In its first action alleging violations of the new mortgage servicing rules, the Consumer Financial Protection Bureau (CFPB) ordered Flagstar Bank to pay a $10 million fine and provide $27.5 million to customers.
According to the Bureau, the Michigan-based bank failed borrowers “at every step in the foreclosure relief process” both before and after the new mortgage servicing rules took effect on January 10, 2014.
Flagstar took an excessive amount of time to process applications for foreclosure relief, wrongfully denied applications for unspecified reasons, and delayed finalizing permanent loan modifications, the CFPB said. Other rule violations included “routinely” miscalculating borrowers’ income, resulting in wrongful denial of loan modifications, and the failure to inform customers about incomplete applications.
The errors occurred over a three-year period beginning in 2011, when Flagstar failed to devote sufficient resources to administration of the bank’s loss mitigation programs for distressed homeowners, the Bureau said. In 2011, the bank assigned 25 full-time employees and a third-party-review vendor to handle 13,000 active applications, leading to serious delays, the CFPB said.
In some instances, it took nine months to review a single application, the average call wait time for Flagstar’s loss mitigation call center was 25 minutes, and the bank closed applications to move its backlog, even though the application documents had expired because of Flagstar’s delay, the Bureau alleged.
Although the bulk of Flagstar’s practices occurred prior to January 2014, the bank continued to commit violations after that date, the CFPB said.
Approximately 6,500 customers will receive payments from the $27.5 million, although the bulk of the total – at least $20 million – will go to the estimated 2,000 customers who were foreclosed upon. The CFPB noted that its settlement with Flagstar does not prevent borrowers from bringing their own civil actions.
Flagstar must end its mortgage servicing violations and is prohibited from future violations of the CFPB’s mortgage servicing rules. The bank is also prohibited from acquiring servicing rights for defaulted loan portfolios until it can demonstrate it has the ability to comply with applicable laws protecting consumers during the loss mitigation process.
In addition, the Bureau required Flagstar to engage in outreach efforts to borrowers who were not foreclosed upon, offering them loss mitigation options. During the outreach and qualification process, Flagstar must halt the foreclosure process against such borrowers.
To read the consent order in In the Matter of Flagstar Bank, click here.
Why it matters: The Bureau came out swinging in its first enforcement action in the mortgage servicing space, with Flagstar facing almost $40 million in liability and a ban on acquiring servicing rights for certain loan portfolios. “The Bureau has been clear that mortgage services must follow our new servicing rules and treat homeowners fairly,” CFPB Director Richard Cordray said on a press call about the case. “Today’s action signals a new era of enforcement to protect consumers against the cost of servicer runarounds. The financial crisis is still fresh in our minds and too many homeowners continue to feel its effects. We need all mortgage servicers to understand that they must step up and follow the law.” Importantly, the Flagstar action included years of bank activity prior to the effective date of the new rules, which the agency included under the scope of its powers to regulate unfair and deceptive acts and practices. Servicers should ensure compliance with the mortgage servicing rules as the CFPB is prepared to take a strict enforcement stance that includes consideration of activity prior to the enforcement date.