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CFPB Hits Flagstar Bank with First Servicer Rule Enforcement

by devteam October 1st, 2014 | Share

The Consumer Financial Protection Bureaurn(CFPB) came down hard on Michigan-based Flagstar Bank both legally and verbally</bas it issued the first enforcement action under its new mortgage servicingrnrules which went into effect in January 2014. rnThe action claims that Flagstar had "failed borrowers" at every step inrnthe foreclosure process by illegally blocking those borrowers' attempts to saverntheir homes.  </p

“Because of Flagstar’s illegal actionsrnand unacceptable delays, struggling homeowners lost the opportunity to saverntheir homes,” said CFPB Director Richard Cordray. “The Bureau has been clearrnthat mortgage servicers must follow our new servicing rules and treatrnhomeowners fairly. Today’s action signals a new era of enforcement to protectrnconsumers against the cost of servicer runarounds.” </p

Flagstar is a federal savings bank andrnmortgage servicer which administers foreclosure relief programs provided by thernowner of the loan.  In a press releasernCFPB said that servicers “are the link between a mortgage borrower and arnmortgage owner.  They collect and apply payments, work out modificationsrnto the loan terms, and handle the difficult process of foreclosure. rnImportantly, consumers cannot take their business elsewhere.  Instead,rnthey are stuck with their mortgage servicer, whether they are treated well orrnpoorly.” </p

CFPB’s investigation found that, 2011 to thernpresent, Flagstar failed to devote sufficient resources to administering lossrnmitigation programs for distressed homeowners.   In 2011 for example the bank had 13,000rnactive loss mitigation applications but only 25 full-time employees and arnthird-party vendor in India assigned to review them. During one period thernstaff was taking up to nine months to review a single application and thernapplication backlog numbered well over a thousand.  The average wait time for a caller tornFlagstar’s loss mitigation center was 25 minutes and nearly half of callersrngave up and hung up.  Further, CFPB said,rnwhen the new mortgage servicing rules went into effect in January Flagstarrncommitted violations of the new rules with respect to loss mitigation. </p

Specifically, the Bureau found:  </p<ul type="disc"

  • Delays due to the bank’s backlog of applications oftenrn caused required documents to expire. rn Flagstar would close applications due to expired documents even thoughrn their delays had caused the expiration.  The servicer also failed to adhere to thern 30 day timeline for evaluating a complete application if it is receivedrn more than 37 days before a foreclosure sale.</li
  • The bank failed to properlyrn notify borrowers when documents were missing from an application.  </li
  • Even when applications were complete Flagstar mishandledrn them.  The servicer routinelyrn miscalculated borrower income and wrongfully denied loan modificationsrn because incomes were erroneously though not to qualify for mitigation. </li
  • Even though new rules requirern servicers to provide the specific reasons a mitigation application isrn denied, Flagstar’s policy wasrn to say only “not approved for loss mitigation options by thern investor/owner of the loan,” even though its internal systems containedrn the true reason for the denial. </li
  • CFPB’s rules require that certain borrowers be notifiedrn of their right to appeal a loan modification denial.  Flagstar failed to provide this noticern and erroneously told borrowers that there was a right of appeal only forrn residents of certain states. </li
  • The bank needlessly prolonged trial periods for loan modifications inrn what Cordray called  “trial modrn purgatory,” causing some borrowers’ loan amounts to increase andrn jeopardizing some borrowers’ permanent loan modifications.</li</ul

    CFPB said that Flagstar’srnfailures as a mortgage servicer hurt homeowners. In many cases, Flagstarrndeprived borrowers of the ability to make an informed choice about how to savernor sell their home, caused borrowers to drop out from the loss mitigationrnprocess entirely, and drove borrowers into foreclosure. </p

    CFPB’s enforcement order requires Flagstar to:rn</p<ul type="disc"

  • Pay $27.5 million to the approximately 6,500 consumersrn whose loans were being serviced by Flagstar and who were subject to itsrn unlawful practices. At least $20 million of this will go to thern approximately 2,000 victims of foreclosure. These borrowers will stillrn have the right to take individual action on their claims as a result ofrn this settlement. </li
  • End all loss mitigationrn mortgage servicing violations. rn Flagstar must, among other things, properlyrn review, acknowledge, and evaluate loss mitigation applications and cannotrn improperly deny loss mitigation applications or improperly prolong thern trial period for a loan modification. </li
  • Stop acquiring defaultrn servicing rights from third parties for default loan portfolios until it demonstrates it has the ability to comply withrn laws that protect consumers during the loss mitigation process. </li
  • Engage in efforts to help borrowersrn affected by Flagstar’s unlawfulrn practices but not foreclosed upon.  Flagstarrn must engage in outreach, including a door knocking campaign andrn translation services, to contact borrowers and offer them loss mitigationrn options, halting any foreclosure actions during this outreach period forrn these borrowers. For affected borrowers who were previously denied a lossrn mitigation option, Flagstar must do an independent review to determinern whether they were offered all loss mitigation options for which theyrn qualified. If they were not, Flagstar must offer the borrower those lossrn mitigation options. </li
  • Pay $10 million civil penalty to the CFPB’s Civil Penalty Fund. </li</ul

    Cordray said that the Bureau’s action signalsrna new era of enforcement to protect consumers against servicer abuses.  “The financial crisis is still fresh in ourrnminds and too many homeowners continue to feel its effects,” he said.  “Wernneed all mortgage servicers to understand that they must step up and follow thernlaw.  We are working very hard to fulfill this objective.” 

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    • About the Author

    devteam

    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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