The Consumer Financial Protection Bureau has fined Flagstar Bancorp (FBC) $37.5 million for violating the CFPB’s mortgage servicing rules, “by illegally blocking borrowers’ attempts to save their homes,” the CFPB said.
According to a release from the CFPB, Flagstar allegedly took excessive time to process borrowers’ applications for foreclosure relief, failed to tell borrowers when their applications were incomplete, denied loan modifications to qualified borrowers, and illegally delayed finalizing permanent loan modifications.
“At every step in the foreclosure relief process, Flagstar failed borrowers,” the CFPB said.
For those violations, the CFPB has ordered Flagstar to “halt its illegal activities,” pay $27.5 million to the victims and pay a $10 million fine to the CFPB’s Civil Penalty Fund.
"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.”
In August, Flagstar disclosed that it was in discussions with the CFPB over settling claims of mortgage servicing rule violations. The Troy, Michigan-based bank filed an 8-K with the United States Securities and Exchange Commission at the end of August announcing the negotiations.
“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.
Now the CFPB has announced the fine and stated just how significant Flagstar’s issues were.
“For example, in 2011, Flagstar had 13,000 active loss mitigation applications but only assigned 25 full-time employees and a third-party vendor in India to review them,” the CFPB said.
Because of that arrangement, it took the staff up to nine months to review a single application, the CFPB said.
“In Flagstar’s loss mitigation call center, the average call wait time was 25 minutes and the average call abandonment rate was almost 50%,” the CFPB said. "And Flagstar’s loss mitigation application backlog numbered well over a thousand.”
The CFPB highlighted the various violations of its servicing rules that Flagstar engaged in, including:
- Closed borrower applications due to its own excessive delays: Flagstar took excessive time to review loss mitigation applications, often causing application documents to expire. To move its backlog, Flagstar would close applications due to expired documents, even though the documents had expired because of Flagstar’s delay.
- Delayed approving or denying borrower applications: Under the new CFPB mortgage servicing rules, Flagstar must evaluate a complete loss mitigation application within 30 days, if it receives the complete application more than 37 days before a foreclosure sale. Flagstar also failed to adhere to these timelines.
- Failed to alert borrowers about incomplete applications: Flagstar is responsible for reviewing borrowers’ initial loss mitigation applications to determine what documents are missing. It must then tell borrowers what documents are missing, usually by sending a “missing document” letter. Flagstar failed to send, or delayed sending, missing document letters to borrowers.
- Miscalculated incomes: Eligibility for some loss mitigation programs, such as a loan modification, is highly dependent on borrower income. If borrowers have too much or too little income, they do not qualify. Flagstar routinely miscalculated borrower income and wrongfully denied loan modifications.
- Denied applications for unspecified reasons: Under the CFPB’s new rules, mortgage servicers must provide the specific reason a complete loan modification application is rejected. Flagstar’s policy was to say only “not approved for loss mitigation options by the investor/owner of the loan,” even though Flagstar’s internal systems contained the true reason for the denial.
- Misinformed borrowers about their appeal rights: Under the CFPB’s new rules, Flagstar must provide certain borrowers the right to appeal the denial of a loan modification. But Flagstar failed to provide this notice, and it wrongly stated that borrowers have an appeal right only if they reside in certain states.
- Put borrowers in trial period purgatory: Flagstar needlessly prolonged trial periods for loan modifications. This caused some borrowers’ loan amount under the modified note to increase and, in some cases, jeopardized borrowers’ permanent loan modification.
“Flagstar’s failures as a mortgage servicer hurt homeowners,” the CFPB said. “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.”
As part of its enforcement action against Flagstar, the CFPB has ordered Flagstar to pay $27.5 million to the approximately 6,500 consumers whose loans were being serviced by Flagstar and who subject to Flagstar’s “unlawful” practices.
“At least $20 million of this will go to the approximately 2,000 victims of foreclosure,” the CFPB said. “Borrowers who receive payments will not be prevented from taking individual action on their claims as a result of this settlement.”
Additionally, Flagstar is now prohibited from engaging in violations of the loss mitigation provisions of the CFPB’s mortgage servicing rules and unfair, deceptive and abusive acts or practices in connection with loss mitigation. The CFPB said that Flagstar must 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.
Flagstar is also prohibited from acquiring default servicing rights from third parties, “until it demonstrates it has the ability to comply with laws that protect consumers during the loss mitigation process,” the CFPB said.
Flagstar must also engage in outreach programs to the affected borrowers who were not yet foreclosed on. During this period of outreach, which is to include a door-knocking campaign and translations services, Flagstar must halt the foreclosure process.
“This resolution is in the bank's best interest and allows us to continue building a great company that is poised for sustainable, long-term growth and value creation, benefitting our shareholders, customers and the communities we serve," said Alessandro DiNello, Flagstar’s president and CEO.
"The dedicated employees of Flagstar Bank have completed thousands of successful loan modifications and work incredibly hard to meet and exceed the needs of our customers,” DiNello added. “With this matter now behind us, everyone at Flagstar Bank is committed to building on the significant progress we have achieved while continuing to operate with integrity, responsiveness and a commitment to our core values."