In separate consent orders, one bank will pay $28.8 million to resolve claims by the Consumer Financial Protection Bureau (CFPB) that it gave its distressed mortgage borrowers the "run-around" during the loss mitigation process.

What happened

On January 23, 2017, the CFPB issued two related consent orders directed against the mortgage servicing practices of mortgage-related operating subsidiaries of one of the country's largest banks. These servicing entities collect payments from borrowers for loans the bank services. According to the CFPB, both servicers ran afoul of the Real Estate Settlement Procedures Act (RESPA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act's prohibition against deceptive acts or practices, with one subsidiary also attacked for alleged violations of the Fair Credit Reporting Act.

The CFPB allegations are straightforward. The CFPB alleges that, when borrowers applied to have their payments deferred, one of the servicing entities failed to consider it a request for foreclosure relief options. The CFPB's mortgage servicing rules require certain protections—such as helping borrowers complete their applications and considering them for all available relief alternatives—but the mortgage servicer kept consumers in the dark, the Bureau claims.

The servicer also allegedly misled borrowers about the impact of postponing a payment due date, specifically that additional interest that accrued by deferring payment would be added to the end of the loan rather than become due when the deferment ended. Instead, the deferred interest became due immediately, and the Bureau claimed that more of the borrowers' payments went to interest and not principal, making it harder for them to pay down their loans.

The CFPB asserts that customers were charged for credit insurance that should have been canceled, with approximately 7,800 borrowers allegedly billed for the product between July 2011 and April 2015, despite allegedly having missed four or more monthly payments (the trigger to cancel the product). Other consumers had their credit insurance prematurely canceled and then had claims denied, the CFPB claims.

Other statutory violations occurred, the CFPB further claims, when the mortgage servicer incorrectly reported settled accounts as being charged off and then failed to correct the information, and when the servicer allegedly failed to investigate consumer disputes about such incorrect reports within the required time periods.

The CFPB's consent order requires the mortgage servicer to pay $4.4 million in restitution to consumers who were either charged premiums on credit insurance after it should have been canceled as well as those who were denied claims for insurance that was canceled prematurely. An additional $4.4 million civil monetary penalty was imposed.

Going forward, the servicer must treat a request for deferment as a trigger for loss mitigation options under the Bureau's mortgage servicing rules and must make clear disclosures to consumers about the impact of loan deferments on interest accrual. In addition, the mortgage servicer must stop reporting settled accounts as charged off to credit reporting agencies and investigate consumer disputes within the requisite time period.

Turning to the second entity, which both originates and services mortgage loans for the bank, the CFPB again alleged violations of Dodd-Frank and RESPA in that entity's mortgage servicing activities. This entity allegedly sent letters to borrowers requesting foreclosure relief demanding dozens of documents and forms that, the CFPB claims, had no bearing on the specific circumstances of the borrower's application (e.g., a "teacher contract" or "Social Security award letter"), or documents that the borrower had already provided. Roughly 41,000 such letters were sent, the CFPB claims.

As required by the consent order, the second entity must pay a substantially larger amount, $17 million, to the approximately 41,000 recipients of the allegedly improper letters as well as pay a $3 million civil monetary penalty. As with the first servicer, the entity must also comply with the Bureau's mortgage servicing rules in the future, clearly identifying specific documents or information needed when a borrower applies for foreclosure relief. For any consumers that never received a decision on their foreclosure application, the mortgage servicer must freeze any current foreclosure action and reach out to the borrower to determine if they want foreclosure relief options.

In an interesting comment on the bank's practices, the CFPB noted that the consent order reflects that the mortgage servicer took affirmative steps to reach out to some borrowers before it was required to by the Bureau's rules. "While those borrowers also would have benefited from more tailored and accurate notices, and the institution will provide compliant notices to them going forward, those individuals were not included [in] the affected group of consumers in this settlement," the CFPB clarified. "This will avoid penalizing the institution for making additional efforts, which the Bureau encourages other institutions to make as well."

Why it matters

The CFPB continues to take very seriously the obligation of mortgage servicers to meet the letter and spirit of the mortgage servicing rules. Recently, the CFPB has paid particular attention to alleged violations of RESPA against two mortgage servicer subsidiaries of a national bank to an action alleging illegal kickbacks paid by a mortgage lender to real estate brokers and a mortgage servicer (see story below).