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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 DebtCollections Practices Act, he represents consumers in credit reporting abuse, predatory lending,automobile fraud, mobile home fraud, and “home improvement fraud” matters. Opinions fromsome 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 havecertified class actions against collection agencies in cases in which Mr. Pittman representedclasses 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 torespond the qualified written requests pointing out its repeated billing errors. The Real EstateSettlement Procedures Act (RESPA), 12 U.S.C. § 2605(e)(2) requires a mortgagors and theirservicers to investigate and respond to qualified written requests for correction of errors.1 Themortgage servicing company erroneously demanded the homeowners maintain homeownersinsurance on their second home when the mortgage was on the first home. The homeownerspointed out the mistake and provided proof of insurance on the mortgaged home. Rather thancorrecting the error the mortgage servicing company forced placed insurance on the secondhome which was the billing address but not collateral for the mortgage and added over $1000each year for two years for forced placed insurance to the mortgage account. The homeownersrepeatedly wrote protesting the error as did several attorneys on their behalf, to little avail. Thecomplaint also alleges that the reporting of their account as delinquent was defamatory, thatasserting erroneous charges on the account was a conversion, and that the servicer negligentlyserviced the loan in breach of its duty to maintain accurate records.

A related memorandum in support of partial summary judgment on the RESPA claim canbe found in 11 Consumer Law Pleadings on CD-Rom Ch. 12 (2005).

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

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF VIRGINIA

RICHMOND DIVISION

[CONSUMER 1],and[CONSUMER 2],

Plaintiffs,

v.

GRACE BROOKLYN MORTGAGE CORPORATION,andJOHN 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 BrooklynMortgage Corporation (Grace), under the Real Estate Settlement Procedures Act (RESPA), 12U.S.C. §2601 et. seq., to recover actual, statutory, and punitive damages, court costs, and

attorney’s fees by reason of Grace’s 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 2202and Rule 57 of the Federal Rules of Civil Procedure, and appropriate injunctive relief pursuant toRule 65 of the Federal Rules of Civil Procedure in order to prevent irreparable harm. Throughits own bungled recordkeeping, Grace falsely and mistakenly put the Plaintiffs’ mortgage loaninto a delinquency and foreclosure status despite the fact that the Plaintiffs paid faithfully ontheir loan. Grace ignored the Plaintiffs’ repeated attempts to explain and document to Grace thatGrace had made a huge error and that it had no basis whatsoever to put the Plaintiffs’ loan into adelinquency and foreclosure status. Grace failed to respond properly to “qualified writtenrequests” by and on behalf of the Plaintiffs, and Grace failed to take corrective action withrespect to the servicing of the Plaintiffs’ mortgage loan. This action also is predicated upon

Grace’s 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 28U.S.C. § 1331, and has supplemental jurisdiction of the state law claims regarding the sametransaction and events under 28 U.S.C. § 1367(a).

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PARTIES

3. Plaintiffs [Consumer 1] and [Consumer 2 ] are natural persons who reside inKingsport, 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 "federallyrelated mortgage loans" as defined in 12 U.S.C. §2602, in that they are secured by a lien onresidential real property designed principally for the occupancy of from one to four families, andin that they are made by "creditors" which make or invest in residential real estate loansaggregating 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 toserve as Substitute Trustee and to foreclose on the subject loan. Mr. Black is a necessary partywho 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 (thesubject 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 ChemicalBank, 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 FinancialManagement 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 faithfullymaking 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 statementthat 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 Coleman’s 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 ahome in Kingsport through another lender, Bank of America. Grace had nothing whatsoever todo 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 Grace’s Deed of Trust on [Consumer 1 and Consumer2]’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,” wastransferring the servicing on his loan to Grace’s Columbus, Ohio Servicing Center, effectiveApril 23, 1999. A true copy of Grace’s letter is attached, marked Exhibit D.

