The bank closed files without reason, misinformed borrowers, miscalculated incomes and mishandled requests for mortgage modifications designed to prevent foreclosures, a federal agency found.

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Troy-based Flagstar Bank was ordered to pay $37.5 million in damages to mortgage customers and in fines Monday for mishandling requests for loan modifications and, in some cases, illegally foreclosing on homes.

The Consumer Financial Protection Bureau fined the bank $10 million and ordered it to pay $27.5 million to victims for illegally blocking borrowers’ attempts to save their homes. Flagstar agreed to the settlement without admitting guilt.

“Because of Flagstar’s illegal actions and unacceptable delays, struggling homeowners lost the opportunity to save their homes,” Richard Cordray, director of the bureau, said in a statement. “Today’s action signals a new era of enforcement to protect consumers against the cost of servicer runarounds.”

In its own statement, Flagstar called it a settlement of “alleged violations of federal consumer financial laws” and noted it has modified “thousands” of mortgages. “This resolution is in the bank’s best interest and allows us to continue building a great company,” CEO Alessandro DiNello said in the news release. Flagstar has 106 branches in Michigan; and runs mortgage lending centers in 18 states and services loans nationwide.

Flagstar also is facing a potential class-action lawsuit filed Sept. 5 in New York by Pomerantz LLP, charging the bank misled investors by failing to disclose the defective mortgage servicing practices.

The bureau’s investigation found that even though Flagstar faced a backlog of 13,000 applications asking for a mortgage modification or other relief on a home loan during 2011, the bank assigned just 25 workers and one vendor based in India to review the files. At times, the bureau said, it took nine months to review just one application, and that callers averaged 25 minutes on hold, with half of them hanging up.

After new mortgage rules issued by the bureau went into effect at the beginning of the year, Flagstar violated them on several counts, the bureau said. That included closing files because the bank took too long to review them, miscalculating borrower incomes, misinforming borrowers, not warning borrowers about incomplete applications, missing deadlines, denying loan modifications without giving a reason, misinforming borrowers about their rights and dragging out modification trial periods so long that it increased the outstanding loan amount and jeopardized the borrower’s ability to get a permanent modification to the mortgage.

A spokesman for the bureau said 2,000 of the 6,500 loans reviewed by Flagstar lost their homes to foreclosure.

It all sounds familiar to Phil Lyman, an auto salesman in Rockford, not far from Grand Rapids. When auto sales tanked during the recession, Lyman contacted Flagstar about refinancing his home or modifying the loan in 2010. After many excuses and delays, he said he was assured his loan modification would be issued only to find that the bank had allowed Farmington Hills attorneys Schneiderman & Sherman P.C., to foreclose.

“They’d say, ‘We’re almost there, we just need this, this and this,’ and then they’d say it didn’t go through,” he recalls.

Lyman scrambled to raise the money to get his home back before the six-month redemption period expired and he would be evicted, eventually raiding his 401(k) retirement fund, which resulted in a $59,000 tax bill.

Lyman said he did eventually receive a final answer on his loan modification. It came after the deadline, when it would have been too late to save his home.

“I didn’t get the notification that I was completely shot down until after the redemption deadline,” he said.

The payment of $27.5 million to 6,500 homeowners will be handled directly by the Consumer Finance Bureau, not Flagstar, and applies only to cases of modification requests handled this year. With the added $10 million fine, the settlement totals $37.5 million. In July, Flagstar reported net income for the second quarter of $25.5 million.

At an average of $4,154 per homeowner, the settlement covers not much more than closing costs and fees on a mortgage those homeowners would have paid.

But that’s high for these kinds of settlements, noted Steve Dibert, a mortgage expert who helps homeowners dispute foreclosures.

“The average is between $1,500 and $2,000 and most homeowners get $500 or $750,” Dibert said. “When you compare it to what people have gotten in other settlements like this, that’s extremely high.”

In addition to the payments and fines, the bureau ordered Flagstar to fix its mitigation process, and contact borrowers who weren’t foreclosed on and offer them modifications. The bureau also barred Flagstar from contracting to service any more loans in default until the problems are repaired.

During the past several years, several government bodies have forged settlements with big home-lenders over the mishandling of mortgages and foreclosures during and after the recession. In 2012, 49 state attorneys general and the federal government wrested an estimated $25 billion settlement over servicing, including forged and backdated documents with five of the country’s five largest mortgage servicers: Ally/GMAC; Bank of America; Citi; JPMorgan Chase; and Wells Fargo.

In December, attorneys general and the Consumer Finance Bureau reached another $125 million settlement with Homeward Residential Holdings (previously known as American Home Mortgage Servicing), Litton Loan Servicing and Ocwen. In addition, Ocwen agreed to forgive $2 billion in mortgage debt.

Only one person has been sentenced to jail for servicing fraud. In 2012, Lorraine Brown, the former president of DocX, a Georgia firm that processed foreclosure documents for banks. After Brown pleaded guilty in a Florida federal court for her role in authorizing forged signatures under the name “Linda Green,” Michigan immediately indicted Brown over similar “robo-signed” documents filed in the state.

In May 2013, a Michigan court sentenced Brown to 40 months to 20 years for racketeering. She was later sentenced to five years on the federal charges.

“This has been a long time coming,” added Dibert, the mortgage expert. “For 10 years, Flagstar has had servicing issues. So this is great for homeowners with Flagstar mortgages, because they’re going to get a better level of customer service than they were getting before.”

boconnor@detroitnews.com

(313) 222-2145

Getting restitution

If your mortgage was one of the 6,500 found to have been improperly handled, the Consumer Finance Protection Bureau will contact you directly about your share of the settlement. Flagstar Bank won’t issue the payments. The settlement applies only to mortgage modification requests handled this year.

You can contact the bureau at (855) 411-2372 or on the Web at www.consumerfinance.gov/complaint

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