Chapter 7

Complaint Against Mortgage Servicer for Responding to Billing Errors with Foreclosure

Dale Pittman maintains a consumer protection litigation practice based in Petersburg, Virginia. In addition to an emphasis on representing consumer debtors under the Fair Debt Collections Practices Act, he represents consumers in credit reporting abuse, predatory lending, automobile fraud, mobile home fraud, and home improvement fraud matters. Opinions from some of his FDCPA cases appear at Creighton v. Emporia Credit Service, Inc., 981 F. Supp. 411 (E.D. Va. 1997); Withers v. Eveland, 988 F. Supp. 942 (E.D. Va. 1997); Morgan v. Credit Adjustment Board, 999 F. Supp. 803 (E.D.Va. 1998); and Talbott v. GC Services Limited Partnership, 53 F. Supp. 2d 846 (W.D. Va. 1999). Courts in North Carolina and Virginia have certified class actions against collection agencies in cases in which Mr. Pittman represented classes of consumers, including Woodard v. Online Information Servs., 191 F.R.D. 502 (E.D.N.C., Jan. 19, 2000); and Talbott v. GC Services Limited Partnership, 191 F.R.D. 99 (W.D. Va. 2000). This chapter contains a complaint against a mortgage servicing company for failing to respond the qualified written requests pointing out its repeated billing errors. The Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. 2605(e)(2) requires a mortgagors and their servicers to investigate and respond to qualified written requests for correction of errors.1 The mortgage servicing company erroneously demanded the homeowners maintain homeowners insurance on their second home when the mortgage was on the first home. The homeowners pointed out the mistake and provided proof of insurance on the mortgaged home. Rather than correcting the error the mortgage servicing company forced placed insurance on the second home which was the billing address but not collateral for the mortgage and added over $1000 each year for two years for forced placed insurance to the mortgage account. The homeowners repeatedly wrote protesting the error as did several attorneys on their behalf, to little avail. The complaint also alleges that the reporting of their account as delinquent was defamatory, that asserting erroneous charges on the account was a conversion, and that the servicer negligently serviced the loan in breach of its duty to maintain accurate records. A related memorandum in support of partial summary judgment on the RESPA claim can be found in 11 Consumer Law Pleadings on CD-Rom Ch. 12 (2005).

National Consumer Law Center, Repossessions and Foreclosures 19.2 (5th ed. 2002 and Supp.).

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF VIRGINIA RICHMOND DIVISION [CONSUMER 1], and [CONSUMER 2], Plaintiffs, v. GRACE BROOKLYN MORTGAGE CORPORATION, and JOHN ABRAHAM BLACK, TRUSTEE, Defendants. Civil Action No.

COMPLAINT AND DEMAND FOR JURY TRIAL INTRODUCTION 1. This Complaint is filed and these proceedings instituted against Grace Brooklyn Mortgage Corporation (Grace), under the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. 2601 et. seq., to recover actual, statutory, and punitive damages, court costs, and attorneys fees by reason of Graces violations of 12 U.S.C. 2605 and Regulation X, 24 C.F.R. 3500.1 et. seq. Plaintiffs also seek declaratory relief pursuant to 28 U.S.C. 2201 and 2202 and Rule 57 of the Federal Rules of Civil Procedure, and appropriate injunctive relief pursuant to Rule 65 of the Federal Rules of Civil Procedure in order to prevent irreparable harm. Through its own bungled recordkeeping, Grace falsely and mistakenly put the Plaintiffs mortgage loan into a delinquency and foreclosure status despite the fact that the Plaintiffs paid faithfully on their loan. Grace ignored the Plaintiffs repeated attempts to explain and document to Grace that Grace had made a huge error and that it had no basis whatsoever to put the Plaintiffs loan into a delinquency and foreclosure status. Grace failed to respond properly to qualified written requests by and on behalf of the Plaintiffs, and Grace failed to take corrective action with respect to the servicing of the Plaintiffs mortgage loan. This action also is predicated upon Graces defamation, its conversion of the Plaintiffs loan payments, and its negligence. JURISDICTION 2. This Court has jurisdiction over this action pursuant to 12 U.S.C. 2614) and 28 U.S.C. 1331, and has supplemental jurisdiction of the state law claims regarding the same transaction and events under 28 U.S.C. 1367(a).

