In re Tolliver | Gross Recklessness – Ocwen Hit with $25,000 in Punitive Damages For Ripping Off Homeowner

In a big win for consumer debtors, the Bankruptcy Court for the Eastern District of Kentucky disallowed Ocwen’s proof of claim for late fees and charges, and awarded judgment, including $25,000 in punitive damages in favor of the debtor due to Ocwen’s “gross recklessness” in accounting and servicing her mortgage.

In re Tolliver, No. 09-21742, Adv. Proc. No. 09-2076 (Bankr. E.D. Ky. July 19, 2012).

The opinion speaks for itself…

Although the Plaintiff has failed to meet her burden of proof to show that the Defendants violated the Kentucky usury statutes or that Ocwen is a “debt collector” pursuant to the Fair Debt Collection Practices Act, the Plaintiff has shown that the Defendants breached the terms of the Note and Mortgage by applying unauthorized late charges, costs and fees to her account and breached an implied contractual duty of good faith and fair dealing. While the Defendants contend that they were authorized to make these charges and the Plaintiff has ultimately waived any claims she may have against the Defendants based on subsequent written forbearance agreements in 2004 and 2005, the agreements are unenforceable for lack of consideration where Ocwen misrepresented the status of the Plaintiff’s Loan to fraudulently induce her to enter into these agreements when, but for Ocwen’s unauthorized acts, the Plaintiff had paid her Loan in full. The Plaintiff, having overpaid her Loan, is entitled to compensatory and punitive damages for the Defendants’ breach of contract and implied covenant of good faith and fair dealing, fraud, and conversion.

Almost fifteen years after the inception of the Loan, Kentucky Housing Corporation assigned the Plaintiff’s Loan to the Department of Housing and Urban Development (“HUD”) on February 28, 1995 (the “KHC Assignment”). The KHC Assignment recites the principal balance of the Mortgage as “the sum of $16,867.86, together with interest thereon from May 1, 1994 at the rate of 10.875% per annum.”

Almost two years after the Loan was assigned to HUD, HUD sold the Loan to one of the Defendants herein. Ocwen Federal Bank, FSB, a federal savings bank and predecessor-in-interest to the Defendant Ocwen Loan Servicing, LLC (“Ocwen Loan Servicing”) (collectively referred to herein as “Ocwen”),FN2 and Blackrock Capital Finance, LLC, purchased the Loan effective January 1, 1997. HUD assigned the Loan to Ocwen on March 7, 1997, with an agreement in the Assignment that “any changes in the payment obligations under the Note by virtue of any forbearance or assistance agreement, payment plan or modification agreement agreed to by U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (“HUD”), whether or not in writing, is binding upon the Assignee/Payee, its successors and assigns.”

From this point forward, Ocwen proceeded to mishandle the servicing of the Plaintiff’s Loan by misapplying her payments contrary to the terms of the Note and Mortgage and assessing unauthorized fees and charges.

Ocwen proceeded to misapply the payments on the Plaintiff’s Loan and charge and collect expenses and fees not authorized by her Note and Mortgage. Ms. Saunders opined that not only did Ocwen misapply the Plaintiff’s payments to fees and charges not allowed by the Note and Mortgage, but Ocwen also misapplied the Plaintiff’s payments to an unauthorized “interest arrearage balance,” allegedly consisting of interest arrearage owed by the Plaintiff at the time of boarding and “securitized interest” advanced by Ocwen in November 1997 to enable it to securitize and the sell the Loan.

The parties dispute whether the Plaintiff was current on her Loan at the time of boarding. The Plaintiff insists that because Ocwen’s records show her Loan was due for the July 1, 1996 payment, the Loan was not current at the time Ocwen assumed servicing it for the purposes of the FDCPA. Ocwen does not dispute that the Loan was in arrears under the original Loan terms, but argues that the Plaintiff’s Loan was considered current under the FDCPA as she was paying pursuant to a forbearance payment plan with HUD.