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16. The letter also stated that one change resulting from the transfer of servicing was thatthe old loan number on the loan, 8400186311, was being changed, and that the new loan numberwould 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] provideGrace with proof of insurance on the Kingsport property, claiming to [Consumer 1 andConsumer 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 andConsumer 2]’s policy of insurance on the Haysi property and that Grace did not have a loan onthe Kingsport property. [Consumer 1 and Consumer 2] sent Grace a copy of [Consumer 1 andConsumer 2]’s policy of insurance on the Haysi property. A copy of [Consumer 1 andConsumer 2]’s insurance policy on the Haysi property for the policy period April 22, 1999, toApril 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 Grace’s letter is attached asExhibit 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 Kingsportproperty, 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 propertyfor a term beginning April, 2000, for a premium payment of $1,035.00. Grace force placedanother 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 theKingsport property are attached, marked Exhibits G and H, respectively.

23. Grace sent [Consumer 1 and Consumer 2] a letter dated July 3, 2000, inaccuratelyreferring to the Kingsport property as the “Property Location” of the subject loan, and statingthat, during a recent audit of its files, it came to Grace’s attention that it did not have currenthazard insurance information for [Consumer 1 and Consumer 2]’s account. A copy of Grace’sletter is attached as Exhibit I.

24. Grace sent [Consumer 1 and Consumer 2] a NOTICE OF PLACEMENT OFINSURANCE 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 theKingsport 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. Acopy of Grace’s notice is attached as Exhibit J.

25. Grace sent [Consumer 1 and Consumer 2] another NOTICE OF PLACEMENT OFINSURANCE, dated April 27, 2001, a copy of which is attached as Exhibit K.

26. Grace sent [Consumer 1 and Consumer 2] ACCELERATION WARNINGS datedAugust 2, 2001, and August 31, 2001, falsely stating that [Consumer 1 and Consumer 2] were indefault on their loan. Copies of Grace’s ACCELERATION WARNINGS are attached asExhibits L and M.

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27. Grace sent [Consumer 1 and Consumer 2] another letter inaccurately referring to theKingsport property as the “Property Location” of the subject loan, dated August 20, 2001, againstating that, during a recent audit of its files, it came to Grace’s attention that it did not havecurrent hazard insurance information for The Blows’ account. A copy of Grace’s letter isattached as Exhibit N.

28. [Consumer 1 and Consumer 2] maintain at their own expense a policy of insuranceon 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 underthe 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 aloan on [Consumer 1 and Consumer 2]’s home in Kingsport, and that [Consumer 1 andConsumer 2] had, and had always maintained, insurance on the Haysi property that was thesubject of their loan with Grace.

30. Grace generated a letter dated September 13, 2001, to [Consumer 1 and Consumer2], 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.” Acopy 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 subjectloan, thanking [Consumer 1 and Consumer 2] for providing evidence of hazard insurance, sayingthat 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 Grace’s letter is attached as Exhibit Q.

32. Thereafter, Grace nevertheless continued to penalize [Consumer 1 and Consumer 2]for Grace’s own inability to maintain correct loan records.

33. Grace’s collectors continued to call, and [Consumer 1 and Consumer 2] continued toexplain that they were neither in default nor out of compliance with the terms of their loan with

Grace, and that Grace’s 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 subjectloan, including, but not limited to, the following:

A. 2/15/02, dunning letter for the allegedly past due principal, interest, fees and latecharges (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 [Consumer1 and Consumer 2] to a purportedly “attached enclosure that includes an itemized listingof how Grace applied the funds to your loan.” (Exhibit X) There was nothing enclosedwith this letter; andH. 9/19/02 dunning letter demanding payment for purportedly past due payments andunspecified “fees due on this account!!!” (Emphasis in original.) (Exhibit Y).

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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 Consumer2] 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 toforeclose on their property without any legitimate basis, [Consumer 1 and Consumer 2] went tosee 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, 2002ACCELERATION WARNING, Exhibit Z, disputing Grace’s claim that [Consumer 1 andConsumer 2] were in default on their loan and setting forth in detail [Consumer 1 and Consumer2]’s faithful payment of their loan payments, Grace’s improper forced placement of insurance onthe Kingsport property, and requesting that Grace provide a statement of the separate amountswhich Grace contends are unpaid with respect to principal, interest, escrow, late charges, andfees. Mr. Sutherland’s 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 inRichmond and Virginia Beach, to foreclose on the subject loan. John Abraham Black of that lawfirm 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 Trustee’s cover letter to [Consumer 1 andConsumer 2] that accompanied the foreclosure papers stated that “the original Note evidencingyour indebtedness has been either lost, misplaced, or destroyed, and is unavailable.”

