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.
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 a variety of alleged activities constitute unfair acts and practices under the CFPA, including failure to properly evaluate loss mitigation applications, improper denial of loan modifications, and prolonging trial periods for loan modifications. Regarding activities that occurred after January 10, 2014, the CFPB alleged 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 that occurred prior to January 10, 2014. The bank did not admit any of the findings.
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.
