CFPB: Flagstar Bank to Pay $37.5 Million for Mortgage Servicing Violations

On Monday, the Consumer Financial Protection Bureau announced it has ordered Michigan-based Flagstar Bank to pay $37.5 million over violations of mortgage servicing rules that went into effect at the beginning of the year.

According to the CFPB, Flagstar harmed borrowers’ attempts to remain in their homes by failing to send notice when applications for foreclosure relief were not complete, denying loan modifications to eligible customers and taking too long to finalize approved mortgage modifications.

This is the CFPB’s first enforcement action under its new mortgage servicing rules that went into effect in January.

“Because of Flagstar’s illegal actions and unacceptable delays, struggling homeowners lost their opportunity to save their homes,” said CFPB Director Richard Cordray. “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.”

Flagstar Bank is a federal savings bank and servicer that administers foreclosure relief programs provided by loan holders. Servicers collect and apply mortgage payments, work out loan modifications and handle foreclosure. Consumers do not have the option to take their business to another company and are forced to stick with their servicer, Cordray stressed.

The bureau’s investigation found that from 2011 to 2014, Flagstar did not devote enough resources to administering loss mitigation programs for homeowners. In 2011, the bank had 13,000 active applications for loss mitigation, but just 25 full-time employees and an India-based third-party vendor assigned to reviews. During one period of the investigation, staff took up to 9 months to review a single application. The average wait time for a caller to the loss mitigation center was close to half an hour, and about half of callers gave up waiting.

The bureau found that, due to the bank’s delays, required documents expired. Flagstaff frequently miscalculated borrower income, wrongfully denying modifications due to erroneously calculated income. While the new mortgage servicing rules require servicers to provide a specific reason for a mitigation application to be denied, Flagstaff policy was to state only that the application was “not approved for loss mitigation options by the investor/owner of the loan,” although its internal system did have a specific reason.

The CFPB has ordered Flagstar to pay $27.5 million to about 6,500 consumers whose loans were serviced by Flagstar and subjected to illegal practices. A minimum of $20 million of this money will go toward nearly 2,000 foreclosure victims, who retain the right to take individual action after the settlement. The servicer must also pay a $10 million civil penalty to the CFPB Civil Penalty Fund.