WASHINGTON — The Consumer Financial Protection Bureau's action against Flagstar Bank on Monday marked a series of firsts for the agency, including the first time it enforced its new mortgage servicing rules and the first time it banned a servicer from servicing new loans until fixes are made.
But the importance of the move was arguably even more far-reaching than that, as the CFPB cited Flagstar for activity that predated the mortgage servicing rule under which the agency took action.
Michigan-based Flagstar was ordered to pay $37.5 million in fines and restitution for its foreclosure activities beginning in 2011, even though the servicing rule did not go into effect until January of this year. CFPB officials billed the regulatory action as a critical shift in the regulatory approach to issues with servicers.
"Today's action signals a new era of enforcement to protect consumers against the cost of servicer runarounds," CFPB Director Richard Cordray told reporters. "We need all mortgage servicers to understand that they must step up and follow the law. We are working very hard to fulfill this objective."
Under the CFPB consent order, $9.9 billion-asset Flagstar must pay $27.5 million to affected consumers and another $10 million in fines. It also much launch a "door knocking campaign" for potential modification borrowers.
Additionally, the CFPB took the unusual step of barring Flagstar from acquiring servicing rights for default loan portfolios until it can prove it is in compliance with the new servicing standards, the first time the CFPB has issued such a ban.
Flagstar was cited for, among other things, taking too long to process applications for foreclosure relief and finalizing permanent loan modifications; failing to inform borrowers when their application was incomplete; and denying loan modifications to qualified borrowers.
The citations largely relate to the CFPB's mortgage servicing rule, which specifies that servicers must maintain accurate paperwork and respond to troubled borrowers within certain timeframes.
Although the servicing rule was not in effect in 2011, when the CFPB began its investigation of Flagstar's activities, an agency official said it also cited Flagstar under the authority of the Dodd-Frank Act, which allows the CFPB to target unfair, deceptive and abusive practices.
"Regardless of what laws we're enforcing during this time period, Flagstar was engaged in activities in the loss mitigation space that were unlawful, either under our Dodd-Frank authority or under the new rules that came into effect in January 2014," said Cara Petersen, the CFPB's acting deputy enforcement director.
Cordray said that part of the problem was that Flagstar was not fully staffed to handle the large influx of modification requests from borrowers. In 2011, Flagstar had 13,000 active loss mitigation applications but only 25 full-time employees and a third-party vendor in India who was reviewing those applications, the CFPB said. As a result, it took up to nine months for staff to review one application, after the documents supporting it had expired, which led to the bank closing the application.
"Nine months is just, by any measure, far over the line," Petersen said.
The mortgage servicing rule requires a servicer to review a loss mitigation application within 30 days if it receives a complete application more than 37 days before a foreclosure sale.
When asked whether Flagstar's third-provider provider being in India played a role of concern to the CFPB, Petersen said it was more based on Flagstar's response to consumers.
"Regardless of where those resources are, there weren't enough and so as a result consumers waited excessive amounts of time to get a response from Flagstar to get approved for a loan modification or to otherwise hear from Flagstar about the status of their application," Petersen said. "I don't think it's that we're speaking to one way or another about where those resources are. It just needs to be sufficient resources to do the job for consumers so that consumers don't end up being harmed by those inadequacies."
The CFPB also said Flagstar's loss mitigation call center had an average call wait time of 25 minutes and calls were abandoned about half the time. The servicer was cited for not letting borrowers know when documents were missing in order to complete a mitigation application nor did it specify why it denied an application. The CFPB also said Flagstar "routinely miscalculates" the income of borrowers who may have qualified for a modification.
"In many cases, we believe Flagstar deprived people of the ability to make an informed choice about how to save or sell their home, causing borrowers to drop out of the process entirely and driving them into foreclosure," Cordray said. "A former manager testified that when borrowers got to an advanced stage of delinquency, 'You can feel that they've given up. There's no hope left.' Another former manager recalled a borrower who told him, 'You know what? My home can just go to foreclosure. I'm not faxing any documentation anymore.'"
Flagstar serviced more than 40,000 delinquent borrowers from 2011 to 2013, according to the consent order. The CFPB estimates 6,500 borrowers were affected by Flagstar's faulty modification practices during this time, of which, 2,000 applicants were foreclosed upon by Sept. 4.
Flagstar has agreed to pay the $37.5 million in consumer remediation and penalties in addition to launching an outreach for potential modification borrowers that includes "a door knocking campaign and translations services," the CFPB said. The ban on Flagstar from obtaining servicing rights on default portfolios will remain in effect until the CFPB decides it's in compliance. No timeline has been set for the ban to be lifted.
Flagstar must "hire an independent consultant to take a look at their default servicing operations and assess whether and how they can change their practices to comply with the laws and protections for consumers in this area," Petersen said. "They need to report to us on those efforts and provide us with certain results and then... we will make an assessment as to whether they can move forward and take on portfolios of default servicing. As far as how long that will take, that's really up to Flagstar."