Eleventh Circuit hands servicer big loss in FCRA case

On March 25, 2019 the Eleventh Circuit in Marchisio v. Carrington Mortgage Services, LLC, 919 F.3d 1288 (11th Cir. 2019) affirmed a ruling that a servicer failed to conduct a reasonable investigation of the Plaintiffs’ challenge of its report that they owed a balloon payment on their second mortgage loan, which had been extinguished as part of a prior settlement and that the servicer had acted willfully and in reckless disregard of its obligations under FCRA by force placing insurance on property they no longer owned. Adding to the servicer’s pain, the appellate court also reversed the district court’s entry of summary judgment on the plaintiff’s emotional distress, actual damage, and punitive damage claims. It also reversed the finding that the servicer’s errors were bona fide under Florida’s debt collection law.

As part of the parties’ settlement of a foreclosure suit brought by the servicer, the borrowers turned over the property which mooted the foreclosure and extinguished the debt on two loans. But the servicer failed to report correctly the status of the loans, and it continued trying to collect on the nonexistent debt, prompting the plaintiffs to file their first federal action alleging violations of FCRA. That case was settled by paying the plaintiff $125,000 and required the servicer to timely correct its reporting of the second loan.

The servicer failed to report the second loan as having a zero balance; instead it issued three reports that continued to inaccurately report the existence of a delinquent debt. It also incorrectly reported that Plaintiffs still owed a balloon payment on the second loan. Plaintiffs disputed with credit reporting agencies. The servicer purportedly investigated the dispute. Yet, notwithstanding their extensive litigation history with Plaintiffs, including two previous settlement agreements acknowledging that Plaintiffs owed nothing on the second loan, the servicer incorrectly confirmed to the reporting agencies that Plaintiffs had a balloon payment pending. Defendant also began charging Plaintiffs for lender-placed insurance on the property that Plaintiffs had turned over years earlier and no longer owned.

The district court granted summary judgment for the plaintiffs on some claims, but for the servicer on others. The appellate court affirmed the finding that the servicer failed to conduct a reasonable investigation and that its conduct was willful. “No other conclusion can be drawn given the number of times that [the servicer] was put on notice of the false information being reported, yet, each time failed to take steps to insure that its records accurately reflected the absence of any debt by Plaintiffs.”

But the Court reversed the district court’s finding that Plaintiffs failed to prove damages for emotional distress as they testified they experienced “added stress” from the verification errors. It also reversed the finding that punitive damages were not recoverable because, one, the district court disposed of the issue without hearing from either party and, two, the Plaintiffs did not need to prove a willful violation; reckless conduct counts as willful for the purpose of imposing punitive damages.

The Court also reversed the finding that the servicer had proven its bona fide error defense to defeat liability under the Florida debt collection statute. It rejected the servicer’s argument that the error, sending lender-placed insurance on property the Plaintiffs no longer owned, was excusable because there existed a question of fact as to whether the procedures to guard against the dissemination of insurance-billing letters for properties secured by second loans were reasonably adapted for that purpose.

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