41. Through the Substitute Trustee, Grace published a LEGAL NOTICE TRUSTEESALE 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 andConsumer 2]’s property for December 11, 2002, at 9:00 a.m., at the front door of the DickinsonCounty 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 SubstituteTrustee (Exhibit dd), advising both that Grace’s foreclosure was the result of seriousadministrative error on the part of Grace, and that Grace had insured [Consumer 1 and Consumer2]’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 isanother 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 Trustee’s 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, thatGrace secured insurance on [Consumer 1 and Consumer 2]’s dwelling in Kingsport, whichdwelling and property is not connected to the Haysi property that is the subject of Grace’s loan,and that The Blows had made every payment that they were supposed to make to Grace.

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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 reinstatementamount for this loan” of $3,774.44. Exhibit ff.

48. Thereafter, in response to Mr. Eads’ December 16, 2002, faxed letter to theSubstitute 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 figurethat included $113.46 in charges for six late charges, and $1,014.00 for attorney’s 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 forsix late charges, and $1,014.00 for attorney’s fees and costs. (Exhibit ii)

50. The Substitute Trustee responded with a December 19, 2002 fax memo to Mr. Eadsstating 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 forappraisals 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 1and 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 anddelinquent.

52. [Consumer 1 and Consumer 2] are now, and at all times relevant hereto, have beenready, willing, and able to pay and reinstate their loan payments, which payments have beenneedlessly and falsely refused and interrupted by the bureaucratic nightmare inflicted upon them

by Grace.53. As a result of Grace’s acts and omissions, [Consumer 1 and Consumer 2] have

endured and suffered, continue to endure and suffer, actual damages and injury, including but notlimited to, costs and expenses, severe stress, lost time, mental anguish and suffering, emotionaldistress, embarrassment, humiliation, and damage to their credit standing and reputation.

54. Grace acted willfully, with reckless disregard for [Consumer 1 and Consumer 2]’srights and interests, and/or with gross negligence, such as to warrant an award of punitivedamages.

FIRST CAUSE OF ACTION

VIOLATION OF RESPA

55. Grace failed to respond appropriately to the Coleman’s and [Consumer 1 andConsumer 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 12U.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] wereoverdue and delinquent, in violation of U.S.C. §2605(e)(4)(i).

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58. Grace refused to cease its collection efforts and demands by letter and telephonecollection 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 writtenrequest 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. Grace’s 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. Grace’s publication of false delinquency allegations in the local newspaperconstituted the tort of defamation.

THIRD CAUSE OF ACTION

CONVERSION

62. Defendants’ actions in collecting and incorrectly applying payment from The Blowswhen it knew or should have known that the fees and charges it was asserting were not owedconstitutes the tort of conversion.

THIRD CAUSE OF ACTION

NEGLIGENCE

63. Grace negligently serviced the subject loan, in breach of its duty to [Consumer 1 andConsumer 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 anonnegligent manner.

WHEREFORE, Plaintiffs [Consumer 1 and Consumer 2] respectfully pray that thisCourt:

(1) Declare that the subject loan was never in default or delinquent by reason of anyconduct of the Plaintiffs, and that the subject loan be reinstated by Grace for an amountthat in no way penalizes the Plaintiffs for Grace’s acts and omissions;(2) Enjoin the Substitute Trustee from foreclosing on the subject loan;(3) Award the Plaintiffs actual and punitive damages for Grace’s violations of RESPA;

(4) Award the Plaintiffs additional damages for Grace’s pattern and practice of noncompliance with RESPA, in the amount of $1,000.00;(5) Award Plaintiffs actual damages for Grace’s negligence;(6) Award Plaintiffs actual and punitive damages for Grace’s defamation andconversion;(7) Award Plaintiffs attorneys' fees and costs under RESPA;(8) Such other and further relief that the Court deems appropriate.

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TRIAL BY JURY IS DEMANDED.

Respectfully submitted,[Consumer 1][Consumer 2]

By Counsel

_____________________________________[Counsel for Plaintiffs]

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