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CFPB Cracks Down on Bad Banking Practices

The Consumer Financial Protection Bureau has received its share of criticism since its founding, particularly from Republicans, who tend to shield big business interests.

Now, it seems large financial institutions have good reason to fear the regulator, given the recent action taken against Flagstar Bank in Michigan. The CFPB appears to have succeeded where the Department of Justice has repeatedly failed: Shutting down bad banks.

Flagstar was reportedly cited for violating the bureau’s new rules on mortgage servicing, which took effect earlier this year. Not only did the company cross the line, according to a Financial Times writer, “It violated (the rules) in earnest.” For this, the company was not only slapped with a $38 million fine, it is also banned from acquiring new mortgage servicing rights, particularly for defaulted loans, until it can satisfactorily prove it can comply with the law.

Why does this matter? Because acquiring new servicing rights is how these companies stay in business. The sanction by the CFPB has effectively pulled Flagstar off the market until it can prove it’s ready to play by the rules.

Our Miami foreclosure lawyers recognize that as a huge shift in approach to what regulators have historically done, which is to slap these companies on the wrist and extract a promise from them to do better. However, most go on to conduct business as usual – until they get caught again.

In Flagstar’s case, problems date back to at least 2011. With the foreclosure crisis in full swing, the company had 13,000 active applications for loan modification. However, it had just two dozen full-time people working to process those requests, along with a review center based in India. Unsurprisingly, this created a huge backlog, and some cases were taking nine months or longer just to undergo initial review.

When cases reached reviewers’ desks with outdated information, applications were simply tossed in the garbage. This process went on – up to present day. The company routinely failed to tell homeowners their modification applications weren’t complete. Staffers were also instructed to delay the process, despite the concrete deadlines set by the CFPB.

The regulator found numerous instances in which the bank illegally denied modifications to borrowers who qualified. The company also never explained to borrowers why the applications were denied, and this too runs contrary to the new rules. Customers who wanted to appeal were lied to about their rights to do so – yet another violation.

The result, in most cases, was that struggling homeowners lost the chance to stay in their homes.

Previously, when such violations were reported, the CFPB was quick to fine banks and servicers for misdeeds. But this never seemed to have any real impact. The decision to deny the company rights to continue business as usual (using the so-called “benching remedy”) sends a clear message, and may be the most effective means to bring companies in line with the law.

This same theory could theoretically be applied to all different kinds of industries. Let’s say a company is found guilty of securities fraud. Bar them from issuing that set of securities. If a company makes high-risk corporate loans that violate federal regulation, block them from being able to make corporate loans. If a bank is caught laundering money for a criminal corporation, disallow it from taking new deposits.

The basic message is that if you don’t play by the rules, you don’t get to play.

Unfortunately, most sanctions for financial fraud have thus far been very different. Take, for example, the DOJ has negotiated multi-billion dollar settlements, some of which have already been paid. However, the “consumer relief” those deals were designed to offer failed in having any great impact. For example, of the 47,000 borrowers who were aided by the JP Morgan Chase settlement, only 2,600 got principal loan reductions. Most of the “relief” came with the banker offering loans to low and moderate-income borrowers. So in essence, the “relief” from the banks came in the form of the bank making a profit by offering more loans.

Somehow, we doubt this approach is likely to have much of a deterring effect on future bad conduct.

If you’re battling foreclosure in Miami or the surrounding areas contact Bruce Jacobs & Associates for a confidential appointment to discuss your rights. Call (305) 358-7991. Also, don’t miss Miami Foreclosure Attorney Bruce Jacobs on 880AM/the Biz, every Wednesday from 5 p.m. to 6 p.m. on “Debt Warriors with Bruce Jacobs,” discussing foreclosure topics that matter to YOU.

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