Regulatory action has been taken in the case of a residential loan servicer that allegedly violated mortgage servicing rules with the way it handled loan modifications.
The settlement was reached between Flagstar Bank FSB and the Consumer Financial Protection Bureau, parent Flagstar Bancorp Inc. announced Monday.
According to the Troy, Mich.-based firm, the settlement resolves alleged violations of federal consumer financial laws related to Flagstar’s loss mitigation practices and default servicing operations.
The CFPB issued a statement alleging that Flagstar outright blocked distressed borrowers’ attempts to avoid foreclosure.
“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,” the bureau stated.
The alleged activity happened from 2011 through this year.
The CFPB claims Flagstar only assigned 25 full-time employees and an offshore vendor to deal with 13,000 active loss mitigation applications.
At one point, it took nine months to review an application, the bureau alleges. Call wait times were 25 minutes at the loss mitigation call center, and nearly half of calls were abandoned.
The CFPB says Flagstar closed loss mitigation applications because the bank, itself, took too long to process.
Flagstar is accused of violating the mortgage servicing rules that went into effect in January by exceeding 30 days’ review time on loss mitigation applications received more than 37 days before a foreclosure sale.
Another allegation is the failure to advise borrowers about missing documentation on incomplete applications. It also didn’t provide specific reasons for the denial of loan modifications, the regulator said.
Flagstar routinely miscalculated borrower income and wrongfully denied loan modifications, according to the CFPB.
Other allegations include misinforming borrowers about their appeal rights and needlessly prolonging trial periods for loan modifications.
Without admitting any guilt, Flagstar agreed to a CFPB consent order that requires it to pay the CFPB $27.5 million in remediation for 6,500 borrowers — including 2,000 with foreclosures — whose loans it serviced.
Another $10 million for a civil money penalty was assessed as part of the consent order.
The CFPB said Flagstar’s failures “deprived borrowers of the ability to make an informed choice about how to save or sell their home, caused borrowers to drop out from the loss mitigation process entirely, and drove borrowers into foreclosure.”
Flagstar is prohibited from acquiring MSRs on distressed loan portfolios until it can demonstrate that it has the ability to comply with the servicing rules.
Flagstar reported in its second-quarter 2013 earnings that it sold MSRs on $12.7 billion in loans.
In December 2013, Flagstar sold 55 percent of the MSRs it owned to Two Harbors Investment Corp. The MSRs on $40.7 billion in Fannie Mae and Ginnie Mae loans cost Two Harbors $500 million.
As of June 30, 2014, Flagstar’s total servicing portfolio was just $29.4 billion.
Flagstar noted that it previously disclosed in a Securities and Exchange filings that it was having settlement discussions with the CFPB.
“This resolution is in the bank’s best interest and allows us to continue building a great company that is poised for sustainable, long-term growth and value creation, benefiting our shareholders, customers and the communities we serve,” Flagstar President and Chief Executive Officer Alessandro DiNello said in the announcement. “The dedicated employees of Flagstar Bank have completed thousands of successful loan modifications and work incredibly hard to meet and exceed the needs of our customers.”