PARTIES 3. Plaintiffs [Consumer 1] and [Consumer 2 ] are natural persons who reside in Kingsport, Tennessee. 4. Defendant Grace Manhattan Mortgage Corporation is a foreign corporation doing business in the State of Virginia. Grace makes and services numerous loans which are "federally related mortgage loans" as defined in 12 U.S.C. 2602, in that they are secured by a lien on residential real property designed principally for the occupancy of from one to four families, and in that they are made by "creditors" which make or invest in residential real estate loans aggregating more than $1,000,000 per year. The Blows loan is one such loan. 5. John Abraham Black (the Substitute Trustee) is the lawyer who Grace engaged to serve as Substitute Trustee and to foreclose on the subject loan. Mr. Black is a necessary party who is sued only by virtue of his capacity as Substitute Trustee. FACTS 6. On May 31, 1996, Mr. and Mrs. Blow closed on a residential real estate loan (the subject loan) on their home in Haysi, Virginia. Copies of the Note, Truth in Lending disclosures, and Deed of Trust are attached as Exhibits A, B, and C, respectively. 7. The lender under the Note and the Beneficiary under the Deed of Trust was Chemical Bank, N.A., whose address was C/O Grace Financial Corporation, 250 West Huron, Cleveland, Ohio 44113-1451. 8. Monthly payments under the Note were to be made at C/O Grace Financial Management Corporation, P.O. Box 91958, Cleveland, Ohio 44101. See Exhibit A, 4.(A). 9. The first payment was due on June 30, 1996, and Mr. and Mrs. Blow began faithfully making payments to Grace on their home loan. 10. Thereafter, The Blows moved to Kingsport, Tennessee, and they notified Grace of a change in their billing address, by changing the address on the March, 1999 billing statement that they received from Grace and returning it with their March payment. 11. The Blows property address in Haysi is: Prater Creek, P.O. Box 57, Haysi, Virginia 24256 (the Haysi property). 12. The Colemans address in Kingsport is: 504 New Beason Well Road, Kingsport, Tennessee 37660-2732 (the Kingsport property). 13. When Mr. and Mrs. Blow moved to Kingsport, they kept their property in Haysi, and they continued making their loan payments to Grace. 14. When Mr. and Mrs. Blow moved to Kingsport, they financed their purGrace of a home in Kingsport through another lender, Bank of America. Grace had nothing whatsoever to do with the loan on The Blows home in Kingsport. The Kingsport property was not subject to a loan with Grace, and it was not subject to Graces Deed of Trust on [Consumer 1 and Consumer 2]s property in Haysi. 15. Thereafter, Grace sent Mr. Coleman a letter dated April 13, 1999, notifying Mr. Coleman that Grace, In a continuing effort to provide a superior level of service, was transferring the servicing on his loan to Graces Columbus, Ohio Servicing Center, effective April 23, 1999. A true copy of Graces letter is attached, marked Exhibit D.

16. The letter also stated that one change resulting from the transfer of servicing was that the old loan number on the loan, 8400186311, was being changed, and that the new loan number would be 091584967. 17. At some point in time, Grace changed its records so as to show that it had a loan with [Consumer 1 and Consumer 2] on the Kingsport property, which, of course, was not true, but was rather the result of a loan serving recordkeeping error on the part of Grace. 18. As a result of the error, Grace demanded that [Consumer 1 and Consumer 2] provide Grace with proof of insurance on the Kingsport property, claiming to [Consumer 1 and Consumer 2] that Grace was their lender for the Kingsport property. 19. [Consumer 1 and Consumer 2] told Grace that Grace had a copy of [Consumer 1 and Consumer 2]s policy of insurance on the Haysi property and that Grace did not have a loan on the Kingsport property. [Consumer 1 and Consumer 2] sent Grace a copy of [Consumer 1 and Consumer 2]s policy of insurance on the Haysi property. A copy of [Consumer 1 and Consumer 2]s insurance policy on the Haysi property for the policy period April 22, 1999, to April 22, 2000, is attached as Exhibit E. 20. Grace sent [Consumer 1 and Consumer 2] a letter dated June 3, 1999, demanding evidence that [Consumer 1 and Consumer 2]s property, referring to the Kingsport property, was covered by the required homeowners insurance. A copy of Graces letter is attached as Exhibit F. 21. Grace kept calling [Consumer 1 and Consumer 2] for about a year demanding that [Consumer 1 and Consumer 2] provide proof of insurance on the Kingsport property, and [Consumer 1 and Consumer 2] kept telling Grace that Grace did not have a loan on the Kingsport property, that [Consumer 1 and Consumer 2] had homeowners insurance on their home in Haysi, and that Grace had nothing to do with the Kingsport property. 22. Grace nevertheless took out, or force placed, insurance on the Kingsport property for a term beginning April, 2000, for a premium payment of $1,035.00. Grace force placed another policy of insurance on the Kingsport property for a term beginning April, 2001, again for a payment of $1,035.00. Copies of the insurance policies that Grace force placed on the Kingsport property are attached, marked Exhibits G and H, respectively. 23. Grace sent [Consumer 1 and Consumer 2] a letter dated July 3, 2000, inaccurately referring to the Kingsport property as the Property Location of the subject loan, and stating that, during a recent audit of its files, it came to Graces attention that it did not have current hazard insurance information for [Consumer 1 and Consumer 2]s account. A copy of Graces letter is attached as Exhibit I. 24. Grace sent [Consumer 1 and Consumer 2] a NOTICE OF PLACEMENT OF INSURANCE dated August 4, 2000, inaccurately referring to the Kingsport property as the Property Location of the subject loan, stating that Grace had force placed insurance on the Kingsport property, and that Grace would increase The Blows monthly mortgage payments and set up an escrow account from which to make insurance payments on the Kingsport property. A copy of Graces notice is attached as Exhibit J. 25. Grace sent [Consumer 1 and Consumer 2] another NOTICE OF PLACEMENT OF INSURANCE, dated April 27, 2001, a copy of which is attached as Exhibit K. 26. Grace sent [Consumer 1 and Consumer 2] ACCELERATION WARNINGS dated August 2, 2001, and August 31, 2001, falsely stating that [Consumer 1 and Consumer 2] were in default on their loan. Copies of Graces ACCELERATION WARNINGS are attached as Exhibits L and M. 4

