CFPB Hits Flagstar Bank with First Servicer Rule Enforcement

By: Jann Swanson •

The Consumer Financial Protection Bureau (CFPB) came down hard on Michigan-based Flagstar Bank both legally and verbally as it issued the first enforcement action under its new mortgage servicing rules which went into effect in January 2014.  The action claims that Flagstar had "failed borrowers" at every step in the foreclosure process by illegally blocking those borrowers' attempts to save their homes. 

"Because of Flagstar's illegal actions and unacceptable delays, struggling homeowners lost the opportunity to save their homes," said CFPB Director Richard Cordray. "The 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."

Flagstar is a federal savings bank and mortgage servicer which administers foreclosure relief programs provided by the owner of the loan.  In a press release CFPB said that servicers "are the link between a mortgage borrower and a mortgage owner.  They collect and apply payments, work out modifications to the loan terms, and handle the difficult process of foreclosure.  Importantly, consumers cannot take their business elsewhere.  Instead, they are stuck with their mortgage servicer, whether they are treated well or poorly."

CFPB's investigation found that, 2011 to the present, Flagstar failed to devote sufficient resources to administering loss mitigation programs for distressed homeowners.   In 2011 for example the bank had 13,000 active loss mitigation applications but only 25 full-time employees and a third-party vendor in India assigned to review them. During one period the staff was taking up to nine months to review a single application and the application backlog numbered well over a thousand.  The average wait time for a caller to Flagstar's loss mitigation center was 25 minutes and nearly half of callers gave up and hung up.  Further, CFPB said, when the new mortgage servicing rules went into effect in January Flagstar committed violations of the new rules with respect to loss mitigation.

Specifically, the Bureau found:  

  • Delays due to the bank's backlog of applications often caused required documents to expire.  Flagstar would close applications due to expired documents even though their delays had caused the expiration.  The servicer also failed to adhere to the 30 day timeline for evaluating a complete application if it is received more than 37 days before a foreclosure sale.
  • The bank failed to properly notify borrowers when documents were missing from an application.  
  • Even when applications were complete Flagstar mishandled them.  The servicer routinely miscalculated borrower income and wrongfully denied loan modifications because incomes were erroneously though not to qualify for mitigation.
  • Even though new rules require servicers to provide the specific reasons a mitigation application is denied, Flagstar's policy was to say only "not approved for loss mitigation options by the investor/owner of the loan," even though its internal systems contained the true reason for the denial.
  • CFPB's rules require that certain borrowers be notified of their right to appeal a loan modification denial.  Flagstar failed to provide this notice and erroneously told borrowers that there was a right of appeal only for residents of certain states.
  • The bank needlessly prolonged trial periods for loan modifications in what Cordray called  "trial mod purgatory," causing some borrowers' loan amounts to increase and jeopardizing some borrowers' permanent loan modifications.

CFPB said that Flagstar's failures as a mortgage servicer hurt homeowners. In many cases, Flagstar deprived borrowers of the ability to make an informed choice about how to save or sell their home, caused borrowers to drop out from the loss mitigation process entirely, and drove borrowers into foreclosure.

CFPB's enforcement order requires Flagstar to:

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

Cordray said that the Bureau's action signals a new era of enforcement to protect consumers against servicer abuses.  "The financial crisis is still fresh in our minds and too many homeowners continue to feel its effects," he said.  "We need all mortgage servicers to understand that they must step up and follow the law.  We are working very hard to fulfill this objective."