Kate Berry reported in American Banker and SourceMedia’s National Mortgage News on how a $616 servicing error snowballed into a $16 million jury verdict. It was reported that a jury last month awarded $514,000 in compensatory damages and $15.7 million in punitive damages to a California homeowner, who waged a multi-year battle to block a foreclosure by the private-label mortgage servicer PHH Corp. As Berry noted, the verdict “is among the largest ever awarded in a mortgage case and $6 million more than PHH’s mortgage servicing business earned in the second quarter.”
While the details of the case are complicated, the source of the dispute between the homeowner and the servicer traces back to a mere $616 shortfall in an escrow account, and an administrative failure by PHH to admit and correct its error in failing to apply $34 a month that the homeowner had already been charged in his monthly payments to that escrow account. This seemingly minor error by PHH apparently resulted in the homeowner’s loan modification being botched in spectacular fashion. Among other errors, following the loan modification, PHH began sending letters to the homeowner demanding a different amount each month for his mortgage payment, and claiming that the homeowner was deficient in varying amounts month to month. Despite efforts by the homeowner to resolve the issue, PHH failed to resolve it. It was later discovered that the $616 shortfall in the homeowner’s escrow account caused the company’s computer systems to automatically generate the letters with the varying payment and deficiency amounts.
Eventually the homeowner stopped making monthly mortgage payments and PHH initiated foreclosure proceedings. The homeowner filed suit to block the foreclosure and his attorneys ultimately pieced together what had happened. Nonetheless, the parties were unable to settle the dispute, which resulted in the large damages award.
While PHH is appealing the jury award, claiming that it is “grossly disproportionate to any alleged damages.” However, even though it is likely that the award will get reduced somewhat at the appellate stage, the lesson here for mortgage loan servicers is clear: put systems in place to avoid errors in the loan origination and loan modification process, take quick action to address and correct any errors that may occur - no matter how small, and be respectful of and responsive to homeowners – particularly those that have fallen behind in their mortgage payments.
Ultimately, the high punitive damages award likely reflects disgust by the jury with how PHH handled the entire situation. Therefore, to avoid a similar fate, it is critical that mortgage loan servicers be able to show a jury that they have been responsive, responsible and acted in good faith in their dealings with a homeowner. Indeed, mortgage loan servicers that fail to heed this advice could find themselves on the receiving end of a threatened crackdown by the Consumer Financial Protection Bureau.