Today the Consumer Financial Protection Bureau is taking its first enforcement action under the Bureau’s new mortgage servicing rules. We are entering an order against Michigan-based Flagstar Bank for violating those rules by failing borrowers and illegally blocking them from trying to save their homes. Flagstar took excessive time to process borrowers’ applications, did not tell them when their applications were incomplete, denied loan modifications to qualified borrowers, and illegally delayed finalizing permanent loan modifications. These unlawful practices caused many consumers to lose the homes they had been trying to save. That is wrong and it is unacceptable.
Mortgage servicers play a central role in homeowners’ lives because they bear responsibility for managing the loans. They are the link between a mortgage borrower and a mortgage owner. They collect and apply payments, work out modifications to the loan terms, and handle the difficult process of foreclosure. Importantly, consumers cannot take their business elsewhere. Instead, they are stuck with their mortgage servicer, whether they are treated well or poorly.
In January 2014, the Consumer Bureau’s new mortgage servicing rules took effect. These new regulations establish specific rules of the road for handling loss mitigation applications. Since we first announced these rules almost two years ago, we have made clear that we expect full compliance to clean up the problems that had been pervasive in this industry and caused so many people to lose their homes. Consumers must not be hurt by illegal servicing any more. When mortgage servicers fail to treat people fairly, we will vigorously enforce the law.
Like many other servicers, Flagstar found that its volume of applications for loss mitigation rose sharply as a result of the foreclosure crisis. Our investigation found that Flagstar was simply not equipped to handle the influx. For a time, it took the staff up to nine months to review a single application. In 2011, Flagstar had 13,000 active loss mitigation applications but had only 25 full-time employees and a third-party vendor in India reviewing them. The Bureau found that in Flagstar’s loss mitigation call center, the average wait time was 25 minutes and the average call abandonment rate was almost 50 percent. Flagstar also had a heavy backlog of loss mitigation applications.
To make things worse, we found that Flagstar would clear its backlog of applications by closing those with expired documents – even though the documents had expired because Flagstar sat on them for so long. We also found that consumers would turn in loan modification applications but would not hear whether they were approved for many months. Flagstar was supposed to send “missing document” letters to consumers so they could provide any missing information, but it often delayed or did not send them at all.
We also concluded that when Flagstar did evaluate a completed application, it did a poor job. For example, we believe it routinely miscalculated the incomes of borrowers. Because loss mitigation programs are heavily dependent on the borrower’s income, this kind of miscalculation can have grave consequences for consumers. We determined that Flagstar’s failures led to wrongful denials of loan modifications.
Furthermore, when Flagstar denied an application, it did not give homeowners a specific reason why. Under the Consumer Bureau’s new rules, mortgage servicers must provide the specific reason why a complete application for a loan modification is rejected. This gives consumers a chance to fix the problem and either reapply or appeal the rejection. It also gives consumers more control over what is happening and provides them with critical information so they can make informed choices.
Another new mortgage servicing right for certain homeowners is the right to appeal the denial of a loan modification. But Flagstar has been wrongly telling borrowers that they only have the right to appeal if they live in certain states. That is not true. It does not matter what state the consumer lives in.
Finally, for those consumers lucky enough to get a trial loan modification, Flagstar kept them in a sort of “trial mod purgatory” for far too long. Indeed, Flagstar needlessly prolonged trial periods, causing some borrowers’ loan amount under the modified note to increase and, in some cases, jeopardizing the potential for a permanent loan modification.
Struggling homeowners paid a heavy price, including losing the opportunity to save their homes, as a result of Flagstar’s illegal actions. These problems were compounded because consumers have almost nowhere to turn. In the mortgage servicing market, they could not take their business elsewhere but were stuck with whatever treatment they received from Flagstar.
As we have seen for many years now – and I have seen it in local government, state government, and now the federal government – mortgage servicing failures hurt homeowners. 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. 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.”
To remedy these wrongs, the Consumer Bureau is ordering Flagstar to halt any further violations of federal law. Flagstar must pay $27.5 million to consumers whose loans were being serviced by Flagstar and who were subject to its unlawful practices. At least $20 million of this amount will go to victims of foreclosure. Flagstar must also engage in outreach to affected borrowers who were not foreclosed on and offer them loss mitigation options. Flagstar must halt the foreclosure process, if one is happening, during this outreach and qualification process. Flagstar also is barred from acquiring servicing rights for default loan portfolios until it demonstrates that it is able to comply with the laws that protect consumers during the loss mitigation process. In addition, Flagstar will make a $10 million payment to the Bureau’s Civil Penalty Fund.
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. The financial crisis is still fresh in our minds and too many homeowners continue to feel its effects. 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. Thank you.
The Consumer Financial Protection Bureau (CFPB) is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov.