Banking and Finance Law Daily Mortgage servicer may be liable for emotional distress damages under FCRA
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Tuesday, March 26, 2019

Mortgage servicer may be liable for emotional distress damages under FCRA

By Nicole D. Prysby, J.D.

Consumers may be able to obtain emotional distress damages against a mortgage servicer who repeatedly failed to properly report that a debt was discharged in a settlement and repeatedly failed to fulfil its obligations under the settlement agreement. The servicer may also be liable for punitive damages. However, it is not liable for emotional distress damages for breach of contract.

A mortgage servicer may be liable for emotional distress damages under the Fair Credit Reporting Act for its repeated failures to conduct a reasonable investigation during a debt inquiry and failures to create a reliable system for tracking settlement information, held the Eleventh Circuit Court of Appeals. The consumers brought multiple actions against the servicer, after it failed to report extinguishment of a loan as required under a settlement agreement. The consumers’ claims of additional anxiety, rapid heartbeats, and marital distress were sufficient to raise genuine issues of material fact as to whether the servicer’s FCRA violation caused the consumers additional emotional distress. The consumers’ breach of contract claim goes forward, although only as to damages caused by higher interest rates the consumers had to pay for auto loans because of the inaccurate credit reports. Emotional distress damages for the breach of contract claim are not available in Florida. The court rejected the consumers’ argument that because emotional distress damages are recoverable for Florida Consumer Collections Practices Act violations, emotional distress is a foreseeable consequence of the breach of a contract specifically intended to resolve prior violations of the statute (Marchisio v. Carrington Mortgage Services, LLC, March 25, 2019, Carnes, J.).

Background. The consumers (husband and wife) defaulted on two loans serviced by the defendant mortgage servicer. In a 2009 settlement agreement, the parties agreed that the consumers would convey the properties to the servicer and in exchange, the servicer would report to the credit reporting agencies that the mortgage was discharged with a zero balance. The consumers conveyed the deed, but the mortgage servicer repeatedly failed to meet its obligations under the settlement agreement. It resumed its debt collection efforts and reported the second debt as delinquent, even though the consumers owed the company no money. The consumers brought FCRA claims against the servicer in 2012, based on the fact that the servicer continued to seek payment on the discharged mortgage and falsely reported to credit reporting agencies that the debt was delinquent. They reached a settlement agreement in 2013, under which the servicer agreed to pay the consumers $125,000 and report the second loan as having a zero balance as soon as possible, but not later than 90 days. Despite the 2013 settlement agreement, the servicer continued to fail to report extinguishment of the second loan. It sent inaccurate reports to credit reporting agencies, causing the consumers to have to make larger down payments and pay higher interest rates on auto purchases in 2013. The servicer also made multiple automated calls each day to the consumers, stating that the home would be foreclosed and they owed a balloon balance.

The consumers then disputed the reports with the credit reporting agencies. Upon receipt of the requests from the agencies, the servicer verified the debt as accurate (not having updated its records with the settlement information). The servicer’s failure to update its records also had the consequence that the servicer’s insurance vendor purchased insurance for the property and attempted to collect on the debt. The consumers filed another action against the servicer, alleging breach of the settlement agreement and violations of the FCRA and the Florida Collections Act.

FCRA claim. The district court held that the servicer was liable on the FCRA claims, because it failed to conduct a reasonably inquiry into the dispute. The servicer was aware of the settlement, but did not make that information available to its employees doing the investigating. The district court also found that the conduct was willful, but ruled that the consumers were entitled only to $3,000 statutory damages. The Eleventh Circuit agreed that the servicer failed to conduct a reasonable investigation and that its conduct was willful, because it failed to create a reliable system for inputting information regarding the settlement of litigation that might impact the data found on the relevant databases and repeatedly failed to correct its own errors.

The appellate court found that the district court erred when it denied the consumers’ claim for emotional distress damages. The consumers had presented evidence of substantial stress as a result of the servicer’s actions prior to the re-verification of the debt, including the husband’s congestive heart failure, anxiety, and exacerbated hypertension caused by anxiety. Although the husband’s health improved after medication, the erroneous verification of the credit reports and the lender-placed insurance triggered additional anxiety, rapid heartbeats, and marital distress. This was sufficient to raise genuine issues of material fact as to whether the servicer’s FCRA violation caused the consumers additional emotional distress, given their testimony that this new violation "added stress" and "made things much worse" and the husband’s health improvements before the servicer’s inaccurate verification.

The court also found that the consumers’ claims for punitive damages should go forward. Intentional conduct is not required for punitive damages, merely willful conduct (which includes reckless conduct).

Florida Collections Act claim. The district court rejected the consumer’s Florida Collections Act claim because the consumers had no independent verification of the multiple automated calls made by the servicer. But the court held that the testimony presented was sufficient to allow the claims to go forward, because the wife’s testimony about the calls was corroborated by the husband. The district court also concluded that the claim relating to the lender-placed insurance should fail because the servicer’s conduct was protected by the bona fide error defense. Again, the Eleventh Circuit disagreed. The servicer failed to store settlement agreements in the relevant databases and failed to show that it has any procedures in place to make sure that the terms of the settlement are conveyed to the proper parties. Therefore, a fact question exists as to liability. The servicer argued that even if the bona fide error defense does not succeed, it is not liable because the insurance company is not its agent. The court rejected that argument, finding a question of fact on both actual and apparent agency because the agreement between the insurance company and servicer provided that the servicer could view reports on the insurer’s activity and the letters were sent out on the servicer’s letterhead. The court also rejected the servicer’s argument that it did not have actual knowledge of the actions of the insurer.

Other claims. The consumers’ breach of contract claim also was allowed to proceed. The district court held that it failed because the consumers could not prove any damages from emotional distress. The Eleventh Circuit considered this issue and also concluded that emotional distress damages are not available for a breach of contract claim under Florida law. The consumers alleged no independent tort arising from the breach. The court rejected the consumers’ argument that because emotional distress damages are recoverable for Florida Collections Act violations, it cannot reasonably be denied that emotional distress is a foreseeable consequence of the breach of a contract specifically intended to resolve prior violations of the statute.

Also, the court concluded that the 2013 settlement in which the servicer agreed to pay the consumers $125,000 presumably included compensation for past violation of the law and for any additional emotional distress that the consumers may have suffered as a result of post-settlement violations in the present action. However, the court found that the breach of contract claim should go forward because the consumers adequately pleaded damages by alleging that the breach caused them to pay additional costs when financing vehicles. The financing decision occurred one month after the settlement which was prior to the 90 day deadline, but there is a fact question on whether the servicer could have "reasonably" issued a corrected report to the credit agencies within one month.

The case number is No. 17-10584.

Attorneys: Donna Greenspan Solomon (Solomon Law Office) for Johnnie Teresa Marchisio. Christopher Patrick Hahn (Maurice Wutscher, LLP) for Carrington Mortgage Services, LLC.

Companies: Carrington Mortgage Services, LLC

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