CFPB Fines Bank $37.5 Million for Illegal Mortgage Servicing

The Consumer Financial Protection Bureau (CFPB) is taking action against Michigan-based Flagstar Bank for violating the CFPB’s new mortgage servicing rules by illegally blocking borrower’s attempts to save their homes, according to the agency. 

As a result of committing what the CFPB defines as “illegal activities,” Flagstar has been ordered to pay $27.5 million to victims and a $10 million civil penalty fine. 

According to CFPB complaints, the bank 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.

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“Because of Flagstar’s illegal actions and unacceptable delays, struggling homeowners lost the opportunity to save their homes,” said CFPB Director Richard Cordray in a statement released Monday. “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 January, the CFPB’s new mortgage servicing rules took effect. These new regulations established specific rules of the road for handling loss mitigation applications. 

However, since 2011, Flagstar has failed to devote sufficient resources to administering loss mitigation programs for distressed homeowners, the CFPB’s examinations and investigation found.

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. For a time, it took the staff up to nine months to review a single application. In Flagstar’s loss mitigation call center, the average call wait time was 25 minutes and the average call abandonment rate was almost 50%.

In addition, Flagstar’s loss mitigation application backlog numbered well over a thousand, the agency said, noting that when the new servicing rules went into effect this year, Flagstar committed violations of the rules with respect to loss mitigation.

“We found that Flagstar would clear its backlog of applications by closing those with expired documents — even though the documents had expired because Flagstar sat on them for so long,” Cordray said in prepared remarks Monday. “We also found that consumers would turn in loan modification applications but would not hear whether they were approved for many months.”

Along with paying $37.5 million in penalties, Flagstar also is barred from acquiring servicing rights for default loan portfolios until it demonstrates that it is able to comply with the laws that protect consumers during the loss mitigation process.

Written by Emily Study

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