(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 modifications.
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)