SEC fines Ocwen $2 million for misstating financials; Altisource, HLSS relationships
Used flawed MSR valuation methods
Ocwen Financial will pay a $2 million fine after a Securities and Exchange Commission investigation found that the nonbank misstated it financials on several occasions by using a “flawed, undisclosed methodology” to value mortgage servicing rights that were sold to an Ocwen-associated company, Home Loan Servicing Solutions.
Last year, Home Loan Servicing Solutions agreed to a $1.5 million fine for misstated its net income in 2012, 2013 and the first quarter of 2014, due to using accounting methodology that misstated the value of the company’s primary asset, the billions of dollars in mortgage servicing rights it purchased from Ocwen.
According to the SEC, HLSS’ accounting methodology did not conform to generally accepted accounting principles, often referred to as GAAP.
The SEC said that HLSS disclosed that it valued these assets at their “fair value,” but the SEC investigation found that the company’s actual approach was to assign a value equal to their carrying value, provided the carrying value was within 5% of a third-party’s fair market value estimate.
Now, Ocwen is settling with the SEC for similar charges.
According to the SEC, its investigation found that Ocwen “inaccurately disclosed” to investors that it independently valued these assets at fair value under GAAP.
“In fact, Ocwen merely used the valuation performed by a related party to which it sold the rights to service certain mortgages that remained a financing liability in Ocwen’s accounting,” the SEC said.
“Ocwen’s audit committee failed to review the methodology with company management or its outside auditor, and the related party’s valuation deviated from fair value measures,” the SEC continued.
According to the SEC, Ocwen then misstated its net income for the last three quarters of 2013 and the first quarter of 2014.
In August 2014, Ocwen said that it would be restating its 2013 and 2014 earnings after its auditor found a potential “material weakness” in in the way it valued and recorded a financial transaction.
The material weakness turned to be a flaw in Ocwen’s system, the SEC said.
“Ocwen’s filings led investors to believe the company was valuing complex mortgage assets using GAAP rather than relying on a related company’s accounting methodology that later proved to be flawed,” said Michael Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “Ocwen released inaccurate financial statements because its internal controls were inadequate and its audit committee failed to scrutinize whether the methodology was an appropriate way to measure fair value.”
The SEC’s investigation also found that Ocwen’s close relationship with Altisource Residential, Altisource Asset Management Corp, Altisource Portfolio Solutions, and Home Loan Servicing Solutions and William Erbey’s role as the chairman of each company contributed to the faulty financial dealings.
Erbey founded Ocwen, and served as chairman of the board of Ocwen, Altisource Residential, Altisource Asset Management, Altisource Portfolio Solutions and Home Loan Servicing Solutions until the relationship between those companies became the subject of intense investigation from the New York Department of Financial Services.
The NYDFS investigation ultimately led to Erbey’s resignation from his positions with each company and a $150 million fine for Ocwen.
According to the SEC, Ocwen’s internal controls also failed to prevent “conflicts of interest” involving Erbey
The SEC said that Ocwen disclosed to investors that its executive chairman was required to recuse himself from transactions with related companies where he also served in a leadership position.
But Ocwen had no written policies or procedures on recusals for related party transactions, and the recusal practice that existed was flawed, inconsistent, and ad hoc, the SEC said.
According to the SEC, Erbey was able to approve transactions from both sides.
The SEC cited a specific example involving a $75 million bridge loan to Ocwen from Altisource Portfolio Solutions.
According to the SEC consent order, Erbey, in his role as executive chairman of Ocwen, voted to approve Ocwen’s entry into the loan agreement.
Erbey was also chairman of Altisource, but he recused himself from the decision to approve the loan on the Altisource side, the SEC order stated.
However, Erbey reviewed and approved the Altisource board presentation before it was circulated to the Altisource Board of Directors for the vote, the SEC said.
As part of the settlement, Ocwen did not admit to or deny the SEC’s findings.
Additionally, neither Ocwen nor any of its personnel were charged with fraud and there is no finding that Ocwen shareholders suffered a loss due to the referenced actions.
“We are pleased with the resolution of this U.S. Securities and Exchange Commission’s investigation,” Ocwen said in a statement.
“As previously disclosed in our October 2015 SEC 10-Q filing, funds have already been reserved to address this settlement,” Ocwen’s statement continued. “Ocwen remains committed to full compliance with all legal and regulatory requirements and will continue to fully cooperate with regulators on any matter brought to its attention.”
Click here to read the full SEC order of the charges and settlement with Ocwen.
[Correction: This article has been updated to more accurately reflect the SEC's findings surrounding the $75 million bridge loan between Ocwen and Altisource.]