Based on the evidence presented by both parties, the Court finds that the Plaintiff was timely making payments of $275.00 per month pursuant to a forbearance payment plan with HUD at the time Ocwen purchased and assumed servicing the Loan on January 1, 1997. The effect of this finding on the Plaintiff’s counterclaim based on the FDCPA is discussed more fully herein.

The only evidence before the Court as to the balance of the Loan at boarding is (1) Ocwen’s records; and (2) Ms. Saunders’ conclusions about the balance based on her review of these records.

The Court agrees with Ms. Saunders that because of their inconsistency, Ocwen’s records are not reliable. The Court further finds the assumptions and conclusions made by Ms. Saunders to be credible, adopts Ms. Saunders’ most conservative conclusion, and finds that the unpaid principal Loan balance as of January 1, 1997, is $16,863.34.

Ocwen began misapplying the Plaintiff’s payments almost immediately after it purchased and began servicing the Loan. Ocwen’s misbehavior started with its application, or lack thereof, of the Plaintiff’s $275.00 monthly forbearance payments.

The concepts of “contractually current” and “performing pursuant to a forbearance plan” appear to be manufactured in an attempt to offer an after-the-fact excuse for the inconsistency in Ocwen’s records.

(3) Ocwen’s “Mistake”—The Securitized Interest Arrearage Balance

On November 1, 1997, the Plaintiff’s Loan was securitized and Bank of America (“BOA”), as Trustee for the Certificate holders of the Mortgage Pass-through Certificates 1997–R3, became the owner and holder of the Loan.FN8 Ocwen continued servicing the Loan on BOA’s behalf pursuant to a Pooling and Servicing Agreement dated November 1, 1997.

FN8. Defendant U.S. Bank as Trustee for the Certificate holders of the Mortgage Pass-through Certificates 1997–R3 is the current holder of the Note and Mortgage. During the pendency of this case, U.S. Bank replaced the original Defendant BOA as the party entitled to enforce the Note and Mortgage. An Agreed Order was entered on April 18, 2012 substituting U.S. Bank as the real party-in-interest.

Until the securitization of the Loan, Ocwen’s Loan History showed the Plaintiff due for the January 1, 1997 payment. The unpaid principal balance as of October 9, 1997, the last entry prior to securitization, was $16,497.97. Despite boarding the Loan with an interest arrearage balance of $2,915.86, the interest arrearage balance as of October 9, 1997 was zero and had been inexplicably reflected as zero in the Loan History since the first payment of $265.86 posted on June 9, 1997.

On the next payment entry made after the securitization of the Loan, Ocwen’s Loan History shows a payment due date of November 1, 1997, rather than January 1, 1997 per the prior entry. Ms. Johnson explained this seemingly inexplicable jump in the payment due date was the result of a “corporate advance” by Ocwen. According to Ms. Johnson, Ocwen advanced the Plaintiff ten (10) months of interest due by the Plaintiff for January through October 1997, in the amount of $1,457.93, and then set a new contractual due date of November 1, 1997, thus supposedly bringing the Plaintiff’s Loan, in Ocwen’s terms, “contractually current.” While Ocwen advanced the Plaintiff interest, it did not advance her the ten (10) months of principal due on the Loan; rather, the unpaid principal balance as of December 23, 1997 remained $16,497.97, the same balance for October 9, 1997 immediately prior to securitization. The unpaid principal Loan balance was then adjusted by a payment of $265.86 made on December 23, 1997 to $16,434.35 and applied to the payment due for November 1, 1997.

*10 According to Ms. Saunders, there was no law, regulation, contractual right, or rule of common sense that permitted Ocwen to arbitrarily assign a first payment due date to her Loan, advance the due date by ten months, and then charge the Plaintiff interest for ten months while dunning her repeatedly until she paid this “interest arrearage balance.” Moreover, despite Ms. Johnson’s testimony that Ocwen advanced the Plaintiff ten (10) months of interest, Ocwen’s Loan History shows no interest arrearage immediately after securitization of the Loan. In fact, Ocwen’s Loan History shows the interest arrearage remained at zero through securitization. When asked to explain why the interest arrearage balance is zero in Ocwen’s Loan History despite Ms. Johnson’s testimony that Ocwen advanced the Plaintiff ten (10) months of interest, Ms. Johnson testified that Ocwen intended to add the securitized interest of $1,457.93 to the interest arrearage balance that boarded with the Loan of $2,915.86, for a total interest arrearage balance of $4,373.79. The only reference to this “corporate advance” is in Ocwen’s Comment Log, which merely reflects a “corporate advance” of $1,457.93 and a new due date of November 1, 1997; there is no entry reflecting Ocwen’s intent or a new interest arrearage balance of $4,373.79.

