Westlaw Journal bANk & LENdER LiAbiLity - Baker Donelson

Westlaw Journal

bank & Lender Liability

Litigation News and Analysis ? Legislation ? Regulation ? Expert Commentary

VOLUME 20, iSSUE 15 / december 15, 2014

Expert Analysis

Analysis and Implications of the Flagstar Consent Order

By Courtney H. Gilmer, Esq. Baker Donelson

Any entity involved in residential mortgage servicing is keenly aware of the new servicing regulations, called the Mortgage Servicing Rule, implemented by the Consumer Financial Protection Bureau in January. Something those entities might not have considered, however, is that actions taken prior to implementation of the regulations could form the basis for a CFPB enforcement action.

Things changed Sept. 29, when the CFPB announced a consent order with Flagstar Bank F.S.B. to resolve alleged violations of the mortgage servicing regulations (see . gov/f/201409_cfpb_consent-order_flagstar.pdf).

The enforcement action is a reminder to the servicing industry that the CFPB intends to pursue robust enforcement of the servicing rules and that continued vigilance regarding compliance is thus critical.

The consent order, under which Flagstar did not admit or deny the allegations, provides a trove of information regarding the CFPB's focus on various types of servicing issues. The most significant focus is on the issue of loss mitigation. The consent order alleges that Flagstar failed to review borrowers' loss mitigation applications in a reasonable amount of time.

The CFPB identified insufficient staffing, lack of written policies, lack of a quality assurance function and inadequate servicing systems as the underlying basis for the violations. In the press release announcing the consent order, the CFPB stated:

For example, in 2011, Flagstar had 13,000 active loss mitigation applications but only assigned 25 full-time employees and a third-party vendor in India to review them. For a time, it took the staff up to nine months to review a single application. In Flagstar's loss-mitigation call center, the average call-wait time was 25 minutes and the average call-abandonment rate was almost 50 percent. And Flagstar's loss-mitigation application backlog numbered well over a thousand.

The CFPB relied on purported "industry guidelines" to determine whether loss mitigation applications were evaluated in a timely manner. The consent order alleges that the Flagstar evaluations routinely took more than 90 days, far exceeding the 30-day limit set by guiedlines for government-sponsored enterprises or GSEs

The CFPB concluded that the failure to comply with the 30-day rule constituted an unfair, deceptive, or abusive act or practice -- even though the rules requiring non-GSE servicers to comply with the 30-day standard were not yet in place. This finding allowed the bureau to include pre-January 2014 conduct within the scope of the consent order.

In addition to finding that loss-mitigation package evaluations were untimely, the bureau concluded that Flagstar was forced to close borrower applications because of its own excessive delays.

Westlaw journal Bank & lender Liability

The enforcement action is a reminder to the servicing industry that the CFPB intends to pursue robust enforcement of the servicing rules.

The CFPB said Flagstar closed applications because of expired documents even though the expirations were caused by the bank's delay.

The bureau also found that Flagstar failed to alert borrowers about incomplete loss-mitigation applications and routinely miscalculated borrowers' income. These alleged missteps purportedly led to the wrongful denial of loan modifications.

In support of its findings, the consent order cites the results of internal audit reviews, third-party audits and GSE reviews of Flagstar's data.

The CFPB noted that mortgage servicers must provide borrowers with a specific reason for rejection when a loan modification application is denied. The consent order said Flagstar's policy was to say only "not approved for loss-mitigation options by the investor/owner of the loan," even though it had an internal system that provided more specific information.

The new rules also required Flagstar to provide certain borrowers with the right to appeal the denial of a loan modification. The CFPB said Flagstar failed to provide this notice and wrongly told borrowers that they could appeal only if they lived in certain states.

Finally, the consent order says Flagstar unnecessarily kept borrowers in trial loan modification periods instead of permanently modifying their loans in accordance with investor guidelines. This caused some borrowers' loan amounts under the modified note to increase, the bureau said. In some cases, it allegedly jeopardized their permanent loan modification.

