Let’s revisit the Flagstar Bank case which I touched on in my November 20, 2014 posting. This is an important case for a number of reasons, most notably because it was the CFPB’s first enforcement action under the CFPB’s new mortgage servicing rules.
It’s also important because Flagstar isn’t the only mortgage servicer who was ill-prepared to deal with the onslaught of delinquencies resulting from the collapse of the housing market (meaning we can expect more enforcement actions from the CFPB against other servicers).
For starters, here’s some background on Flagstar:
- Flagstar is the largest banking company headquartered in Michigan;
- Per Flagstar’s website, Flagstar is “one of the nation’s top 10 largest savings banks;”
- Flagstar is a full-service bank with over 100 branches;
- Flagstar has assets of over $9 billion and over 3,000 employees;
- Per Flagstar’s website, Flagstar is a “top-tier mortgage originator” in the U.S.;
- In addition to originating mortgages, Flagstar is a mortgage servicer and administers foreclosure relief programs for other lenders;
- In January 2009, Flagstar was able to raise over $500 million from a few sources, including $266 million from the US. Treasury’s Trouble Asset Relief Program Capital Purchase Program;
- Per Wikipedia, in mid-August 2009, Flagstar was “named as one of the biggest and worst off of more than 150 lenders which own nonperforming loans that equal 5 percent or more of their holdings.”
So Flagstar is no minor player in the mortgage servicing business. Here’s some more history on Flagstar: On February 24, 2012 the US Department of Justice filed a civil fraud lawsuit against Flagstar in the U.S. District Court for the Southern District of New York. In its Complaint, DOJ alleges, among other things, that over the past decade Flagstar “improperly approved thousands of residential home mortgage loans for government insurance using unauthorized staff employees to conduct key underwriting functions” and “submitted false certifications” to FHA and HUD leading to “thousands of loans being approved for government insurance that did not qualify for such insurance…When the loans ultimately defaulted, HUD – which had insured the loans against default – was left to cover the losses.” If one pulls up the docket to this case (12-cv-01392), one will see that the next pleading, filed the same day as the Complaint, is a Stipulation and Order of Settlement and Dismissal. In the stipulation, Flagstar admitted and accepted responsibility for the conduct alleged in the Complaint (to a certain extent), agreed to comply with relevant HUD/FHA rules, and agreed to make a payment to the Government of $15 million within 30 business days plus additional payments to the Government of $117,889,806 if certain events occurred and criteria met. So before we even get to the recent CFPB enforcement action, we see that Flagstar had this troubling, recent history with the law in how Flagstar operated its home mortgage loan business.
Now that we have this background on Flagstar, let’s jump forward 2 years. As noted in my prior post, the CFPB’s new mortgage servicing rules went into effect January 10, 2014--which include rules for handling loss mitigation applications. At this point, servicers across the country were and had been scrambling to beef up their staff and get systems in place to comply with these new rules. In September, 2014 the CFPB brought the enforcement action against Flagstar for, according to the CFPB’s website, “violating those rules by failing borrowers and illegally blocking them from trying to save their homes.” Keep in mind that the CFPB’s action against Flagstar also covered activities by Flagstar that predated the date the new rules went into effect (activities which the CFPB included in the action pursuant to the CFPB’s powers to regulate unfair and deceptive acts and practices), the action doesn’t simply cover Flagstar’s activities post January 10, 2014.
The Consent Order filed in the CFPB’s action against Flagstar on September 29, 2014 opens by stating that the CFPB has reviewed the default servicing practices of Flagstar and “has identified the following law violations. First, Respondent has committed unfair acts or practices by impeding borrowers’ access to loss mitigation. Respondent failed to review loss mitigation applications in a reasonable amount of time; withheld information that borrowers needed to complete their loss mitigation applications; improperly denied borrower requests for loan modifications…violated the loss mitigation provisions of…RESPA…” and “committed deceptive acts or practices by misrepresenting borrowers’ right to appeal the denial of a loan modification.” In the “Overview” portion of the Consent Order, the CFPB notes that Flagstar is a mortgage servicer responsible for administering loss mitigation programs to delinquent borrows on behalf of the owners or guarantors of the owners’ loans” and that between 2011 and 2013, Flagstar “serviced loans for over 40,000 delinquent borrowers.”
