Flagstar Servicing Enforcement Order
The CFPB entered into a Consent Order with Flagstar Bank regarding its default mortgage servicing practices. This order is really important. It's the first enforcement action of the CFPB's new servicing rules, and its "benching" remedy that prevents Flagstar from most default servicing until it demonstrates compliance shows that the Bureau is serious about cleaning out the Augean stables of servicing. (The Ocwen order had a much larger dollar figure attached, but was about pre-2014 conduct).
The details given in the consent order tell an all-too-common picture about mortgage servicing.
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.
And we wonder why loss mitigation hasn't been more effective?
84. Respondent shall not acquire the right to service or sub-service any Third Party
Originated Loan that is in default.
It also requires Flagstar to find default subservicers for all third-party loans it services:
85. If a Third Party Originated Loan defaults after Respondent’s acquisition of the
right to service or sub-service such loan, Respondent must assign all component
default servicing activities to a service provider within 10 days of the borrower’s
These requirements continue until Flagstar has demonstrated compliance with the Consent Order's numerous operational reform provisions. In other words, the CFPB has "benched" Flagstar from the default servicing business (other than for self-originated loans) until it complies with the law. This is a critical enforcement development. The typical Consent Order is based around monetary penalties and some injunctive reforms. Monetary penalties alone, however, are never a sufficient deterrent because (1) they are negotiated to something less than the actual harm, and (2) firms further discount the possibility of penalties by the likelihood of enforcement. As a result, penalties will never outweigh the benefits to a firm from legal non-compliance.
A benching remedy starts to change that, both because compliance can be costly and because be taken out of the market can really squeeze firm's market position and potentially even its cashflow position. Will this be the start of a more general trend in financial services remedies? A benching remedy seems utterly antithetical to the SEC (no trading in OTC markets until compliant?) or OCC (no accepting new accounts until compliant?), but that underscores the problem with these regulators--they are intrinsically concerned about not upsetting firms' ability to do business, even firms that are violating the law.
David Dayen has noted in some Tweets that Flagstar might be in a bind here. It can't get new business without cleaning up its act, but the servicing compensation act won't pay for proper servicing. I agree with David that there are serious flaws with the servicing compensation model, but Flagstar assumed the risk of increased default servicing costs when it entered its servicing contracts.