The Consumer Financial Protection Bureau recently announced a consent order with Flagstar Bank, F.S.B., alleging unfair acts and practices under the Consumer Financial Protection Act (CFPA) and violations of the CFPB's Mortgage Servicing Rules. The penalties include $27.5 million in damages for harmed borrowers, a $10 million civil money penalty, a temporary restriction on the Bank's ability to acquire additional default loan servicing rights, and a required compliance review and plan implementation.

Pre-Servicing Rules Violations

While this constitutes the first CFPB enforcement action for violations of the Bureau's Mortgage Servicing Rules, the majority of the activity subject to the consent order occurred before January 10, 2014, when the rules took effect. The Bureau concluded that such activities constitute unfair acts and practices under the CFPA. A summary of those findings is provided below. The Bank did not admit any of the findings.

Failure To Timely Evaluate Loss Mitigation Applications

The CFPB found that from 2011 until 2013, the Bank failed to review loss mitigation applications in a reasonable amount of time. The order focused on the Bank’s inability to process its volume of loss mitigation applications due to insufficient staffing, lack of written policies, no quality assurance function, and inadequate servicing systems.

Interestingly, among the alleged unfair acts and practices, the consent order states that the Bank failed to meet "industry guidelines" for the timely evaluation of loss mitigation applications. The order alleges that the evaluation routinely took more than 90 days, while government-sponsored enterprise (GSE) guidelines require a review within 30 days. Accordingly, while the 30-day loss mitigation evaluation requirement under the rules was not yet effective, the Bureau took the position that a failure to meet the 30-day evaluation requirement imposed by the GSE constitutes an unfair, deceptive or abusive acts or practices (UDAAP) violation.

Failure To Inform Borrowers of Required Missing Documentation

The consent order alleges that from 2012 to 2013, the Bank failed to adequately inform borrowers of outstanding information required to complete a loss mitigation application. According to the CFPB, the Bank failed to send out missing documentation request letters, or delayed sending them, giving the borrower insufficient time to respond.

Improper Denial of Loan Modifications

The Bureau found that the Bank improperly calculated borrower income in loss mitigation evaluations, which resulted in incorrect modification denials. Regarding this alleged violation, the CFPB states that the Bank lacked a "systemized, controlled process for calculating borrower income." The consent order cites findings from internal audit reviews, third-party audits, and GSE reviews.

Prolonging Trial Periods for Loan Modifications

The order states that the Bank improperly kept borrowers in trial loan modification periods, instead of permanently modifying the loans in accordance with investor guidelines. As an example, the order states that GSE guidelines entitle a borrower to a permanent modification after 120 days of trial payments. The Bank, however, allegedly kept borrowers in trial plans for 120 to 150 days from the first trial payment in some cases. According to the order, the prolonged trial plans resulted in an increased loan amount under the permanent modification, as well as unnecessary delinquency reporting to the credit bureaus.

Violations of the Mortgage Servicing Rules

Regarding activities that occurred after January 10, 2014, the CFPB alleges violations of the Mortgage Servicing Rules, namely the loss mitigation requirements under 12 C.F.R. § 1024.41. These alleged activities are generally continuations of the alleged unfair acts and practices discussed above.

Loss Mitigation Acknowledgement Letters

The order alleges a failure to provide a compliant loss mitigation acknowledgement letter within five business days of receiving an application, in accordance with 12 C.F.R. § 1024.41(b). The frequency of these alleged violations after January 10 is not made clear in the consent order.

Evaluation of Complete Loss Mitigation Applications

Regarding the Bank's evaluation of loss mitigation applications after January 10, the order alleges violations of the 30-day evaluation requirement under 12 C.F.R. § 1024.41(c). Notably, the consent order alleges only one occurrence of an evaluation taking 90 days, and two occurrences of an evaluation taking 60 days. The order further alleges an insufficient explanation of denial reasons in the Bank's evaluation letters. According to the CFPB, the Bank often used a blanket statement that the application did not meet investor guidelines, instead of specifying the criteria.

Failure To Notify Borrowers of Appeal Rights

The consent order alleges that the Bank incorrectly informed borrowers of their loan modification appeal rights in violation of 12 C.F.R. § 1024.41(c), (h). The order cites language in the denial notices that states that the borrower may be entitled to loss mitigation appeal rights only in certain states. Notably, in a subsequent section of the consent order, the CFPB also characterizes this activity as a deceptive act or practice in violation of the CFPA.

Failure To Maintain Reasonable Policies and Procedures

In alleging violations of the requirement to maintain certain reasonable loss mitigation policies and procedures, under 12 C.F.R. § 1024.38, the CFPB focuses on the Bank’s practical failure to issue compliant acknowledgement letters and evaluation notices. Regarding the actual content of the Bank's policies and procedures, the order includes a brief statement that vague and contradictory guidance appeared in some places regarding the acknowledgement letter requirement.

Prohibition of Acquiring Additional Default Servicing Rights

The order prohibits the Bank from acquiring servicing rights for any third-party originated loan that is in default. For the purpose of this restriction, a loan is in "default" if it meets any of the following three criteria: the loan is at least 60 days delinquent; the borrower has applied for loss mitigation and the process is still pending; or the borrower is in active bankruptcy. In the event a loan goes into default after acquisition by the Bank, servicing activities must be transferred to a service provider within 10 days. To clear these restrictions, the Bank must implement a compliance plan detailed in the order.

Additional Provisions

The order includes a section imposing certain immediate requirements for the Bank to provide loss mitigation assistance to borrowers currently delinquent or in foreclosure. The Bank also must undergo an independent compliance management system review covering default loan servicing and implement the resulting compliance plan.

Analysis

It is not surprising that the CFPB's first enforcement action under the Mortgage Servicing Rules pertains to alleged loss mitigation violations. Among the rules that took effect on January 10, 2014, a failure to meet the loss mitigation requirements has the greatest potential for borrower harm. Surprisingly, the Bureau effectively enforced certain of these requirements, for violations occurring prior to the effective date, using its UDAAP enforcement authority.

It is also interesting to note the CFPB's imposition of a provision restricting the bank's ability to acquire additional servicing rights for default loan portfolios. Over the past six months, a variety of regulators have increasingly attempted to restrict or otherwise scrutinize servicing transfers before the transfer occurs. The Federal Housing Finance Agency has published heightened guidelines for approval of servicing transfers by the GSEs, and its Inspector General advocated even greater scrutiny for transfers to nonbank servicers. The CFPB's recent bulletin also provides a framework for pre-transfer evaluation of a servicing transfer plan. This restriction on the bank's acquisition of default loan servicing rights seems to be part of a growing regulatory trend for the industry.

The enforcement action should be a wake-up call to the industry that the CFPB is going to strictly enforce the Mortgage Servicing Rules and that servicers should confirm that they are in full compliance.

Ballard Spahr’s Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of the firm’s Consumer Financial Services Group, which produces the CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe, use the link provided to the right.

For more information, contact Reid F. Herlihy at 202.661.2279 or herlihyr@ballardspahr.com, Mortgage Banking Group Practice Leader John D. Socknat at 202.661.2253 or socknatj@ballardspahr.com, Mortgage Banking Group Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com, or CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com.


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