The CFPB’s Findings and Conclusions in the Consent Order include the following background:
- Flagstar has operated a mortgage servicing business since at least 2011;
- Flagstar “performs these functions primarily for loans it does not own;”
- The “vast majority” of the loans in Flagstar’s “first lien servicing portfolio are owned or guaranteed by ‘investors,” (someone besides Flagstar);
- These “investors” play a critical role in Flagstar’s mortgage servicing operations; the investor is the default risk holder and, as such, the investor establishes the terms and conditions by which Flagstar “is required to service the loans the investor owns or guarantees. These guidelines include comprehensive rules for the servicing of loans that become delinquent;”
- As a result of the collapse in the housing market starting in 2007, the investors responded by developing “loss mitigation programs,” the goal of which was to “minimize the losses to both borrowers and investors by providing borrowers alternatives to foreclosure;”
- Flagstar “is responsible for administering loss mitigation programs on its investors’ behalf in accordance with rules established by the investor;”
- Pursuant to these loss mitigation programs, Flagstar’s duties include “soliciting borrowers for loss mitigation programs; collecting loss mitigation applications; decisioning (i.e., underwriting) complete loss mitigation applications to determine if a borrower is qualified for a loss mitigation program; and executing the loss mitigation program for qualified borrowers.”
Up to this point, we know what Flagstar was supposed to do; but the additional, following Findings and Conclusions in the Consent Order depict an ugly turn of events:
- Flagstar, “like many servicers, experienced a dramatic increase in the volume of loss mitigation applications in connection with the foreclosure crisis;”
- Flagstar “was not equipped to handle the influx;”
- Flagstar “had insufficient staff, no written policies…and inadequate servicing systems;:
- It took Flagstar’s “loss mitigation staff as long as nine months to review a single application during this time;”
- By 2011, Flagstar “had 13,0000 active loss mitigation applications versus 25 full-time employees in the loss mitigation department” and Flagstar was using a third party vendor in India to help review applications;
- The “average call wait time in the loss mitigation call center was 25 minutes; the average call abandonment rate was almost 50 percent;”
- In response to notification from a government-sponsored entity that Flagstar’s servicing rights on “loans owned or guaranteed by the GSE could be terminated,” Flagstar restructured its loss mitigation department and “hired additional staff in late 2011;”
- However, despite Flagstar’s changes to and restructuring of its loss mitigation department, Flagstar’s loss mitigation department remained “under-resourced;”
- Flagstar “failed to make a decision on loss mitigation applications prior to referring borrowers to foreclosure. On average, borrowers were over 250 days delinquent by the time they knew if they qualified for loss mitigation;”
- To move the backlog, Flagstar “sometimes closed applications due to expired documents, even though the documents had expired due to [Flagstar’s] delay;”
- Flagstar’s “acts and practices” caused “borrowers to drop out from the loss mitigation process;”
- While borrowers waited “for a loss mitigation decision,” the foreclosure process would continue;”
- “For at least a nine month period in 2012-2013, [Flagstar] withheld critical information that borrowers needed to complete their loss mitigation applications;”
- Flagstar “denied loan modifications to qualified borrowers by regularly and frequently miscalculating borrower income;”
And it goes on and on, and the picture doesn’t get any prettier. The result is Flagstar got socked by the CFPB as follows:
- Flagstar had to pay $27.5 million to the CFPB in order to compensate the affected consumers (in the range of 6,500) whose loans were being serviced by Flagstar, with $20 million of this amount to go to victims of foreclosure;
- Flagstar had to pay an additional $10 million civil penalty to the CFPB’s Civil Penalty Fund;
- Flagstar must of course cease its mortgage servicing violations;
- Perhaps most significantly, Flagstar is banned from acquiring new mortgage servicing rights until Flagstar can demonstrate it has the ability comply with the new rules.
Point # 4 is especially significant if Flagstar is slow to get its act together quickly in ramping up staff and resources to the point that it can demonstrate an ability to comply with the new mortgage servicing rules; generally speaking, mortgage servicers are having to constantly purchase new servicing rights to refresh their portfolio in order to make a go of the mortgage servicing business. Any down time will have consequences for their servicing business model.
One might argue that Flagstar, like a lot of mortgage servicers, simply got overwhelmed by the influx of loss mitigation applications. But it’s hard to be sympathetic to Flagstar in light of the recent civil fraud lawsuit the Department of Justice brought in 2012 discussed above. Plus, Flagstar was in the mortgage servicing business in a big way and held itself out as being capable of administering loss mitigation programs for its investors – that was a significant part of the bank’s business model. Plus some of the activities and omissions on the part of Flagstar spelled out in the Consent Order sound just downright egregious, even if Flagstar was overwhelmed. Finally, the CFPB’s new mortgage servicing rules – when they went into effect last January – did not appear out of nowhere. The industry knew the new rules were coming, and mortgage servicers knew they would have to ramp up their staff, resources, and systems in order to comply with the new rules.
All mortgage servicers need to be aware of the Flagstar case. In his prepared remarks on September 29, the date the Consent Order and Stipulation were entered, the CFPB Director Rich Corday stated “[t]he Bureau has been clear that mortgage servicers must follow our new servicing rules and treat homeowners fairly. Today’s action signals a new era of enforcement to protect consumers against the cost of servicer runarounds.”