Bank fined for mortgage-processing failures

Michigan-based Flagstar Bank was ordered to pay $37.5 million in consumer relief and fines Monday in the first enforcement action involving violations of federal regulations designed to help struggling borrowers' efforts to save their homes from foreclosure.

The Consumer Financial Protection Bureau imposed the penalties in a consent order after an investigation showed Flagstar took excessive time to process applications for foreclosure relief, didn't notify borrowers whose applications were incomplete, denied loan modifications to qualified owners and delayed finalizing permanent modifications.

The bank's operating procedures and delays ultimately caused some borrowers to abandon efforts to save their homes. According to the CFPB, one former Flagstar manager recalled borrowers saying: "You know what, my home can just go to foreclosure. I'm not faxing any documentation anymore."

The bank's actions violated CFPB mortgage-servicing rules that took effect in January and affected approximately 6,500 borrowers nationwide whose home loans were serviced by Flagstar. The borrowers will receive $27.5 million in relief, with at least $20 million of that total going to approximately 2,000 victims of foreclosure, the CFPB said.

Flagstar is also required to mount a new outreach effort to assist borrowers who still have their homes, pay a $10 million fine and ensure that the violations don't recur.

"These unlawful practices caused many consumers to lose the homes they'd been trying to save," CFPB Director Richard Cordray said during a phone conference with news reporters. "That is wrong, and it's unacceptable."

Flagstar shares closed up 1.9% at $16.56 on Monday. The bank, which had previously disclosed it was in settlement talks with the CFPB, neither admitted nor denied the allegations.

"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, benefitting our shareholders, customers and the communities we serve," bank CEO Alessandro (Sandro) DiNello said in a statement. "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."

The enforcement action focused on the type of foreclosure problems that exploded from coast to coast following the nation's real estate market collapse and financial crisis. Many relief programs, intended to provide alternatives to foreclosure that help both homeowners and lenders, instead have bogged down amid red tape, delays and other problems.

The CFPB investigation found that from 2011 to the present Flagstar:

• Lacked adequate staffing for its loss-mitigation programs. Only 25 employees and a third party-vendor in India were assigned to handle 13,000 applications for mortgage relief.
• For a time took as long as nine months to review a single application. One former employee described the bank's loss-mitigation process as "literally me in a cubicle with my giant file drawer just pulling [applications] out one at a time."
• Operated a foreclosure-assistance call center where the average wait time was 25 minutes, and nearly half the callers seeking help abandoned the calls.
• Amassed more than 1,000 backlogged applications seeking foreclosure help.

The practices violated consumer protections against improper or deceptive practices enacted under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, as well under the consumer agency's new rules, the CFPB said.

The rules required evaluation of completed loss-mitigation applications within 30 days if the documents are received more than 37 days before a foreclosure sale. But the bank didn't meet the timeline, the CFPB said.

Some of Flagstar's processing delays were so lengthy that application documents expired. To move the backlog, the CFPB said bank staffers closed the applications caused by the expirations.