Focusing on conduct occurring after Jan. 10, the CFPB alleged the bank committed violations of the Mortgage Servicing Rule, including the loss-mitigation requirements set forth at 12 C.F.R. ? 1024.41.

The order further alleged that the bank violated 12 C.F.R. ? 1024.41(b) by failing to provide a compliant loss-mitigation acknowledgment letter to borrowers no more than five business days after receiving an application. In asserting violations of the requirement to maintain certain reasonable loss-mitigation policies and procedures in compliance with 12 C.F.R. ? 1024.38, the CFPB specifically focused on acknowledgement letters and evaluation notices.

The consent order requires Flagstar to pay $27.5 million to roughly 6,500 consumers whose loans were serviced by the bank. At least $20 million of that figure will go to nearly 2,000 borrowers subjected to foreclosure. Importantly, the settlement will not prevent borrowers who receive payments from pursuing individual claims against the bank.

Further, the order requires Flagstar to properly review, acknowledge and evaluate loss-mitigation applications. It also prohibits the bank from improperly denying loss-mitigation applications or prolonging the trial period for a loan modification.

Nor can Flagstar acquire servicing rights for any third-party originated loan that is in default. Under the terms of the order, a loan is in default if:

?The loan is at least 60 days delinquent.

?The borrower has applied for loss mitigation and the process is still pending.

?The borrower is in active bankruptcy.

If a loan goes into default after Flagstar acquires it, all servicing activities must be transferred to another service provider within 10 days.

The consent order also details a compliance plan that Flagstar must follow to regain the ability to service defaulted loans.

This "benching" of Flagstar until it can establish compliance with servicing rules is in line with a pattern. Specifically, regulators have become more heavily involved in potential servicing transfers, and in some cases have halted transfers altogether. It is anticipated that the CFPB and other regulators will continue to use control over servicing transfers as a compliance enforcement tool.

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? 2014 Thomson Reuters

Westlaw journal Bank & lender Liability

As additional relief for borrowers who were not foreclosed upon, the order requires Flagstar to engage in outreach to contact borrowers and offer them loss-mitigation options. These efforts must include a "door-knocking" campaign and translation services for borrowers who are not proficient in English.

For borrowers who were previously denied a loss-mitigation option, Flagstar must independently review each loan. The review is designed to determine whether borrowers were offered all loss-mitigation options for which they qualified. If they were not, Flagstar must offer them those loss-mitigation options. Finally, Flagstar will pay a $10 million penalty to the CFPB's Civil Penalty Fund.

The overriding message of the Flagstar consent order is that the bureau is focused on both loss mitigation and prompt compliance with the new servicing rules. Though the consent order does not specifically say so, it appears the bureau believes servicers have had adequate time to prepare for and implement vigorous compliance programs.

The CFPB has repeatedly identified loss-mitigation actions as those with the potential for the greatest impact on borrowers, both good and bad. The only real surprise from the order is the bureau's use of the "unfair, deceptive, or abusive acts or practices" authority to penalize Flagstar for pre-Jan. 10 violations. Servicers should assess their ongoing compliance with the loss-mitigation and other applicable regulations and ensure a robust compliance program is being followed. As the one-year anniversary of the new rules approaches, now is the perfect time to take a fresh look at compliance and ensure there are no gaps in the process.

The consent order alleges Flagstar failed to review borrowers' lossmitigation applications in a timely manner.

Courtney H. Gilmer is a bankruptcy and creditors' rights shareholder in the Nashville, Tenn., office of Baker Donelson. She represents lenders, businesses, secured creditors and creditor committees in bankruptcy proceedings, financial transactions, corporate reorganizations, and state and federal court litigation. She can be reached at cgilmer@ .

?2014 Thomson Reuters. This publication was created to provide you with accurate and authoritative information concerning the subject matter covered, however it may not necessarily have been prepared by persons licensed to practice law in a particular jurisdiction. The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional. For subscription information, please visit West..

? 2014 Thomson Reuters

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