Flagstar Bank has been ordered to pay a $10 million fine and provide $27.5 million in restitution to mortgage customers by the Consumer Financial Protection Bureau. It is the first enforcement action by the CFPB under new mortgage servicing rules promulgated in January. The consent order issued against Flagstar can be found here.
The CFPB asserts that Flagstar victimized consumers “at every step in the foreclosure relief process.”
According to the consent order, 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. Other rule violations included “routinely” miscalculating borrowers’ income on relief paperwork which resulted in wrongful denial of loan modifications, as well as the failure to inform customers about incomplete applications.
The broad scope of the CFPB review signals that the CFPB considers actions prior to the new rules to be subject to its powers. The Flagstar rule violations occurred over a three-year period beginning in 2011, when the bank failed to devote sufficient resources to the administration of the bank’s loss mitigation programs for distressed homeowners, said the CFPB. In 2011, the bank assigned just 25 full-time employees and a third-party-review vendor to handle more than 13,000 active relief applications, leading to serious delays. In some instances, it took nine months to review a single application, and pending applications were purposely allowed to expire to minimize the backlog. During this time, consumers had to wait an average of 25 minutes to speak with a Flagstar representative on the telephone.
Flagstar must pay the $10 million into the CFPB’s Civil Penalty Fund. Approximately 6,500 customers will receive payments from the $27.5 million, although about $20 million of that sum will go to the estimated 2,000 customers who were foreclosed upon due to Flagstar’s rule violations. The CFPB noted that its settlement with Flagstar does not prevent borrowers from bringing their own civil actions.
In addition to the monetary penalties, the consent order states that Flagstar is prohibited from growing its business by acquiring servicing rights for any defaulted loan portfolios until it can demonstrate to the CFPB that it is in compliance with all servicing rules. Further, Flagstar must 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 any such borrowers.