The background to the Eleventh Circuit’s decision in Marchisio v. Carrington Mortgage Services, LLC, — F. 3d — (11th Cir. March 25, 2019)(2019 WL 1320522) demonstrated repeated recklessness by a lender in updating its reporting databases after repeated litigation and settlements.

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The borrowers defaulted on their home loans in 2008; the loan servicer brought a foreclosure action; in 2009, the parties settled with a deed in lieu of foreclosure that extinguished first and second loans and required the loan servicer to report to the credit reporting agencies that nothing more was due on the loans. The loan servicer failed to correct the credit reporting and continued to try to collect on the nonexistent debt, prompting the borrowers/Plaintiffs in 2012 to file a lawsuit under the Fair Credit Reporting Act. The parties settled the FCRA suit in 2013, with the loan servicer/Defendant agreeing to correct the credit reporting. The loan servicer failed to timely comply with this correction requirement within 90 days and issued three erroneous reports that the second loan was delinquent.

The Plaintiffs then disputed with the credit reporting agencies the reporting of a balloon payment due on the second loan. In response, the loan servicer investigated the dispute. However, because the loan servicer had not updated its database to reflect the settlements, it erroneously verified to the credit reporting agencies that the Plaintiffs were delinquent, and then in 2014 charged them for lender-placed insurance on the property, which the Plaintiffs no longer owned. This led in 2014 to the second lawsuit with the FCRA claim that the 11th Circuit addressed. This lawsuit “caught Defendant’s attention” and immediately prompted it to update its database, correct its previous errors and accurately report the status of Plaintiffs’ second loan, finally.

Plaintiffs claimed that because of these reporting mistakes, they paid higher interest on loans to purchase used cars and suffered emotional distress. The district court granted Plaintiffs summary judgment on this FCRA claim, finding the Defendant’s conduct was willful under 15 U.S.C. § 1681n(a), given all the litigation regarding whether Plaintiffs owed anything more on the second loan. However, the court denied Plaintiffs’ request for emotional distress and punitive damages. Cross-appeals followed.

The Court of Appeals affirmed the finding of a willful violation of FCRA. It dismissed Defendant’s contention that the error was the mistake of a single employee. Instead, it laid the blame on Defendant for its failure “to create a reliable system for inputting information regarding the settlement of litigation that might impact the data found on the relevant databases” used to verify the status of loan obligations. Given this failure, “it was quite foreseeable that any investigation of the disputed information here would yield an incorrect conclusion by the employee-investigator.”

The Court of Appeals reversed the grant of summary judgment to Defendant on the claim of emotional distress. In its summary judgment motion, Defendant had argued, in a self-incriminating manner, that Plaintiffs had already experienced substantial stress because of Defendant’s actions prior to the erroneous re-verification of the non-existent debt. The Court of Appeals ruled that a finder of fact could conclude that Defendant’s FCRA violation caused Plaintiffs additional emotional distress, based on Plaintiffs testimony.

The Court of Appeals also reversed the grant of summary judgment to Defendant on the claim for punitive damages, because 15 U.S.C. § 1681n(a)(2) provides for “such punitive damages as the court may allow” for “willful” FCRA violations, and “willful” violations include reckless conduct, which the district court had correctly found in the underlying FCRA violation.

The lesson learned: loan servicers must have in place a system to update their reporting databases with information to reflect the terms of settlement agreements that affect borrowers’ loan obligations. Every attorney representing a loan servicer in a settlement should ask her client whether the client has such a system and remind her client to update its reporting databases, plus the borrower should always work with a trusted bank.