Flagstar Bank will pay $37.5 million in fines and penalties for failing to comply with the Consumer Financial Protection Bureau's (CFPB) new mortgage servicing rules.
Specifically, the bank will pay a $10 million fine and return $27.5 million to affected borrowers for allegedly taking excessive time to process borrowers' applications for foreclosure relief, failing to tell borrowers when their applications were incomplete, denying loan modifications to qualified borrowers, and illegally delaying the finalization of permanent loan modifications, among other violations.
In a statement, Richard Cordray, director of the CFPB, says the action taken against Flagstar ‘signals a new era of enforcement to protect consumers against the cost of servicer runarounds.’
‘Because of Flagstar's illegal actions and unacceptable delays, struggling homeowners lost the opportunity to save their homes,’ Cordray says. ‘The bureau has been clear that mortgage servicers must follow our new servicing rules and treat homeowners fairly.’
The CFPB says Flagstar ‘failed struggling borrowers at every step in the foreclosure relief process.’ Flagstar ‘took excessive time to review loss mitigation applications, often causing application documents to expire,’ which, in turn, resulted in some applications being closed. It also ‘delayed approving or denying borrower applications,’ which, again, resulted in the applications expiring prior to the 30-day deadline for a servicer to review an application and take action.
Flagstar also failed to alert borrowers about incomplete applications, including telling them which documents were missing by way of ‘missing document’ letters. The bank also miscalculated borrowers' incomes and, as a result, ended up wrongfully denying loan modifications, the CFPB says in a release.
It also denied applications for unspecified reasons, misinformed borrowers about their appeal rights, and put borrowers in ‘trial period purgatory,’ which is when trial periods for loan modifications are needlessly prolonged.
Flagstar is also accused of failing to allocate sufficient resources to administering loss mitigation programs for distressed homeowners. For example, the CFPB claims that in 2011, the bank had 13,000 active loss mitigation applications but only assigned 25 full-time employees and a third-party vendor in India to review them.
As a result, applications for loss mitigation actions became backlogged up to nine months and call wait times in Flagstar's loss mitigation call center averaged 25 minutes during certain time periods. During these periods, the average call abandonment rate was almost 50%.
At one point, the backlog at Flagstar was well over 1,000 applications, according to the CFPB.
Although the bureau's investigation into violations at Flagstar goes back to 2011, it was not able to take action until its new servicing rules went into effect in January of this year.
As mentioned, Flagstar will pay $27.5 million to the approximately 6,500 consumers whose loans were improperly serviced. At least $20 million of this will go to the approximately 2,000 victims of foreclosure, the CFPB says in its release.
In addition, the bank is prohibited from acquiring default servicing rights from third parties until it demonstrates it has the ability to comply with the bureau's new servicing rules.
What's more, the bank must contact those borrowers who may have been adversely harmed by its past practices – including engaging in a door knocking campaign – and further, must halt the foreclosure process for those borrowers who may have been impacted.
Finally, Flagstar must do an independent review of previously denied loan modifications to determine whether the borrower was offered all loss mitigation options for which they qualified. If they were not, the bank must offer the borrower those loss mitigation options.
In a statement, Alessandro (Sandro) DiNello, president and CEO of Flagstar Bank, says the resolution with the CFPB ‘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.
‘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 adds. ‘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.’