27. Grace sent [Consumer 1 and Consumer 2] another letter inaccurately referring to the Kingsport property as the Property Location of the subject loan, dated August 20, 2001, again stating that, during a recent audit of its files, it came to Graces attention that it did not have current hazard insurance information for The Blows account. A copy of Graces letter is attached as Exhibit N. 28. [Consumer 1 and Consumer 2] maintain at their own expense a policy of insurance on the property in Haysi, which was the subject of the loan with Grace. Exhibit O is a copy of the July 20, 2001 through July 20, 2002 policy. 29. [Consumer 1 and Consumer 2] continued making the loan payments called for under the subject loan, while at the same time responding whenever Grace called demanding proof of insurance on the Kingsport property, attempting to explain to Grace that Grace did not have a loan on [Consumer 1 and Consumer 2]s home in Kingsport, and that [Consumer 1 and Consumer 2] had, and had always maintained, insurance on the Haysi property that was the subject of their loan with Grace. 30. Grace generated a letter dated September 13, 2001, to [Consumer 1 and Consumer 2], stating that it had no documentation to support [Consumer 1 and Consumer 2]s dispute and that it could not complete its research until it had both the note and the title for this loan. A copy of this letter is attached as Exhibit P. 31. By letter dated October 1, 2001, Grace wrote to [Consumer 1 and Consumer 2], again inaccurately referring to the Kingsport property as the Property Location of the subject loan, thanking [Consumer 1 and Consumer 2] for providing evidence of hazard insurance, saying that it had updated its records, and that any coverage had been cancelled without charge to [Consumer 1 and Consumer 2]s account. A copy of Graces letter is attached as Exhibit Q. 32. Thereafter, Grace nevertheless continued to penalize [Consumer 1 and Consumer 2] for Graces own inability to maintain correct loan records. 33. Graces collectors continued to call, and [Consumer 1 and Consumer 2] continued to explain that they were neither in default nor out of compliance with the terms of their loan with Grace, and that Graces records were and continued to be wrong and needed correcting. 34. Grace continued to spit out dunning letters, acceleration warnings, notices of default, and form letters acknowledging [Consumer 1 and Consumer 2]s contacts regarding the subject loan, including, but not limited to, the following: A. 2/15/02, dunning letter for the allegedly past due principal, interest, fees and late charges (Exhibit R); B. 3/3/02 ACCELERATION WARNING (Exhibit S); C. 4/2/02 ACCELERATION WARNING (Exhibit T); D. 4/7/02 NOTICE OF DEFAULTED MORTGAGE (Exhibit U); E. 5/8/02 dunning letter (Exhibit V); F. 5/23/02 form letter acknowledging [Consumer 1 and Consumer 2]s contact and promising confirmation as soon as this situation has been resolved. (Exhibit W); G. June 14, 2002 letter stating that it completed its research and referring [Consumer 1 and Consumer 2] to a purportedly attached enclosure that includes an itemized listing of how Grace applied the funds to your loan. (Exhibit X) There was nothing enclosed with this letter; and H. 9/19/02 dunning letter demanding payment for purportedly past due payments and unspecified fees due on this account!!! (Emphasis in original.) (Exhibit Y).

