On September 29, 2014, the CFPB announced it reached a consent order with Flagstar Bank, F.S.B., the 17th largest mortgage servicer in the U.S., alleging violations of the CFPB’s Mortgage Servicing Rules. The consent order included payment of $27.5 million in damages to borrowers, $10 million in penalties, and a temporary injunction preventing Flagstar from acquiring or servicing additional default loan servicing rights. This was the CFPB’s first enforcement action for violations of its new mortgage servicing rules, and provides insights into the CFPB’s focus and strategy for mortgagor protection.
The CFPB alleged that Flagstar, among other things, “imped[ed] borrowers’ access to loss mitigation” as the bank “failed to review loss mitigation applications in a reasonable amount of time; withheld information that borrowers needed to complete their loss mitigation applications; improperly denied borrower requests for loan modifications; and improperly prolonged trial periods for loan modifications.” For example, the consent order alleged that in 2011, Flagstar had 13,000 loss mitigation applications and only 25 full-time employees reviewing those applications. This resulted in impermissible delays and applications left to expire or otherwise go unattended. The CFPB also alleged that the bank “misrepresent[ed] borrowers’ right to appeal the denial of a loan modification.” Flagstar stipulated to the consent order, but did so without admitting any of the CFPB’s findings or conclusions.
In announcing the enforcement action, CFPB director Richard Cordray stated, “Because of Flagstar's illegal actions and unacceptable delays, struggling homeowners lost the opportunity to save their homes … The [CFPB] 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.”
What can be gleaned from this? The CFPB’s initial enforcement action is noteworthy for several reasons. First, the CFPB’s focus on loss mitigation violations reinforces that improper loss mitigation procedures have the potential to cause great harm to borrowers, and mortgage servicers must be vigilant in adhering to all applicable regulations. Second, Flagstar was enjoined from purchasing default loan servicing until it “demonstrates that it is able to comply with the laws that protect consumers during the loss mitigation process.” This injunctive remedy is a significant shift from standard monetary penalties, and the CFPB’s willingness to remove noncompliant entities from the marketplace may be a stronger deterrent than negotiated damages and fees. Third, the CFPB also punished Flagstar for alleged violations occurring prior to the enactment of the mortgage servicing requirements under its catch-all “Unfair, Deceptive, or Abusive Acts or Practices” prohibition. This signals the CFPB’s aggressiveness in dealing with perceived failures of the mortgage servicing industry, and its broad interpretation of the applicable restrictions. Members of the industry are advised to comply with not only the letter, but the spirit of the CFPB’s mortgage servicing regulations, in order to avoid being accused of an “unfair, deceptive, or abusive act or practice,” however the CFPB may interpret it.