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From Banking and Finance Law Daily, September 29, 2014

Servicing failures draw sanctions for depriving borrowers of foreclosure relief

By Andrew A. Turner, J.D.

Flagstar Bank has agreed to pay $37.5 million to settle claims brought by the Consumer Financial Protection Bureau for violating mortgage servicing rules while administering loss mitigation programs for distressed homeowners. The bank agreed to the consent order, without admitting or denying the bureau’s findings that the bank illegally impeded borrowers’ attempts to save their homes. This was the first enforcement action under the CFPB’s new mortgage servicing rules that went into effect in January 2014.

The CFPB said that the bank failed to review loss mitigation applications in a reasonable amount of time, withheld information that borrowers needed to complete their loss mitigation applications, and improperly denied borrower requests for loan modifications. “At every step in the foreclosure relief process, Flagstar failed consumers,” the CFPB said.

The CFPB found that the bank failed to devote sufficient resources to administering loss mitigation programs for distressed homeowners. 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. As a result, it took the staff up to nine months to review a single application. The CFPB found various violations of the servicing rules:

  • closed borrower applications due to excessive delays—to move its backlog, the bank would close applications due to expired documents even though the documents had expired because of its own delay;

  • delayed approval or denial of borrowing applications, as the bank failed to adhere to required timelines for evaluating a loss mitigation application before a foreclosure sale;

  • failure to alert borrowers about incomplete applications;

  • miscalculated incomes, resulting in wrongfully denied loan modifications;

  • denied applications for unspecified reasons even though the bank’s internal systems contained the true reason for the denial;

  • misinformed borrowers about appeal rights; and

  • needlessly prolonged trial periods for loan modifications causing increased loan amounts or jeopardizing permanent loan modifications.

Remedies. The CFPB’s order requires Flagstar to pay $27.5 million to victims and make a $10 million penalty payment to the CFPB’s Civil Penalty fund. Flagstar is also required to stop acquiring default servicing rights from third parties and engage in efforts to help affected borrowers who were not foreclosed on. The bank must engage in outreach, including a door knocking campaign and translations services, to contact borrowers and offer them loss mitigation options.

Under the Dodd-Frank Act, the CFPB has the authority to take action against institutions violating the January 2014 mortgage servicing rules, and it has authority to take action against institutions engaging in unfair, deceptive, or abusive practices.

Companies: Flagstar Bank, F.S.B.

MainStory: TopStory CFPB DoddFrankAct EnforcementActions Mortgages UDAAP

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