In what is certainly an indication of its enforcement priorities as well as a warning to mortgage servicers, the CFPB recently announced its first enforcement action for violations of its Mortgage Servicing Rules, which went into effect last January and impose a variety of requirements on mortgage servicers.
In a consent order issued against Flagstar Bank, F.S.B., the CFPB cited multiple legal violations by Flagstar in its default servicing practices, all in the area of loss mitigation. The order requires the bank to pay $27.5 million in damages, at least $20 million of which will be distributed to foreclosed customers. In addition, the CFPB assessed a $10 million civil money penalty and placed a temporary prohibition on the bank's right to acquire servicing or sub-servicing rights on defaulted loans until it implements a compliance plan as set forth in the consent order.
The consent order cites four main violations by the bank since the rules went into effect:
- Failure to provide the required loss mitigation acknowledgement letter to a consumer within five business days of receiving an application pursuant to 12 C.F.R. § 1024.41(b);
- Failure to evaluate loss mitigation applications within the 30-day period prescribed in 12 C.F.R. § 1024.41(c);
- Failure to properly notify borrowers of their right to appeal under 12 C.F.R. § 1024.41(c) and (h), specifically by incorrectly informing borrowers that the right to appeal exists only in certain states and by failing to provide some borrowers the required appeal form; and
- Failure to maintain reasonable policies and procedures under 12 C.F.R. § 1024.38, including vague and contradictory guidance in the bank's procedure manual and the policies' practical failure to ensure the bank's compliance with the Mortgage Servicing Rules.
In addition, the consent order encompasses many violations of the Consumer Financial Protection Act (CFPA) that occurred before the CFPB's Mortgage Servicing Rules became effective.
The enforcement action comes as no surprise, but it gives servicers a clear indication of the kinds of issues attracting CFPB scrutiny and sends a clear message that strict adherence to these rules is the expectation. Indeed, CFPB Director Richard Cordray has described it as "a new era of enforcement." Expect to see more CFPB enforcement activity on mortgage servicing issues in the future.
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