Consumer Agency Penalizes Flagstar Bank Over Mortgage Servicing

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Richard Cordray, director of the Consumer Financial Protection Bureau.Credit Daniel Rosenbaum for The New York Times

The Consumer Financial Protection Bureau took aim at one of the most powerful players in the housing market: the mortgage servicing firms that have great sway in deciding whether struggling homeowners lose their homes to foreclosure or win a reprieve.

In its first enforcement action under mortgage-servicing rules that went into effect at the start of this year, the agency reached a $37.5 million settlement with Flagstar Bank, based in Troy, Mich., over accusations that it prevented thousands of homeowners from averting foreclosure.

In its action against the bank, the agency outlined how Flagstar strung along borrowers for months only to wrongfully deny them loan modifications. Further thwarting the efforts of homeowners, Flagstar also failed to tell borrowers that their applications for loan modifications were missing critical documents, the agency said.

“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,” Richard Cordray, the director of the consumer protection bureau, said in a statement on Monday.

As part of the settlement, Flagstar must 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.

The action is a harbinger of others that could be brought under new mortgage servicing guidelines. Under rules dating to January 2014, mortgage servicing firms must evaluate applications from foundering homeowners within 30 days. The rules also require that servicers alert borrowers about any critical documents missing from applications for mortgage modifications

At their center, the rules are a reaction to the widespread problems — erroneous fees and wrongful evictions — that led the nation’s largest banks to reach a $26 billion settlement with federal authorities in 2012. In their role as servicers that transfer payments from borrowers to lenders, the companies wield tremendous power in the lives of homeowners, including many who are left to wage lonely — and increasingly futile battles — against lost documents and delays.

Particularly troubling, Mr. Cordray said, is that borrowers have few other options. “In the mortgage servicing market, they could not take their business elsewhere but were stuck with whatever treatment they received from Flagstar,” Mr. Cordray said.

Many of the problems in Flagstar’s foreclosure process — a bureaucratic maze that was hobbled by delays, shoddy paperwork and inefficiencies — came down to scarce resources. Faced with a deluge of applications from borrowers applying for loan modifications, Flagstar did not sufficiently beef up its staff, the agency said. In 2011, for example, Flagstar assigned only 25 full-time employees to review roughly 13,000 applications for loan assistance.

The flimsy staffing took its toll. The Consumer Financial Protection Bureau found that callers, looking for loan modifications, languished, sometimes waiting for an average of 25 minutes just to speak to a bank employee. At one point, the agency said, the bank’s staff took nine months to process a single application for relief. To the handle the glut of applications for loan modifications, the agency said, Flagstar sometimes just closed applications altogether.

Those applications that the bank did process were did not always turn out better, the agency said. The bank, the agency said, miscalculated borrowers’ incomes, leading the servicer to wrongfully denied them relief. And some borrowers were never told why their applications were scuttled.

Flagstar Bank did not return calls for comment.

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