Feds order bank to pay $37.5M for breaking mortgage rules

The Consumer Financial Protection Bureau (CFPB) is forcing a mortgage bank to $37.5 million in fines and compensation, claiming that it drove homeowners into foreclosure.

Michigan-based Flagstar Bank will pay $27.5 million to reimburse borrowers who were trying to avoid foreclosure, but missed the opportunity to restructure their mortgages into more affordable payments because of excessive processing delays at the bank.

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The CFPB is also hitting Flagstar with a $10 million fine for violating new mortgage servicing rules, which went into effect in January.

"These unlawful practices caused many consumers to lose the homes they had been trying to save," CFPB Director Richard CordrayRichard Adams CordrayJustices spar over fate of consumer agency To understand true impact of proposed interest rate caps, listen to history and borrowers Democrats blast consumer bureau over student loan oversight agreement with DeVos MORE said. "That is wrong and unacceptable."

Cordray said the bank "failed borrowers."

Flagstar's loss mitigation division was slow to respond to homeowners' requests to restructure their mortgages and had a backlog of more than 1,000 applications, the agency said. The division was responsible for working with homeowners to avoid foreclosures.

The CFPB's new mortgage servicing rules require Flagstar to review loss mitigation applications within 30 days. But in some cases, it took the bank nine months to review an application.

These "excessive delays" caused many applications to expire.

"To move its backlog, Flagstar would close applications due to expired documents, even though the documents had expired because of Flagstar’s delay," the agency said.

Flagstar also misreported homeowners' incomes, which led to many borrowers being denied loan modifications, even though they should have qualified, the agency added.