- Agency cracks down on Flagstar Bank for severe violations.
- This case could force mortgage-servicing industry to clean up.
- By contrast, DOJ’s sanctions typically follow a much different path.
CFPB has in the past sanctioned mortgage servicers for similar violations, with limited success. This time, in addition to fining the bank $37.5 million (the bulk of which will go to victims of Flagstar’s bad servicing, who also must be offered new loan modifications), CFPB banned the company from acquiring new mortgage servicing rights, particularly for defaulted loans, until it can demonstrate its ability to comply with the law.
This is enormous. There’s a healthy trade in the right to service loans in default, because new capital rules make them less attractive to large banks, and because CFPB’s regulations are costly to follow. Because servicers don’t originate a massive amount of loans themselves, and because consumers constantly refinance, pay off, or lose a loan to foreclosure, servicers must constantly purchase new servicing rights to refresh their supply and stay in business.
But CFPB ordered Flagstar to not purchase any more default loan servicing until it figures out how to do it properly. This “benching remedy,” as Georgetown law professor Adam Levitin calls it, can change the calculations for financial institutions over whether to commit a fraud, where the potential penalty is usually less than the profit they can make. In this case, Levitin writes, “compliance can be costly, and being taken out of the market can really squeeze the firm’s market position and potentially even its cashflow.”
– See more at: http://www.thefiscaltimes.com/Columns/2014/10/03/Regulator-Finally-Gets-It-Right-CFPB-Hits-Bad-Bank-Where-It-Hurts#sthash.7YUofY3p.dpuf
From CFPB website, here is Director Richard Cordray’s remarks:
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.
WASHINGTON — Michigan-based Flagstar Bank will be required to pay $37.5 million in restitution and fines over regulatory allegations it blocked struggling homeowners from receiving foreclosure relief, the Consumer Financial Protection Bureau said Monday.
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