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 Citi (C) rescinded its “buy” rating, and both Citi and Sterne Agee reduced their price targets for Ocwen.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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Here are the allegations presented to Ocwen in the letter:
These are the facts established by documents Ocwen provided to the Monitor: In August 2013, Ocwen appointed an Altisource subsidiary called Beltline Road Insurance Agency, Inc. ("Beltline") as its exclusive insurance representative, purportedly to negotiate and place a new force-placed insurance program for Ocwen. Ocwen's existing force-placed arrangement with the insurer Assurant was set to expire in March 2014, and Beltline's stated task was to find an alternative arrangement. In January 2014, Altisource provided a memo to the Credit Committee of Ocwen Mortgage Servicing, Inc., recommending, among other things, replacing Assurant with SWBC as Ocwen's managing general agent. SWBC would then be charged with managing Ocwen's force-placed insurance program, including negotiating premiums with insurers. As part of this arrangement, Altisource recommended itself to provide fee-based services to SWBC.
In emails dated January 15 and 16, 2014, the transaction was approved by the three members of the Credit Committee: William Erbey, Duo Zhang, and Richard Cooperstein. The Credit Committee did not meet to discuss this proposal, no minutes were taken of the Credit Committee's consideration of this proposed transaction, and the proposed transaction apparently was not presented for review or approval to any member of the Ocwen Board of Directors except Mr. Erbey, as Mr. Zhang and Mr. Cooperstein are not members of the Ocwen Board of Directors.
Just one month after this Credit Committee approval, on February 26, 2014, the company received the Department's letter raising concerns about potential conflicts of interest between Ocwen and its related public companies. In that letter, we identified facts that "cast serious doubts on recent public statements made by the company that Ocwen has a 'strictly arms-length business relationship' with those companies," and we specifically referenced the multiple roles played by Mr. Erbey as an area of concern.
Disregarding the concerns raised in our letter, Ocwen proceeded to execute contracts formalizing this new force-placed arrangement, apparently without further consideration by any Board member other than Mr. Erbey. Those contracts, dated as of June 1, 2014, indicate that Altisource will generate significant revenue from Ocwen's new force-placed arrangement while apparently doing very little work. Indeed, a careful review of these and other documents suggests that Ocwen hired Altisource to design Ocwen's new force-placed program with the expectation and intent that Altisource would use this opportunity to steer profits to itself.
First, Altisource will reap enormous insurance commissions for having recommended that Ocwen hire SWBC. Under the contracts, Ocwen promises to give its force-placed insurance business to SWBC. SWBC does the work of negotiating premiums, preparing policies, and handling renewals and cancellations. For these services, SWBC receives commissions from insurers. SWBC then passes on a portion of those commissions, constituting 15% of net written premium on the policies, to Altisource subsidiary Beltline, for "insurance placement services." Documents indicate that Ocwen expects to force-place policies on its borrowers in excess of $400 million net written premium per year; a 15% commission on $400 million would be $60 million per year. It is unclear what insurance placement services, if any, Altisource is providing to justify these commissions.
Second, Altisource will be paid a substantial annual fee for providing technology support that it appears to be already obligated to provide. This fee relates to monitoring services, whereby Ocwen pays a company to monitor whether its borrowers' insurance remains in effect. Such monitoring is necessary to establish which borrowers have lapsed on their payments and need to have insurance force-placed upon them. Prior to 2014, Ocwen was paying ten cents per loan per month to Assurant for monitoring. In this new arrangement, however, Ocwen agrees to pay double the prior amount – twenty cents per loan per month now paid to SWBC, for each of the approximately 2.8 million borrowers serviced by Ocwen. SWBC, in turn, agrees to pass on fifteen out of that twenty cents to Altisource, or an estimated $5 million per year. Altisource provides only one service in exchange for this fee: granting SWBC access to Ocwen's loan files. Altisource, of course, only has access to Ocwen's loan files through its own separate services agreements with Ocwen, which appear to contractually obligate Altisource to provide this access to business users designated by Ocwen to receive such access.
Third, the contracts require SWBC to use Altisource to provide loss draft management services for Ocwen borrowers; to pay Altisource $75 per loss draft for these services; and to pay Altisource an additional $10,000 per month for certain other services.
The DFS then poses a series of questions to Ocwen and Altisource.
1. Is Altisource already obligated to provide access to Ocwen's loan files to SWBC pursuant to separate agreements with Ocwen? If your answer is no, please specifically explain how the Technology Products Letter between Ocwen and Altisource, produced to the Department beginning at OFC00002496, does not impose this obligation.
