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Lending

Flagstar mortgage servicing settlement with CFPB imminent

Bank holds little to no reserve for issue...

time is money

Before Flagstar Bancorp (FBC) can celebrate its strong comeback in its second-quarter earnings, it has to deal with a small blip on its record stemming back to the bank's loss mitigation practices and mortgage default servicing operations in 2011.

The Troy, Michigan-based bank filed an 8-K with the United States Securities and Exchange Commission Tuesday stating the bank is in mortgage settlement discussions with the Consumer Financial Protection Bureau.

The bank previously provided the CFPB with documents and other information concerning its loss mitigation practices and default servicing operations in response to Civil Investigative Demands received from the bureau. 

What’s unusual is that there have been large mortgage servicers that have received CIDs from the CFPB before, but not all of them have been disclosed, a report from Compass Point Trading and Research said. 

“Considering FBC felt it was necessary to mention the company was in discussions with the CFPB, we believe a material settlement may be imminent. Furthermore, any financial settlement would likely include some minor operational changes as well,” the report said.

However, Flagstar might have trouble financially handling the situation, since according to Compass Point, the bank likely has little to no reserve established for this kind of issue.

Nonetheless, as a whole, there are many positives at the financial institution, in regard to a strengthening bottom line.

In the second quarter, Flagstar posted a net income of $25.5 million, or $0.33 per diluted share, citing improved net interest income and gain on loan sales, increased mortgage rate lock commitments and loan origination volume and a continued focus on expense management as drivers of the income growth.

The bank did undergo a significant amount of cost-cutting initiatives during the year, including announcing plans to slash 600 jobs and outsourcing its default servicing.

In addition, Compass Point estimates the company sold over $100 billion of servicing UPB in order to reduce operating risk and increase much needed capital.

However, it is difficult to gauge the financial outcome of the settlement since most of the recent settlements between the CFPB and other mortgage servicers have included several other regulators. This regulatory discussion appears to only involve the CFPB.

“While the bank intends to vigorously defend against any enforcement action that may be brought, it has commenced discussions with the CFPB staff to determine if a settlement can be achieved. Those discussions are ongoing,” Flagstar said in the 8-K.

But as the bank sifts through the settlement with the CFPB, it was lucky enough to make a different, positive list with the bureau.

Last week, Flagstar was included on the CFPB’s list of participants in the mortgage eClosing pilot program.

The selected few will kick start the exploration of the increased use of technology during the mortgage closing process and how it could affect consumer understanding and engagement and save time and money for consumers, lenders and other market participants.

This could help to potentially offset the bank’s rough start to the year and support its rebound. 

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