35. From the beginning of this loan, Grace accepted payment by personal check. However, Grace sent back [Consumer 1 and Consumer 2]s payment due December 30, 2001, and demanded that payment be made by certified check. Thereafter, [Consumer 1 and Consumer 2] began sending their payments to Grace by certified check. 36. Because their efforts at getting Grace to rectify its mistake were not working, because Grace was refusing to accept their loan payments, and because Grace was threatening to foreclose on their property without any legitimate basis, [Consumer 1 and Consumer 2] went to see a lawyer, Benjamin F. Sutherland, Esquire, of Clintwood, Virginia. 37. On March 27, 2002, Mr. Sutherland wrote to Grace in response to the March 3, 2002 ACCELERATION WARNING, Exhibit Z, disputing Graces claim that [Consumer 1 and Consumer 2] were in default on their loan and setting forth in detail [Consumer 1 and Consumer 2]s faithful payment of their loan payments, Graces improper forced placement of insurance on the Kingsport property, and requesting that Grace provide a statement of the separate amounts which Grace contends are unpaid with respect to principal, interest, escrow, late charges, and fees. Mr. Sutherlands letter to Grace was one of various RESPA Qualified Written Requests sent by or on behalf of [Consumer 1 and Consumer 2]. 38. Grace retained the services of the Gordon Y. Black, P.C., law firm, with offices in Richmond and Virginia Beach, to foreclose on the subject loan. John Abraham Black of that law firm is acting as Substitute Trustee. 39. On November 12, 2002, the Substitute Trustee sent foreclosure notice papers to [Consumer 1 and Consumer 2], copies of which are attached as Exhibit aa. 40. Among other things, the Substitute Trustees cover letter to [Consumer 1 and Consumer 2] that accompanied the foreclosure papers stated that the original Note evidencing your indebtedness has been either lost, misplaced, or destroyed, and is unavailable. 41. Through the Substitute Trustee, Grace published a LEGAL NOTICE TRUSTEE SALE in the Dickenson Star/Cumberland Times. A copy of the notice that ran on November 27, 2002 is attached as Exhibit bb. 42. Through the Substitute Trustee, Grace scheduled the sale of [Consumer 1 and Consumer 2]s property for December 11, 2002, at 9:00 a.m., at the front door of the Dickinson County Courthouse, Main Street, Clintwood, Virginia. 43. In an attempt to prevent the sale of their property, [Consumer 1 and Consumer 2] retained the services of another lawyer, Randall A. Eads, Esquire, of Abingdon, Virginia. 44. On November 22, 2002, Mr. Eads wrote to Grace (Exhibit cc) and to the Substitute Trustee (Exhibit dd), advising both that Graces foreclosure was the result of serious administrative error on the part of Grace, and that Grace had insured [Consumer 1 and Consumer 2]s Kingsport property, as to which Grace has no security interest, causing an increase in [Consumer 1 and Consumer 2]s payments and creating the alleged default. Mr. Eads letter is another example of one of the RESPA Qualified Written Requests sent to Grace by or on behalf of [Consumer 1 and Consumer 2]. 45. After Mr. Eads contacted the Substitute Trustees office, the foreclosure sale was reset for January 14, 2003. 46. Mr. Eads sent a December 4, 2002 letter (Exhibit ee) to the Substitute Trustee, setting forth the reasons why Grace had no reason to sell the Haysi property, inter alia, that Grace secured insurance on [Consumer 1 and Consumer 2]s dwelling in Kingsport, which dwelling and property is not connected to the Haysi property that is the subject of Graces loan, and that The Blows had made every payment that they were supposed to make to Grace. 6

