The Daughterys purchased their home in 1999, with a 15-year balloon note payable in July 2014 in the amount of $82,666.36. In 2012, the Daughterys had fallen $6,128.39 behind on the regular payments and Ocwen, who had become the mortgage servicer after the first default by the Daughterys, commenced foreclosure, reporting accurately the delinquency and foreclosure proceeding. Using retirement savings, the Daughters brought the mortgage current within one month with the foreclosure be discontinued.
During this period, Ocwen had discovered that its predecessor had inaccurately reported the origination date of the note and submitted information to correct this error. Equifax mistook this for a separate account, creating a new, duplicate trade line for Mr. Daughtery. After curing the default, Ocwen notified Equifax of the current status of the note, but only one of these trade lines was updated.
In March 2013, more than a year in advance of the balloon, the Daughters began preparing to refinance their home and discovered this error. Mr. Daughtery wrote to Ocwen to request this be corrected, including a copy of the credit report, to which Ocwen responded that the trade line was accurate as of March 2012. Mr. Daughtery then hired Aggressive Credit Repair, which sent numerous more dispute letters to Equifax, which were then sent to Ocwen. Some of these disputes included a 001 Code, relating to a dispute regarding ownership of the account, and others included the 007 Code, which disputes the current or previous account status and/or the payment history or rating. Ocwen continued to report numerous trade lines as incorrect and Mr. Daughtery brought suit againdt Ocwen and Equifax (which settled prior to trial) for violation of the Fair Credit Reporting Act. At trial, the jury found that Ocwen willfully violated FCRA and awarded $6,200 in compensatory and $2.5 million in punitive damages.
Ocwen appealed raising three evidentiary issues- First, Ocwen argued that the district court erred in allow admission of documents provided by Equifax to Mr. Daughtery, since those had not been disclosed as required by Rule 26(a)(3). The Court of Appeals agreed with the district court that such late disclosure was harmless and Ocwen had possession of those documents (and had, in fact, used them in a deposition).
Secondly, Ocwen argued that the admission of expert testimony from Evan Hendricks was both impermissibly vague and addressed legal standards. This was rejected as Ocwen had been provided adequate notice for the basis of his expert opinion. While expert witnesses are generally not permitted to “state a legal standard or draw a legal conclusion.” United States v. Offill, 666 F.3d 168, 175 (4th Cir. 2011) (quoting United States v. McIver, 470 F.3d 550, 562 (4th Cir. 2006)), “reasonableness” is a subject that experts routinely address.
Thirdly, Ocwen objected to the exclusion of the letters from Aggressive Credit Repair to Equifax, but this was also rejected as the issue in the case was the reasonableness of Ocwen’s investigations and it was completely unaware of these letters.
Beyond the unsuccessful evidentiary appeals, Ocwen also argued that there was no basis as a matter of law to find that it had willfully violated the FCRA. The Court of Appeals held that the jury could have, in light of the 007 Codes, concluded that Ocwen had behaved recklessly in only reviewing ownership of the account and not investigating more fully the account status, payment history, etc. Further, since Ocwen processed each dispute independently, without consulting prior correspondence with the Daughterys, Equifax and the CFPB, assigning different investigators over a 17-month period.
Ocwen then challenge the admission of its corporate consolidated balance sheets in the punitive damage phase of the trial to prove Ocwen’s net worth. This argument was rejected, as at its corporate representative, whom Mr. Daughtery had initially attempted to recall as a witness regarding this question, had left the state, despite not having been released by the trial court.
Lastly, Ocwen challenged the award of $2.5 million under the Due Process Clause as being disproportionate to the conduct or magnitude of harm. Following State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408, 416–17 (2003), courts are to use three “guideposts” when reviewing punitive damages awards for compliance with the Due Process Clause:
1. the degree of reprehensibility of the defendant’s misconduct, based on:
a. the harm caused was physical as opposed to economic;
b. the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others;
c. the target of the conduct had financial vulnerability;
d. the conduct involved repeated actions or was an isolated incident; and e. the harm was the result of intentional malice, trickery, or deceit, or mere accident;
2. the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and
3. the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.
As to reprehensibility, factors related to physical injury would not necessarily be present in FCRA cases and such absence was not preclusive. See Saunders v. Branch Banking & Trust Co., 526 F.3d 142 (4th Cir. 2008), but the risk of losing their home to foreclosure due to the repeated actions and failures by Ocwen was more than sufficient for a jury to find reprehensible.
While the second guidepost, while a susceptible to analysis with simple mathematical ratio, “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” See State Farm, 538 U.S. at 424–25. And while the degree of reprehensibility can justify a higher ratio, here the lack of an financial benefit to Ocwen related to these errors established that the $2.5 million damages were unconstitutionally excessive.
Accordingly, recognizing the “practical value” of an appellate court setting an upper limit for punitive damages, the Court of Appeals held that Mr. Daughtery was entitled to either a new trial as to damages or $600,000.
To be clear: Ocwen has been found to be reprehensible.
Mortgage servicers need to realize that it is not just in the loan modification process (where they still continue to fail, despite numerous national consent judgments and state and federal regulations) that mortgage accounts should be handled by a continuous point of contact, familiar with that account. This is obviously more expensive, but why does anyone believe that being a mortgage servicer should be a wildly profitable industry.
For a Blog and Summary of the Trial from Mr. Daughtery’s attorney:
Did Ocwen Do Anything Wrong? Trying Cases Against Credit Furnishers
For a copy of the opinion, please see: