to the agreement, CMS was supposed to report to credit agencies that the borrowers’ loans were discharged with zero balances. However, after two years, the borrowers discovered that CMS had still not reported the discharge.

In response to this discovery, the Marchisios filed suit in Federal District Court alleging that CMS failed to timely report settlement terms to the credit reporting agency and thereby violated the Fair Credit Reporting Act (“FCRA”) and the Florida Collections Act (“FCA”).

Getting sued appeared to initially wake CMS from its stupor. The servicer partially corrected its misreporting, sending a notification to the reporting agencies updating the first loan to reflect a zero balance. CMS, however, failed to update the record on the second mortgage and instead continued to misreport a delinquent balloon payment balance.

The case ultimately settled, with CMS agreeing to pay the borrowers $125,000 and “report the second loan as having a zero balance as of December 9, 2009 . . . as soon as is reasonably possible, but in any case within 90 days.”  In exchange, the borrowers agreed to dismiss their action.

Apparently, CMS’ commitment to good faith and conformity with federal law was short-lived. Before the ink on the settlement was even dry, CMS reverted to the conduct that got them sued in the first place. If possible, it even elected to double down on its stupidity. 

CMS continued to send inaccurate reports to the credit agencies regarding the second loan. Worse, CMS continued to make debt collection calls to the Marchisios on the second mortgage and even billed the borrowers for forced-placed insurance coverage on a home they no longer owned!

The borrowers moved to enforce the settlement agreement in the first action, but the District Court declined to exercise jurisdiction. Seeking some remedy, the borrowers filed a second action alleging breach of the settlement and violations of FCRA. Seeking to head off the second action, the servicer issued an order to the reporting agencies to delete any information about a “balloon-payment obligation.”

The district court entered summary judgment in favor of the borrowers on their FCRA claim, finding the servicer “failed to conduct a reasonable investigation” of the dispute filed with the credit agency. The court awarded statutory damages of $3,000 but ruled the plaintiffs were not entitled to punitive damages as a matter of law but did grant them $94,000 in attorney’s fees.

On appeal from the District Court’s rulings, the Eleventh Circuit affirmed the District Court’s finding of a “willful FCRA violation,” saying that it was “obvious [that CMS] failed to conduct a reasonable investigation of the borrower’s report.” The court also found that it was CMS 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.”

In a remarkable example of understatement, the Eleventh Circuit concluded that the CMS’ 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 Circuit Court also concluded that CMS’ conduct was willful because, although it was unintentional, CMS acted “in reckless disregard” of its obligations under FCRA, and failed to take corrective action despite being put on notice several times.

The Circuit Court concluded that CMS’ FCRA violation could support an award for emotional stress and punitive damages, and in remanding the case for a jury trial, set the floor for a fee award at $94,000, reasoning that the District Court had calculated that number, in part by surmising that the borrowers may prevail on more than one claim.

The Circuit Court’s opinion highlights CMS’ lack of basic competency when it came to servicing the Marchisio’s loans. The opinion should stimulate a great deal of thought among non-conventional or private money lenders – particularly those who do not self-service. As a loan servicer is generally imputed to be an agent of the lender – what stupidity is your agent engaged in?