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Federal Court Clarifies Mortgage Servicer Responsibilities after Loan Transfers

Posted By USFN, Monday, April 15, 2019

by Paul Weingarden, Esq. & Brian Liebo, Esq.
Usset, Weingarden & Liebo, PLLP
USFN Member (MN)


In Hrebal v. Seterus, Inc. (D. Minn., 2019), a Federal District Court situated in the 8th Circuit issued an order which presents a cautionary warning to loan servicers.  The case illustrates the potential perils when servicing loans following a service transfer, and specifically in reporting delinquencies under the Fair Credit Reporting Act (“FCRA”). 

In October 2007, Minnesota resident Charles Hrebal entered into a mortgage with the originating lender. When Hrebal ran into financial problems, he filed a Chapter 13 Bankruptcy listing four delinquent payments on his mortgage.  For unknown reasons, the original lender filed a proof of claim (“POC”) for only two out of the four payments, and in response Hrebal filed an amended plan reflecting that lender’s lower claimed delinquency.  The plan was approved without objection.  As in most such plans in the district, the trustee paid the lender past due amounts during the plan period to pay the pre-petition arrears in full, and Hrebal directly maintained his ongoing payments post-petition.  During the bankruptcy, the original lender recognized its POC filing error, but did not file an amended POC despite numerous notes found in its servicing records concerning the discrepancy.

The loan was subsequently service transferred to Seterus, Inc.  Seterus continued to receive monthly post-petition payments during the bankruptcy proceedings and did not raise the missing prepetition payments issue during the pendency of the bankruptcy case.  Also, when Hrebal called to inquire about his mortgage’s status, Seterus appeared to inform him that he was “current on all payments.”  In 2015, Hrebal completed his plan and was granted a discharge.

Unfortunately, the issue of the missed prepetition payments reared its ugly head when Seterus raised for the first time that two payments were still due post-petition in response to a Trustee’s Notice of Final Cure.  Seterus’ corporate witness later asserted that, even though Hrebal made every monthly payment after entering bankruptcy, the erroneous POC filed by the original lender resulted in Hrebal “walking out of bankruptcy still two payments behind.”

Thereafter, Hrebal discovered that Seterus reported the loan delinquent to the three major credit reporting agencies (“CRAs”) after Hrebal wrote Seterus and the CRAs to dispute the reported delinquency.  According to the court’s findings, Seterus refused to notify the CRAs that the debt was disputed, never reviewed the prior servicer’s notes, nor changed its internal records concerning the dates of the alleged delinquency. 

Hrebal sued Seterus for violating the FCRA, claiming damages to reputation and emotional distress, and both parties moved for summary judgment.  The parties primarily disputed whether Seterus provided “inaccurate” or “materially misleading”  information to the CRAs when Seterus reported Hrebal as delinquent on his mortgage shortly after successfully completing a Chapter 13 bankruptcy plan, as well as whether Seterus’s alleged FCRA violations were willful.

The first issue facing the court was whether the two missing payments from the original lender’s POC survived the bankruptcy discharge, in which case the credit reporting by Seterus of Hrebal being “two payments behind as he exited bankruptcy” might have been “technically accurate.”   However, the district court judge refrained from analyzing the bankruptcy issues due to split authority, and believed that the court could resolve the FCRA claims without opining on that “complex” bankruptcy law question.  

Turning to the FCRA claims, the court recognized that the FCRA requires furnishers of credit information to provide accurate information to CRAs, and if informed by a CRA that a consumer is disputing any information appearing on their credit report, the furnisher must conduct a reasonable investigation of records to determine whether disputed information can be verified.  See, 15 U.S.C. § 1681s.  Courts across the country have generally held that “a fairly searching inquiry, or at least something more than a mere cursory review” is required under the FCRA for such an investigation to be reasonable.  Also, multiple circuit courts have held that “even if credit information is technically correct, it may nonetheless be inaccurate if, through omission, it creates a materially misleading impression.” 

During an exhaustive factual review, the court found a number of servicing errors starting with the initial, mistaken POC.  These purported errors included servicing records Seterus never reviewed when responding to the CRAs which easily should have been found per the court.  This caused inadequate responses by Seterus resulting in possibly "misleading and inaccurate reporting” which triggered the right for the borrower to claim damages. 

Citing the record, the court noted:  “…perhaps most importantly, [Seterus employees] could have marked Hrebal’s delinquency as ‘disputed’, but never did….”, noting testimony that it was a Seterus blanket policy to never do so which in the court’s opinion may have evidenced a "willful or reckless disregard for compliance with the FCRA.” 

The district court denied Seterus’s request to be dismissed from the litigation and the judge set the matter for trial.  The court found a jury could reasonably find that Seterus breached its FCRA duties by simply reaffirming Hrebal’s delinquency without any mention of a dispute.  That response rendered Seterus’s credit reporting inaccurate because, through omission, it created a materially misleading impression that Hrebal was more financially irresponsible than he actually was, according to the court.  The court further explained that a reasonable juror might find Seterus’s omission especially misleading because Hrebal had just successfully completed a long Chapter 13 bankruptcy plan, received a discharge, and had not missed a mortgage payment in over five years.

It is important to note that this is just an order denying Seterus summary judgment motion, not a final order assessing liability. It is unknown if the case will be settled, won at trial or appealed.   But it should be read as a cautionary lesson by noting that if the original lender had acted on the improper information it found on its POC; or if Seterus had read the prior servicing notes and records; or followed guidelines noting that the debt was disputed for purposes of credit reporting, then this case perhaps might never have been filed.

As an important practice pointer for mortgage servicers, it is always prudent to carefully review prior servicing notes when receiving loans, especially whenever a servicing dispute is raised, to ensure responses to inquiries and records are entirely accurate and appropriate. 


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