CFPB’s Action Against Flagstar Bank Included a Benching Remedy

Reuters reports in the Fiscal Times regarding special features of the newest regulatory action taken against Flagstar related to servicing default loans, with the full article here:

CFPB has in the past sanctioned mortgage servicers for similar violations, with limited success. This time, in addition to fining the bank
$37.5 million (the bulk of which will go to victims of Flagstar’s bad servicing, who also must be offered new loan modifications), CFPB
banned the company from acquiring new mortgage servicing rights, particularly for defaulted loans, until it can demonstrate its ability to
comply with the law.

This is enormous. There’s a healthy trade in the right to service loans in default, because new capital rules make them less attractive to large
banks, and because CFPB’s regulations are costly to follow. Because servicers don’t originate a massive amount of loans themselves, and
because consumers constantly refinance, pay off, or lose a loan to foreclosure, servicers must constantly purchase new servicing rights to
refresh their supply and stay in business.
But CFPB ordered Flagstar to not purchase any more default loan servicing until it figures out how to do it properly. This “benching remedy,”
as Georgetown law professor Adam Levitin calls it, can change the calculations for financial institutions over whether to commit a fraud,
where the potential penalty is usually less than the profit they can make. In this case, Levitin writes, “compliance can be costly, and being
taken out of the market can really squeeze the firm’s market position and potentially even its cashflow.”

Imagine applying this model to other parts of the financial services industry. Firms guilty of securities fraud could be barred from issuing that
set of securities. Companies making high-risk corporate loans outside regulatory guidelines could be stopped from making corporate loans
entirely. Banks caught laundering money for sanctioned organizations could be barred from U.S. dollar clearing operations, or from taking
new deposits. The message would come through clearly: Violate the law and you no longer get to participate in the business until you prove
you can do it legally.
Unfortunately, federal financial fraud sanctions typically follow a different path. Take the Justice Department’s vaunted settlements with big
banks for mortgage-backed securities violations. This week, a monitor released the latest review of how JPMorgan Chase has complied with
the “consumer relief” section of the settlement.
At the time of the deal, prosecutors touted consumer relief as a way to deliver principal reductions for struggling homeowners. But of the
46,404 borrowers helped by the settlement as of June 30, only 2,633 got principal reductions. JPMorgan satisfied most of its punishment by
making 39,445 loans to low- and moderate-income borrowers, and borrowers in disaster areas. Of the $7.6 billion in gross “relief,” $7.1
billion came through lending.

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