The Loan History shows that no interest arrearage from either HUD or Ocwen was assessed to the Plaintiff at the time of securitization. Rather, the securitized interest created by Ocwen materialized, seemingly out of thin air, years later, in Ocwen’s Loan History. After years of showing a zero interest arrearage balance, the amount of $1,457.93 reappeared on Ocwen’s Loan History on February 13, 2001 with absolutely no explanation in Ocwen’s Comment Log, where explanations such as this were, according to Ms. Johnson, supposed to be memorialized. When once again asked to explain yet another discrepancy in Ocwen’s records, Ms. Johnson finally admitted that Ocwen made a “mistake” and instead of adding the securitized interest of $1,457.93 to the HUD interest arrearage that boarded on January 1, 1997, Ocwen inadvertently subtracted Ocwen’s securitized interest from the HUD interest arrearage. Ms. Johnson further testified that this occurred because of the migration of data from an old computer system to a new computer system in 2001 and the difference has since been “waived” by Ocwen. The new interest arrearage balance as of February 13, 2001 is exactly half of the interest arrearage balance shown at boarding.

Ocwen’s Comment Log makes no reference to this “mistake” or “waiver.” There is no evidence that the Plaintiff was ever informed of Ocwen’s “mistake” or “waiver.” This is not surprising since Ms. Johnson confessed at trial she only discovered the “mistake” in preparation for trial, when she finally undertook the very serious task of trying to reconcile the Loan with a forensic accounting.

In conclusion, the Court finds no credible evidence of an interest arrearage balance at boarding or a basis for the assessment of the securitized interest balance. The application of this interest arrearage balance is nothing more than a farce. Ocwen cannot substantiate its existence at the time of boarding, nor can Ocwen credibly explain or justify its application, particularly following the securitization of the Plaintiff’s Loan. Thus, the Court finds that Ocwen’s assessment of the interest arrearage balance, in any amount, is improper and further evidence of Ocwen’s mishandling of the Loan.

(4) Ocwen’s Assessment of Impermissible Late Charges, Fees and Costs

*11 Ocwen not only mishandled the Loan by failing to apply the Plaintiff’s payments correctly and assessing and collecting from the Plaintiff an unsubstantiated interest arrearage balance, but also in systematically assessing late charges, fees and costs in complete disregard of the terms of the Plaintiff’s Note and Mortgage.

D. Ocwen’s Excuse—The 2004 and 2005 Forbearance Agreements

Ocwen admits that the Note and Mortgage do not allow the assessment of many of its charges, but denies that the charges it assessed were improper. Ocwen takes the position that it was allowed to collect for these fees and expenses pursuant to the terms of two forbearance agreements entered into on November 9, 2004 (the “2004 Forbearance Agreement”) and December 5, 2005 (the “2005 Forbearance Agreement”). Specifically, Ocwen refers to a provision in the 2004 Forbearance Agreement allowing Ocwen to charge and add to the Plaintiff’s Loan balance many of the costs that it assessed:

Ocwen’s reliance is misplaced because the 2004 and 2005 Forbearance Agreements are meaningless where the evidence shows that the Plaintiff had already paid off her Loan prior to entering into the agreements.

*14 However, at time that the Plaintiff signed the 2004 Forbearance Agreement to stop the foreclosure, the Defendants had no right to foreclose on her home because she had paid off her Loan in full on October 29, 2004. In fact, pursuant to Ms. Saunders’ testimony, the Court finds that the Plaintiff had overpaid her obligation to the Defendants as of October 29, 2004, by $747.49.

