SEC filing details Ocwen's efforts to rid itself of California mortgage servicing restrictions
With monitor costs mounting, Ocwen moves to settle
Ocwen Financial revealed Wednesday that it is attempting to rid itself of the business restrictions placed upon it by the California Department of Business Oversight, but a Thursday filing with the Securities and Exchange Commission details just how those negotiations are going and why Ocwen is trying to buy its way out of the settlement.
Ocwen reached a settlement agreement with the CDBO in early 2015, ending what the nonbank called a “frustrating skirmish” over the CDBO threatening to suspend Ocwen’s mortgage license because the company failed to turn over documentation showing that it complies with the state’s laws.
Under the terms of that settlement agreement, Ocwen was required to pay a fine of $2.5 million to the state of California. But more importantly for the company, which is built on mortgage servicing, the California settlement prohibited Ocwen from acquiring new mortgage servicing rights in the state of California without approval from the CDBO.
And perhaps most important of all, the CDBO settlement placed a monitor inside of Ocwen’s operations to ensure the company’s compliance with the settlement’s terms, at Ocwen’s expense.
The monitor is the most significant feature of the settlement, at least in terms of Ocwen’s bottom line. The company said Wednesday that a large portion of the net loss of $87.2 million it took in the second quarter was due to the monitor costs of not only the CDBO monitor, but also the monitors from the New York Department of Financial Services and the National Mortgage Settlement.
Ocwen said Wednesday that it spent $28.1 million in monitor costs in the second quarter alone, and the company disclosed Thursday that much of that cost is from the California monitor.
Ocwen revealed that detail in its 10-Q filing with the SEC, where it highlighted just how much it pays and has paid in monitor costs recently.
According to Ocwen’s SEC filing, the company paid $147.5 million in third-party monitoring costs from Jan. 1, 2014 through June 30, 2016 as part of its various settlements.
The monitor expenses for the first six months of 2016 were $42.9 million higher than the same period last year, primarily as a result of costs related to the California monitor, Ocwen said Thursday.
So, because of the rising costs of the California monitor and the restrictions placed upon it by the CDBO, Ocwen is trying to reach a monetary settlement with the CDBO to rid itself of those business restrictions, going so far as to set aside $15 million in the second quarter to pay for a potential settlement.
But the settlement isn’t a done deal, Ocwen said.
Ocwen said that the company has “recently engaged” in talks with the CDBO about ending the terms of the settlement agreement early, instead of potentially ending in July 2017, as it is scheduled to do now.
“We have not reached any agreement with the CDBO and cannot predict whether or when we may reach such an agreement; however, we have offered to pay $15 million to the CA DBO to settle and terminate the consent order,” Ocwen said in its SEC filing.
But despite Ocwen’s offer of $15 million to buy itself out of the CDBO restrictions, there is no deal yet, but why?
Well, part of the reason could be multiple violations of the terms of the CDBO settlement that Ocwen has apparently fallen victim to in the last 18 months.
Ocwen disclosed the violations in the SEC filing.
In one case, Ocwen said that the CDBO informed the company of its belief that “certain onboarding activities” relating to new California originations in 2015 were prohibited by the terms of the consent order, and represent a material breach of the agreement.
“We disagree with this position,” Ocwen said in the SEC filing.
“Given that we have already made adjustments to our processes for California originations, the CDBO has not asked us to make any additional changes to such processes at this time,” Ocwen noted.
Additionally, Ocwen stated that the CDBO also raised similar concerns related to the company’s onboarding of loans subject to subservicing agreements.
Ocwen said that the CDBO is still evaluating this activity as it relates to the terms of the consent order.
“The CDBO has not asked us to cease any subservicing activities, and these activities are not material to our overall operations,” Ocwen stated.
“However, it is possible that the CDBO could determine to take action against us, which could subject us to financial penalties or other regulatory action, and it is possible that the CA auditor or the CDBO could allege that other activities do not comply with California laws or regulations, which could also result in regulatory action against us,” Ocwen said.
So, Ocwen’s not out of the woods yet, but it’s certainly trying.
“Whether or not we reach an agreement after discussions with the CDBO, it is possible that we could incur losses that materially exceed this amount, which could have a material adverse impact our on our business, reputation, financial condition, liquidity and results of operations,” Ocwen said in the SEC filing. “We cannot currently estimate the amount, if any, of reasonably possible loss above amounts that have been recorded as of June 30, 2016.”