How a $600 Servicing Error Snowballed into a $16M Jury Verdict

"Banks and servicers are recognizing that homeowners need to be taken seriously," says plaintiff's attorney Stephen Foondos.

Here is a cautionary tale of how a seemingly minor error can end up costing a financial services company big if left unaddressed.

A jury last month awarded $16.2 million in damages to a California homeowner who waged a three-year battle to block a foreclosure by the private-label mortgage servicer PHH Corp. 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.

And, according to the plaintiff's attorneys, it all started with a $616 shortfall in an escrow account.

PHH is appealing the judgment, which may eventually be reduced. But the case encapsulates many of the problems that have plagued the mortgage servicing industry in recent years -systems errors, confusing and contradictory information sent to borrowers and apparent indifference to their situations.

"There was a lack of communication, a lack of policies and procedures within the company to show the left hand didn't know what the right hand was doing," said Andre Chernay, one of the plaintiff's attorneys.

Mortgage servicers have been under public and regulatory scrutiny in the years since the housing bust. The plaintiff's bar has been aggressive in trying to stave off foreclosure for some borrowers, often in the hopes of getting principal reductions and other loan modifications.

The large judgment against PHH comes amid concerns about a crackdown by the Consumer Financial Protection Bureau. The CFPB has vowed to punish servicers that fail to adapt to new rules requiring better communication with borrowers who have fallen behind on their mortgage payments.

The agency's new rules require that servicers follow certain procedures when a borrower asserts there has been an error on an account. Servicers also are required to send borrowers statements explaining the allocation of their mortgage payment that goes to principal, interest, taxes and insurance, some of which are held in escrow accounts.

PHH, of Mount Laurel, N.J., said in a statement that the Yuba County Superior Court verdict "is not supported by the facts presented in the case against PHH or by applicable law."

The jury award of $514,000 in compensatory damages and $15.7 million in punitive damages "is grossly disproportionate to any alleged damages," said the company, which would not discuss the matter further.

Punitive damages are intended to send a message that a company needs to reform the practices that led to such a lawsuit. Such damages are considered excessive if they are 10 times the amount of compensatory damages, which is why the judgment against PHH could be reduced on appeal.

Industry members, when asked about the case, complained about the plaintiff's bar, the CFPB's clampdown on servicers and the difficulty that companies handling millions of loans generally face in providing good customer service.

Others note that borrowers typically only have negative responses to their mortgage servicer, because their only interaction is when the servicer makes a mistake.

"It's rare that borrowers have a real relationship with their mortgage servicer," said Rudy Orman, a senior vice president and director of marketing and business development at Residential Credit Solutions, in Fort Worth, Texas.

PHH is in the process of improving the profitability of its private-label mortgage business, which originates and services loans on behalf of small banks and some large financial firms including Morgan Stanley and HSBC Holdings.

The company reported a second-quarter loss of $59 million, or $1.02 a share in the second quarter, on revenues of $196 million. Those results include PHH's fleet management business, which was sold on July 1.

PHH could have avoided the eight-figure judgment had it admitted it made an error and apologized, said Chernay, an attorney at United Law Center in Roseville, Calif. He and Jon Oldenburg represented homeowner Phillip Linza, a salesman from Plumas Lakes, Calif., about 30 miles north of Sacramento.

After Linza got a loan modification in 2011, PHH began sending letters demanding a different amount each month for his mortgage payment, Chernay said. "We asked PHH at trial why they simply didn't send a three-line letter saying what the borrower's mortgage payment would be going forward," he said. "Their response was they weren't required to."

It was later learned that the $616 shortfall in Linza's escrow account caused the company's computer systems to automatically generate the letters demanding different amounts each month that he owed on his mortgage, Chernay said.

Linza's attorneys claim the jury was swayed to award huge damages, in part, because PHH refused to produce certain documents and also because the company never sent Linza a letter clarifying the correct amount of his mortgage payment and overriding the ones that contradicted each other.

"PHH wouldn't own their own mistake and find a reasonable solution, which was to do the decent act of writing a letter to clarify everything," said Oldenburg.

"It's a pretty consistent theme that servicers in this context very rarely admit that they've done anything wrong," he said. "You don't see many servicers own up to their part in the process. They think that because the borrower went into default, they don't have any legal claims."

After the loan modification reduced his monthly mortgage bill to $1,543 from $2,100, Linza made three consecutive payments, Chernay said. Then, in April 2011, Linza got a letter saying his monthly payments were short by $809 a month and the real payment was actually $2,352. The letter never explained why the payment had suddenly increased, Chernay said.

Linza, who bought his home in 2006 for roughly $280,000, knew something was wrong when he got yet another letter demanding that he pay $7,056. Despite repeated attempts to find out what the problem was, PHH would not resolve it, Chernay said.

Letters from PHH kept coming over the next few months, each one stating a different amount that Linza owed on his mortgage. By then, PHH had stopped applying any of Linza's monthly mortgage payments to his principal balance. The company continued to claim he had a deficiency, which Linza had always claimed was incorrect.

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Comments (4)
I'm still fascinated people don't challenge third party interlopers, such as "servicers" for complete chain of title and chain of servicing validation and authentication. NOBODY "owes" anything to any Servicer - it's a Consumer Credit transaction - and in refi's the Debtor and Creditor of the entire financial transaction is reversed. Possession is still 9/10 of the Law. Mortgage Banking (especially secondary marketing) is ALL predicated on fraud from the lack of notice of the collateralization of the 1003 for a CUSIP. People SHOULD be Demanding a RETURN of their DEPOSITS (the Note). Once the authorized signor handed the Note to the Lender - the Lender was obligated under the TERMS - to hand over "money" - how many SEE - yet? ...ugh ...so depressing.
Posted by JANE DOE S | Saturday, August 16 2014 at 6:57PM ET
Most Mortgage Servicers do a great job and have efficient customer service teams and servicing managers that adhere to customer friendly policies and procedures. Grant it, there has been a lot of confusion in the industry since the housing crisis, overwhelming demand on servicers to help customers and poorly trained CSR's to assist with the needs of the customers lending to a great deal customer frustration and encouraging a feeling of of dislike and lack of trust on the servicing lenders. The PHH example above is horrible and they should be forced into improving there business practices and customer communication practices or they should be forced out. Companies need to have procedures in place that actually assist their customers and they need well trained employees with authority to make customer related decisions.
Posted by Karen P | Friday, August 15 2014 at 11:08PM ET
Well Fargo pulled a similar stunt with me in 2007, made an error in escrow, increased mortgage payment 30% on a prime mortgage, then told me a modification was the best solution. It was a fiasco, servicers have had this coming for a long time.
Posted by DepthON | Friday, August 15 2014 at 2:48PM ET
Glad to see it...these Mortgage Services like this one and Nationstar need to be slapped big time for the illegal acts and games they play with mortgage modification. I was offered a "alt mod" that would have me pay $450,000 EXCLUDING the 12 yrs of payments already made...over forty years for a sinkhole home worth $60K that will never appreciate in value.
Posted by allen g | Thursday, August 14 2014 at 4:40PM ET
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