2. What services, if any, does Altisource or its subsidiary provide to SWBC in exchange for SWBC paying the Altisource subsidiary a commission of 15% of insurance premiums? In addition, it appears that payment of this commission excludes premium generated by policies issued on properties in New York State. Please describe the negotiations that resulted in this exclusion, and identify any alternate compensation to be paid to Altisource or any affiliate to make up for the excluded commissions on New York properties.
3. What services, if any, does Altisource provide to SWBC in exchange for SWBC paying Altisource fifteen cents per loan per month?
4. What services, if any, does Altisource provide to SWBC in exchange for an additional $10,000 per month?
5. Under what circumstances do Ocwen policies and procedures permit approval of transactions solely through the Credit Committee? Did this force-placed insurance arrangement meet those requirements? Do Ocwen policies and procedures require any additional review or approvals for transactions involving related companies? If so, did Ocwen engage in that review or obtain those approvals for this arrangement?
6. Were any options presented to the Credit Committee other than the proposed SWBC transaction? If so, did all such options feature the retention of Altisource to provide fee-based services? Or were options presented that did not involve payments to Altisource
7. Throughout this process, did members of the Credit Committee or any Ocwen personnel give any consideration to the impact that Altisource fees and commissions would have in increasing insurance premiums to be paid by struggling families?
8. After the Credit Committee approved Altisource's January 2014 proposal for Ocwen's new forced-placed insurance program, it appears that certain changes were made to the proposal, including an expansion of SWBC's and Altisource's roles in the program and their associated compensation. Please describe those changes and the negotiations that led to those changes, and identify all personnel involved in negotiating and approving those changes.
9. What process resulted in the August 2013 appointment of Altisource's subsidiary as Ocwen's exclusive insurance representative? Was this process competitive? What Ocwen Board members or personnel were involved in this appointment? Which Board members, if any, authorized this appointment? Did those Ocwen Board members or personnel know or anticipate that Altisource would return with a plan that would appear to be highly profitable for itself?
10. What amount of revenue has Altisource or its affiliates realized, and what amount of revenue is it projected to realize, from the services it is providing pursuant to this force-placed insurance arrangement? What are its costs for providing those services? How many employees at Altisource or its subsidiaries work on providing those services, and how much of their time is dedicated to this work?
11. Altisource's presentation to the Credit Committee stated that "Altisource will establish its own managing general underwriter during 2014 to provide LPI underwriting services starting in 2015." Please explain Altisource's intention to establish a managing general underwriter, state whether Ocwen supports Altisource's plan, and explain how this development will affect Ocwen's force-placed program, Altisource's revenue, and the fees to be charged to Ocwen borrowers or mortgage investors.
In addition to the issues raised above, Lawsky’s letter says that he has serious concerns about the allegedly conflicted role played by Erbey and potentially other Ocwen officers and directors in directing profits to Altisource, which is "related" to Ocwen but is formally a separate, publicly-traded company.
“As you know, Mr. Erbey is Ocwen's largest shareholder and is also the Chairman of and largest shareholder in Altisource. In fact, Mr. Erbey's stake in Altisource is nearly double his stake in Ocwen: 29 percent versus 15 percent. Thus, for every dollar Ocwen makes, Mr. Erbey's share is 15 cents, but for every dollar Altisource makes, his share is 29 cents,” the letter states. “The Department and its Monitor have uncovered a growing body of evidence that Mr. Erbey has approved a number of transactions with the related companies, despite Ocwen's and Altisource's public claims – including in SEC filings – that he recuses himself from decisions involving related companies. Mr. Erbey's approval of this force-placed insurance arrangement as described above appears to be a gross violation of this supposed recusal policy.”
Additional questions follow.
12. Please explain how and why Mr. Erbey approved the arrangement between Ocwen, SWBC, and Altisource.
13. Please provide every instance where Mr. Erbey has approved a transaction involving a related company notwithstanding Ocwen's statements to the contrary.
Finally, Ocwen and Altisource state in their public filings that rates charged under agreements with related companies are market rate, but Ocwen has not been able to provide the Monitor with any analysis to support this assertion.
14. Please advise whether Ocwen has performed any independent analysis to determine whether the rates charged in the SWBC arrangement are market rate.
15. Please address whether Ocwen has performed any independent analysis to support the assertion that the rates charged under other related party agreements are market rate.