The Consumer Financial Protection Bureau recently announced its first enforcement action for alleged violations of the new requirements imposed upon mortgage servicers regarding loss mitigation applications submitted by borrowers. According to the CFPB, Michigan-based Flagstar Bank took too long to process borrowers' applications for relief from foreclosure, improperly denied loss mitigation applications, and made numerous mistakes and miscalculations, resulting in the denial of loss mitigation options that should have been approved.
The January 10, 2014 amendments to Regulation X, which implements the Real Estate Settlement Procedures Act ("RESPA"), requires mortgage servicers, among other things, to promptly notify a borrower upon receipt of a loss mitigation application that the application has been received and whether it is complete. Once the application is complete, the servicer is required to speedily evaluate the application and notify the borrower of all available loss mitigation options that might help the borrower avoid foreclosure.
Although the January 10, 2014 amendments vests servicers with discretion in evaluating loss mitigation applications and expressly declines to impose a duty on a servicer to provide borrowers with specific loss mitigation options, the CFPB's enforcement action against Flagstar indicates that servicers are expected to devote sufficient resources to handle borrowers' loss mitigation applications promptly and accurately. CFPB Director Richard Cordray noted Flagstar's lack of staff to review loss mitigation applications, lengthy telephone hold times, and improper closing of applications due to documents that had expired simply because Flagstar took too long to review them.
Servicers should be aware that those who violate the loss mitigation requirements face steep penalties, both monetary and non-monetary. Besides being ordered to pay $27.5 million in redress and $10 million in civil penalties, Flagstar is prohibited from acquiring servicing rights for any defaulted loan portfolios until it can demonstrate its ability to comply with the servicing rules. Flagstar must also reach out to borrowers who were affected by Flagstar's violations and who have not yet been foreclosed upon, halt the foreclosure process, and offer loss mitigation options to those borrowers. Director Cordray warned servicers that they "must follow [the] new servicing rules and treat homeowners fairly. … We need all mortgage servicers to understand that they must step up and follow the law."
The consent order entered by the CFPB is available at http://www.consumerfinance.gov/f/201409_cfpb_consent-order_flagstar.pdf.
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