The New York Department of Financial Services is questioning Altisource Portfolio Solutions' practice of force-placed insurance, calling the transaction troubling, and saying that parent Ocwen Financial Corporation (OCN) may be funneling as much as $65 million to Altisource even though his office has raised concerns about potential conflicts of interest between such entities.
This comes as the latest setback for Altisource and Ocwen.
The DFS under Director Benjamin Lawsky has homed in on the practices of nonbank mortgage servicers in light of their growing presence in the mortgage space.
These heightened regulatory burdens and compliance costs continue to drag on Ocwen, as seen in its second-quarter earnings, where the decline was attributed to “significant compliance and regulatory-related costs.” Ocwen was down to its lowest intraday price since late 2012 on Friday, and down 21% in the worst week the company has seen since 2008. Citi (C) rescinded its “buy” rating, and both Citi and Sterne Agee reduced their price targets for Ocwen.
In an open letter dated Monday to Ocwen’s general counsel, Timothy Hayes, Lawsky raises a series of questions, alleging that there exists a complex arrangement related to force-placement that “appears designed to funnel as much as $65 million in fees annually from already-distressed homeowners to Altisource for minimal work.”
The full text of Lawsky’s letter can be read here.
Lawsky’s office wants to know more about Ocwen's force-placed arrangement with Altisource, which features the use of an unaffiliated insurance agent, Southwest Business Corporation, apparently as a pass-through so that Ocwen and Altisource are not directly contracting with each other, but Altisource can still receive insurance commissions and certain fees seemingly for doing very little work.
Lawsky also charges that Ocwen CEO and Chairman William Erbey’s approval of this arrangement appears to be inconsistent with public statements Ocwen has made, as well as representations in company SEC filings.
In late April, Lawsky sent an initial letter to Ocwen raising a series of questions about its relationship and ancillary service practices, as regards Altisource and another affiliate, Hubzu.
Lawsky argues that the fast growth of nonbank MSR firms puts mortgage holders at risk. He has said that he believes regulators have a responsibility to ask whether the efficiencies at nonbank mortgage servicers are too good to be true.
Lawsky’s office has place nonbanks in the MSR space under enhanced scrutiny, over concerns of the increasing role of nonbanks. In early February, Lawsky put an indefinite hold on the $2.7 billion MSR deal between Ocwen and Wells Fargo (WFC).
“The potential for conflicts of interest and self-dealing here are perfectly clear. Servicers have every incentive to use these affiliated companies exclusively for their ancillary services, and they often do. The affiliated companies have every incentive to provide low-quality services for high fees, and they appear in some cases to be doing so,” Lawsky said. “In the context of the nonbank mortgage servicing market, homeowners and investors are at risk of becoming fee factories.”
In the letter dated August 4, 2014, Lawsky notes that the DFS has previously expressed concerns about Ocwen's use of related companies to provide fee-based services such as property inspections, online auction sites, foreclosure sales, real estate brokers, debt collection, and many others.
“Because mortgage servicing presents the extraordinary circumstance where there is effectively no customer to select a vendor for ancillary services, Ocwen's use of related companies to provide such services raises concerns about whether such transactions are priced fairly and conducted at arms-length,” the letter states. “As you are aware, the Department's recent investigation into force-placed insurance revealed that mortgage servicers were setting up affiliated insurance agencies to collect commissions on force-placed insurance, and funneling all of their borrowers' force-placed business through their own agencies, in violation of New York Insurance Law section 2324's anti-inducement provisions.”
In that investigation, the DFS says it discovered that servicers' own insurance agencies had an incentive to purchase force-placed insurance with high premiums because the higher the premiums, the higher the commissions kicked back by insurers to the servicers or their affiliates.
“The extra expense of higher premiums, in turn, can push already struggling families over the foreclosure cliff. In light of this investigation, the Department last year imposed further prohibitions on these kickbacks to servicers or their affiliates.
"However, as part of our broader review of ancillary services provided by nonbank mortgage servicers, we are concerned that certain non-bank mortgage servicers are seeking to side-step those borrower protections through complex arrangements with subsidiaries and affiliated companies. Indeed, in recent weeks, we halted one such arrangement at another non-bank mortgage servicing company,” Lawsky says in the letter.
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