Insights

After a lender enters into a deed-in-lieu of foreclosure agreement or other settlement agreement with a borrower, the lender may believe that its relationship with the borrower is over. But what if the servicer keeps trying to collect mortgage payments from the borrower? In a recent case, a lender was held liable to the borrower for the servicer’s failure to comply with a settlement agreement. Here’s what happened.

Sarah Yarney sued Wells Fargo Bank, N.A., the mortgage holder, and others alleging predatory lending after she defaulted on her mortgage. Ocwen Loan Servicing, LLC was the servicer on Yarney’s mortgage. Yarney and Wells Fargo entered into a settlement agreement that (1) eliminated Yarney’s interest in the property and liability for the mortgage debt by a deed in lieu of foreclosure; (2) required Ocwen to remove all credit reporting on the mortgage from the date of Yarney’s lawsuit and discontinue credit reporting; and (3) required Yarney to dismiss the lawsuit with prejudice. After Yarney executed the deed-in-lieu and dismissed her lawsuit, Wells Fargo informed Ocwen of the settlement in April 2011.

Even though Ocwen noted in its file that credit reporting should be discontinued on Yarney’s account in April 2011, Ocwen continued to report the mortgage as delinquent until April 2012. Ocwen also sent Yarney monthly bills from April 2011 to February 2012 and periodically called her requesting payment even though Yarney’s mortgage debt had been extinguished by the settlement. Ocwen even sent Yarney a notice of Intent to Force Place Insurance in September 2011, and then a bill dated October 29, 2011 for the cost of the forced placement of insurance for the 718 West Street property in Charlottesville, even though Yarney no longer owned the property or lived there. During that time, Yarney’s attorney contacted Wells Fargo’s attorney on several occasions and requested that the collection efforts cease. Wells Fargo’s attorney responded that he had contacted Ocwen and told it to stop collection efforts. In an August 2011 email exchange with Yarney’s attorney, Wells Fargo’s atttorney replied that, with regard to Ocwen’s continued attempt to collect from Yarney, “We have once again reminded Ocwen to cease its billing of Mrs. Yarney.” Yarney’s attorney also contacted Ocwen to advise Ocwen that Yarney was represented by an attorney and that Ocwen should not contact Yarney. However, Ocwen’s collection actions did not cease.

Due to Ocwen’s actions after the settlement, Yarney sued Ocwen alleging violation of Sections 1692e(2)(A) and 1692c(a)(2) of the Fair Debt Collection Practices Act. Ocwen argued that it did not violate the FDCPA because there was no debt and Yarney was not deceived because she knew there was no debt and was represented by counsel. Yarney also sued Wells Fargo for breach of contract because its agent, Ocwen, did not honor the settlement agreement. Wells Fargo argued that it was not liable after it notified Ocwen to discontinue Yarney’s credit reporting information because Ocwen’s subsequent activities were outside of the agreement. Yarney moved for summary judgment on all of her claims.

The U.S. District Court for the Western District of Virginia granted Yarney’s motion for summary judgment against both Ocwen and Wells Fargo. The court found that Ocwen violated FDCPA Section 1692e(2)(A) by sending monthly bills after the mortgage was extinguished by the settlement agreement because the least sophisticated consumer could believe that he still owed the debt. The court also found that Ocwen violated FDCPA Section 1692c(a)(2) by sending Yarney monthly bills and calling her after Ocwen was advised that Yarney was represented by counsel. Finally, the trial court found that Wells Fargo breached the settlement agreement due to the actions of Ocwen. The court noted that Ocwen was acting as Wells Fargo’s agent when it attempted to collect the debt and failed to remove and discontinue credit reporting in connection with the mortgage debt, which was a violation of the agreement. To find otherwise would render the material terms of the agreement irrelevant.

Based on this case, a mortgage holder’s responsibility for ensuring that a servicer has complied with a deed-in-lieu or settlement agreement extinguishing a mortgage debt may not end until the servicer actually stops collection efforts. A lender should implement measures to verify that a servicer has ceased collection activity after an agreement extinguishing the mortgage debt has been entered into to avoid liability.

Yarney v. Ocwen Loan Servicing, LLC, 2013 U.S. Dist. LEXIS 32802 (W.D. Va. March 8, 2013)

Shawnielle D. Predeoux is an associate of Hudson Cook, LLP, in the firm’s Hanover, Maryland office. Shawnielle can be reached at 410-865-5425 or by email at spredeoux@hudco.com.