The United States Court of Appeals for the Fourth Circuit—which covers federal courts in North Carolina—recently affirmed a borrower’s victory against a loan servicer under the federal Fair Credit Reporting Act (“FCRA”).  In Daugherty v. Ocwen Loan Servicing, LLC, David Daugherty alleged that Ocwen Loan Servicing, LLC (“Ocwen”) failed to investigate and to correct certain erroneous information on his credit report as required under the FCRA.  A jury found that Ocwen willfully had failed to perform a reasonable investigation regarding the true status of Daugherty’s account and awarded Daugherty $6,128.39 in compensatory damages and $2.5 million in punitive damages. 

The Fourth Circuit affirmed the jury’s findings and compensatory damage award, but reversed the punitive damage award for being unconstitutionally excessive.  This was not a victory for Ocwen, however, because the Fourth Circuit remanded the case to the district court to provide Daugherty the option of accepting a punitive damages award of $600,000 or proceeding to a new trial on punitive damages.  A problem that could have been resolved with modest effort by Ocwen now will cost them over half a million dollars. 

The facts of the underlying case are basic.  In 1999, the Daughertys financed a home purchase with a 15-year balloon note payable in July 2014.  In 2012, the Daughertys were $6,128.39 behind on the regular payments and Ocwen, who had become the mortgage servicer, commenced foreclosure, reporting accurately to certain consumer reporting agencies the delinquency and foreclosure proceeding.  Using retirement savings, the Daughertys brought the mortgage current and Ocwen stopped the foreclosure. 

During this time, Ocwen discovered that its predecessor had inaccurately reported the origination date of the note and submitted information to correct this error.  Equifax misinterpreted this as a separate account and created a new, duplicate trade line for Daugherty.  After curing the default, Ocwen notified Equifax of the current status of the note, but Equifax updated only one of the trade lines.  So Daugherty had only one account with Ocwen, but two account trade lines with Equifax, one of which continued to show that the account was in foreclosure.

In March 2013, the Daughertys began preparing to refinance their home and discovered the credit report error.  Daugherty requested a correction by Ocwen, but Ocwen responded that the trade line was accurate as of March 2012.  Daugherty then hired Aggressive Credit Repair, which sent numerous dispute letters to Equifax, which were then sent to Ocwen. 

Some disputes included a “001” code, meaning a dispute regarding ownership of the account.  Other disputes included a “007” code, which disputes the current or previous account status or the payment history or rating.  Ocwen continued to report the duplicate trade line as delinquent and in foreclosure, so Daugherty sued Ocwen and Equifax.  Equifax settled before trial.  Ocwen did not, but now probably wishes it had.

The FCRA requires a lender or servicer to conduct a reasonable investigation into disputed credit report information on each dispute verification request and to conduct a careful inquiry into its own records to resolve the dispute.  In affirming the jury’s finding that Ocwen willfully violated the FCRA, the Fourth Circuit held that the jury could have concluded that Ocwen had behaved recklessly in only reviewing ownership of the account (an “001” code dispute) and not investigating more fully the account status and payment history (an “007” code dispute).

The Fourth Circuit pointed to these factors to support the jury’s findings:  First, Ocwen possessed the information in its own records to correct the erroneous data identified by Equifax as disputed in its “007” verification requests.  Ocwen could have discovered the duplicate trade line mistake through a competent internal investigation.  Second, Ocwen was reckless in processing each dispute verification request independently, without consulting the context of prior correspondence from Daugherty, the Consumer Financial Protection Bureau, or Equifax regarding the same account.  Ocwen assigned each dispute verification request to a different investigator, with no regard for the other dispute verification requests and investigations.  Over a 17-month period, Ocwen received 23 dispute verification requests concerning Daugherty’s account, eight of which contained “007” codes, and four of which contained “007” codes regarding erroneously reported information.  Ocwen never grasped the big picture, treating each dispute in isolation.  Finally, Ocwen lacked a procedure to correct erroneous reports that an account is currently past due or in foreclosure, when that account had been past due or in foreclosure but had been reinstated.

As to punitive damages, the Fourth Circuit handed Ocwen a small victory.  Punitive damages exact retribution against a wrongdoer and deter future misconduct.  In reviewing punitive damages awards, the Fourth Circuit considers these factors: 

1. The degree of reprehensibility of the defendant’s misconduct, based on physical or economic harm, indifference to or a reckless disregard of the health or safety of others, financial vulnerability of the victim, repeated versus isolated actions, and accidental conduct or intentional malice, trickery, or deceit;

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.

The Fourth Circuit held that Ocwen’s repeated actions and failures were reprehensible because of the risk to the Daughertys of losing their home to foreclosure. 

Discussing the second factor, the disparity between the harm and the punitive damages award, the Fourth Circuit held that generally few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy the due process requirement.  But under the FCRA, where the compensable harm often is small, the ratio can be much greater.  The lack of any financial benefit to Ocwen related to its errors established that the $2.5 million award was unconstitutionally excessive and disproportionate to the compensatory damages award of just over $6,000.  In setting the maximum punitive damage award on the evidence from the first trial, the Fourth Circuit applied an approximate 100 times multiplier to the compensatory damage award to set the punitive damage award at $600,000. 

This case should remind lenders that the FCRA’s obligations (and penalties) are real, and they give them short shrift at their peril.  If a customer continues to dispute a reporting error, you should not dismiss the report without understanding the issue in dispute and conducting a proper investigation.  From a practical standpoint, lenders should use a single point of contact to handle account disputes.  If that is impossible, it is critical that employees resolving disputes have access to account history and real-time information about contemporaneous disputes.