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UPDATE 2-Flagstar Bank to pay $37.5 mln over servicing violations -CFPB

(Adds Flagstar comment, paragraph 6)

By Emily Stephenson

WASHINGTON, Sept 29 (Reuters) – The U.S. consumer watchdog
on Monday said Flagstar Bancorp would pay $37.5 million
over allegations that it broke new mortgage servicing rules and
hurt struggling borrowers’ efforts to stay in their homes.

The U.S. Consumer Financial Protection Bureau (CFPB) said
Michigan-based Flagstar failed to notify borrowers when their
applications for foreclosure relief were incomplete, denied loan
modifications to eligible people and took too long to finalize

The action was the bureau’s first settlement over new rules
that took effect in January 2014. The rules seek to prevent the
kinds of sloppy servicing practices that contributed to an
explosion of foreclosures after the 2007-2009 financial crisis.

“Because of Flagstar’s illegal actions and unacceptable
delays, struggling homeowners lost the opportunity to save their
homes,” CFPB Director Richard Cordray said.

Flagstar, which neither admitted nor denied the bureau’s
findings, said in August that it was pursuing a settlement.

“With this matter now behind us, everyone at Flagstar Bank
is committed to building on the significant progress we have
achieved while continuing to operate with integrity,
responsiveness and a commitment to our core values,” Flagstar’s
chief executive, Alessandro DiNello, said in a statement.

Mortgage servicers, including banks and non-bank firms,
collect monthly payments, modify loans for people who struggle
to make payments and process foreclosures.

After the crisis, servicers were swamped by borrowers facing
foreclosure and cut corners in handling the cases. Problems
included poor record-keeping, little customer service and
“robo-signing,” or the automated signing, of unread and
sometimes inaccurate foreclosure documents.

The consumer bureau, which was created by the 2010
Dodd-Frank law, sought to clean up the industry. Its new rules
require clear procedures to help troubled borrowers keep their
homes and prevent “dual-tracking,” or initiating foreclosure at
the same time a borrower is trying to modify a loan.

Flagstar lacked the resources to handle all of its cases of
distressed borrowers, the bureau said. In 2011, the bank had
13,000 applications for loss-mitigation programs, but only 25
full-time staff and a third-party call center handling them.

Flagstar was “simply not equipped” to handle the influx,
Cordray said on Monday.

In some cases, it took Flagstar up to nine months to review
applications for loss mitigation, the CFPB said. Flagstar would
then clear its backlog of mitigation requests by closing expired
applications, even if the documents had expired because the bank
did not act fast enough, Cordray said.

The bank also denied some requests for loan modifications
based on miscalculations of borrowers’ incomes and gave
homeowners inaccurate information about whether they could
appeal after their applications were denied.

Flagstar must pay $27.5 million to 6,500 borrowers whose
loans it serviced, about 2,000 of whom were foreclosed upon, the
CFPB said. The bank also must pay a $10 million fine, stop
acquiring servicing rights for loans that are in default, and
contact harmed borrowers who did not go through foreclosure to
help them remain in their homes.

(Reporting by Emily Stephenson; Editing by Bernard Orr and
Grant McCool)

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