By: Joshua A. Huber
On September 28, 2014, Flagstar Bank, FSB (“Flagstar”) agreed to a Consent Order, under which it will pay $37.5 million to resolve allegations that it engaged in unfair acts or practices by impeding borrowers’ access to loss mitigation. Flagstar’s settlement with the Consumer Financial Protections Bureau (CFPB) marks the CFPB’s first major enforcement action under the new Mortgage Servicing Rules, which became effective January 1, 2014.[i]
The CFPB’s allegations encompassed five (5) areas of Flagstar’s default servicing practices. Specifically, the CFPB found that:
- Flagstar systematically failed to review loss mitigation applications in a reasonable amount of time which often caused required documents to expire. The CFPB specifically referenced Flagstar’s insufficient staffing, a significant backlog of loss mitigation applications, call wait times exceeding twenty-five (25) minutes and a ninety (90) day timeline to review a single borrower application.
- Flagstar withheld information that borrowers needed to complete their loss mitigation applications, such as “missing document letters” which are designed to inform borrowers of deficiencies in pending applications.
- Flagstar lacked a systemized, controlled process for calculating borrower income, which led to the improper denial of a large number of modifications.
- Flagstar impermissibly extended trial period plans beyond the timeframe permitted by investors, causing borrowers to lose out on permanent modifications.
- Flagstar’s ongoing administration of loss mitigation programs does not comply with the Mortgage Servicing Rules.
Flagstar consented to the issuance and enforcement of the Consent Order but neither admitted nor denied the CFPB’s findings of fact or conclusions of law. The remedial aspects of the Consent Order include a damages payment of $27.5 million ($20 million of which will be paid to foreclosed borrowers), a $10 million civil penalty pursuant to 12 U.S.C. § 5565(c) and a temporary prohibition on Flagstar’s ability to acquire servicing rights to any third-party originated loans which are in default.
The Consent Order demonstrates the CFPB’s continued focus on loss mitigation practices during the peak of the financial crisis. In light of this Consent Order, mortgage servicers would be well-served by reviewing and re-evaluating their loss mitigation processes.
[i] See 12 C.F.R. § 1024.41(b), et seq.