47. In response to Mr. Eads December 4, 2002 letter, the Substitute Trustee sent Mr. Eads a letter dated December 11, 2002, advising that he had provided Grace with a copy of Mr. Eads December 4, 2002 letter, and that the January 14, 2003 foreclosure sale would not occur unless the loan is not reinstated by the mortgagors, and demanding a current reinstatement amount for this loan of $3,774.44. Exhibit ff. 48. Thereafter, in response to Mr. Eads December 16, 2002, faxed letter to the Substitute Trustee (Exhibit gg) protesting the inclusion of late fees in the reinstatement amount, the Substitute Trustee, by fax dated December 17, 2002, gave Mr. Eads a reinstatement figure that included $113.46 in charges for six late charges, and $1,014.00 for attorneys fees and costs. (Exhibit hh). 49. In response, Mr. Eads sent a December 17, 2002 fax memo to the Substitute Trustee, among other things, protesting the inclusion in the reinstatement figure $113.46 in charges for six late charges, and $1,014.00 for attorneys fees and costs. (Exhibit ii) 50. The Substitute Trustee responded with a December 19, 2002 fax memo to Mr. Eads stating that Grace would waive all fees and costs of the foreclosure and the late charges. However, on January 22, 2003, the Substitute Trustee faxed to [Consumer 1 and Consumer 2]s undersigned counsel a payoff quote that included a claimed unpaid principal amount of $27,175.94, interest through January 31, 2003 of $1,738.80, $151.28 in late charges, $59.50 for appraisals and property inspections, and the direction to add attorney costs and fees to date. (Exhibit jj 51. Despite receiving qualified written request letters from and on behalf of [Consumer 1 and Consumer 2], and despite failing to respond appropriately to the qualified written requests, Grace reported to credit reporting agencies that [Consumer 1 and Consumer 2] were overdue and delinquent. 52. [Consumer 1 and Consumer 2] are now, and at all times relevant hereto, have been ready, willing, and able to pay and reinstate their loan payments, which payments have been needlessly and falsely refused and interrupted by the bureaucratic nightmare inflicted upon them by Grace. 53. As a result of Graces acts and omissions, [Consumer 1 and Consumer 2] have endured and suffered, continue to endure and suffer, actual damages and injury, including but not limited to, costs and expenses, severe stress, lost time, mental anguish and suffering, emotional distress, embarrassment, humiliation, and damage to their credit standing and reputation. 54. Grace acted willfully, with reckless disregard for [Consumer 1 and Consumer 2]s rights and interests, and/or with gross negligence, such as to warrant an award of punitive damages. FIRST CAUSE OF ACTION VIOLATION OF RESPA 55. Grace failed to respond appropriately to the Colemans and [Consumer 1 and Consumer 2]s lawyers qualified written requests not later than 60 business days after receipt of such qualified written requests. 56. Grace failed to correct [Consumer 1 and Consumer 2]s account in violation of 12 U.S.C. 2605(e)(2) and 24 C.F.R. 3500.21(e)(3) (1996). 57. Grace reported to credit reporting agencies that [Consumer 1 and Consumer 2] were overdue and delinquent, in violation of U.S.C. 2605(e)(4)(i). 7

58. Grace refused to cease its collection efforts and demands by letter and telephone collection harassment after receiving qualified written request letters from or on behalf of [Consumer 1 and Consumer 2], in violation of 12 U.S.C. 2605(e) (2). 59. Grace failed to conduct an appropriate investigation after receiving qualified written request letters from or on behalf of [Consumer 1 and Consumer 2], in violation of 12 U.S.C. 2605(e) (2). SECOND CAUSE OF ACTION DEFAMATION 60. Graces reporting to the credit reporting agencies that [Consumer 1 and Consumer 2] were delinquent and overdue in their payment of the Note constituted the tort of defamation. 61. Graces publication of false delinquency allegations in the local newspaper constituted the tort of defamation. THIRD CAUSE OF ACTION CONVERSION 62. Defendants actions in collecting and incorrectly applying payment from The Blows when it knew or should have known that the fees and charges it was asserting were not owed constitutes the tort of conversion. THIRD CAUSE OF ACTION NEGLIGENCE 63. Grace negligently serviced the subject loan, in breach of its duty to [Consumer 1 and Consumer 2] to maintain proper and accurate loan records and to discharge and fulfill the other incidents attendant to the maintenance, accounting and servicing of loan records in a nonnegligent manner. WHEREFORE, Plaintiffs [Consumer 1 and Consumer 2] respectfully pray that this Court: (1) Declare that the subject loan was never in default or delinquent by reason of any conduct of the Plaintiffs, and that the subject loan be reinstated by Grace for an amount that in no way penalizes the Plaintiffs for Graces acts and omissions; (2) Enjoin the Substitute Trustee from foreclosing on the subject loan; (3) Award the Plaintiffs actual and punitive damages for Graces violations of RESPA; (4) Award the Plaintiffs additional damages for Graces pattern and practice of noncompliance with RESPA, in the amount of $1,000.00; (5) Award Plaintiffs actual damages for Graces negligence; (6) Award Plaintiffs actual and punitive damages for Graces defamation and conversion; (7) Award Plaintiffs attorneys' fees and costs under RESPA; (8) Such other and further relief that the Court deems appropriate.

TRIAL BY JURY IS DEMANDED. Respectfully submitted, [Consumer 1] [Consumer 2] By Counsel

_____________________________________ [Counsel for Plaintiffs]