The Consumer Financial Protection Bureau (CFPB) announced that it has reached a consent agreement with Flagstar Bank to settle accusations that the bank delayed or prevented thousands of homeowners from obtaining mortgage relief and avoid foreclosure. The agreement calls for Flagstar to pay $27.5 million to the roughly 6,500 consumers whose loans were serviced by the bank. The bank will also pay a $10 million fine to the agency. Flagstar is one of the nation’s largest mortgage servicers.
What makes this penalty unique is that the CFPB halted Flagstar’s mortgage servicing operation until it can show that it is in compliance with federal laws.
The consent agreement outlined many of Flagstar’s wrongful acts, including assigning only 25 full-time employees and a third-party vendor in India to review nearly 13,000 active loss mitigation applications. During 2011, it took Flagstar up to nine months to review a single application. When consumers called Flagstar for information, the average call wait time was 25 minutes and the average call abandonment rate was almost 50 percent. In many cases loan modification applicants were wrongfully denied, often without explanation.
Pursuant to the consent order with the CFPB, Flagstar is prohibited from acquiring any servicing rights for defaulted loans. If a loan it services goes into default, Flagstar must transfer the servicing of that loan to another mortgage servicer. These prohibitions continue until Flagstar has demonstrated compliance with the consent order’s operational reform provisions.
The CFPB, like the rest of the country, has figured out that mortgage servicers benefit from non-compliance with the law, and that it is more profitable to simply pay fines without change. Halting Flagstar’s operations changes the character of the penalty and may ultimately provide incentive for the industry to reform itself.