E. Ocwen Overcharges the Plaintiff

Despite paying her obligation in full by October 29, 2004, Ocwen continued to collect payments from the Plaintiff. Ms. Saunders testified, and the Court finds, that the Plaintiff had overpaid her obligation to the Defendants by $494.19 when she entered into the 2005 Forbearance Agreement. Ms. Saunders further testified, and the Court finds, that the Plaintiff had overpaid her obligation by $3,839.05 when the Defendants instituted foreclosure proceedings for a third time on June 19, 2009 in Campbell Circuit Court.

Based on the Court’s findings, the Plaintiff has fully paid her obligation to the Defendants and did so years prior to this bankruptcy. Therefore the Defendants Proof of Claim # 14–1 shall be disallowed in its entirety.

At the time the Plaintiff entered into the 2004 Forbearance Agreement, she had paid the Loan in full. As such, Ocwen had no right to threaten foreclosure on her property and did not act in good faith in doing so.

Ocwen’s repeated representations to the Plaintiff that she was in default were materially false representations that Ocwen knew or should have known to be untrue.

Moreover, the Plaintiff questioned the charges many times over the course of Ocwen’s servicing and Ocwen did nothing to investigate her concerns.

The Plaintiff reasonably relied on Ocwen’s representations that she was in default on her Loan before entering into the 2004 and 2005 Forbearance Agreements. The Plaintiff had no reasonable choice when faced with the loss of her home but to rely on Ocwen’s false representations as to the status of her Loan. The Plaintiff was therefore fraudulently induced to enter into the 2004 and 2005 Forbearance Agreements.

Ocwen does not dispute that it charged the Plaintiff’s account for impermissible fees and costs contrary to the Note and Mortgage, a fact that the evidence supports. The Defendants therefore breached their contract with the Plaintiff. The Plaintiff has been damaged by overpaying her Loan as a result of these impermissible fees and charges, and allocation of her payments to an unsubstantiated interest arrearage balance, in the amount of $3,839.05.

Thus, judgment shall be entered for the Plaintiff in the amount of $3,389.05, plus prejudgment interest FN11 at the Note rate of 10.875% per annum from October 29, 2004, or the date that the Plaintiff paid her Loan in full, until the date hereof, as to Counts III (fraud/intentional misrepresentation); V (breach of implied covenant of good faith); and VII (breach of contract) of the Complaint. Furthermore, because the Court finds in the Plaintiff’s favor on her fraud count, and holds that Ocwen was grossly reckless in the accounting and servicing of the Plaintiff’s Loan, it is unnecessary for the Court to rule on the Plaintiff’s claim for negligent misrepresentation (Count VI).

C. Punitive Damages

*22 The Plaintiff is entitled to an award of punitive damages for Ocwen’s grossly reckless and fraudulent conduct.

The Plaintiff has met her burden and is entitled to punitive damages because Ocwen recklessly disregarded the terms of the Plaintiff’s Loan documents and proceeded to collect from her unauthorized charges while at the same time misapplying the Plaintiff’s payments and failing to keep an accurate accounting of the Plaintiff’s Loan. Ocwen then fraudulently induced the Plaintiff to enter into forbearance agreements with terms that allowed it to assess the charges that it wasn’t allowed to otherwise charge. These forbearance agreements were used as a vehicle for Ocwen to make more money from servicing the Plaintiff’s Loan, to the Plaintiff’s detriment. The Plaintiff challenged Ocwen’s accounting and Ocwen did nothing to address her concerns or to verify that its accounting was accurate. Rather, it bullied the Plaintiff to enter into meaningless forbearance agreements, which she “completed,” while at the same time constantly dunning her after she attempted to “cure” her “defaults.” Ocwen ignored the Plaintiff’s pleas until she finally filed bankruptcy and this adversary proceeding and even then failed to do a full forensic accounting on her Loan until the eve of trial. Based on the foregoing, the Court shall award the Plaintiff punitive damages in the amount of $25,000.00.

Copy of the full opinion below…

Well worth the read…



In re Tolliver