HereÕ what Ocwen did wrong

A deeper dive into the NYDFS allegations and settlement

Throughout 2014, Ocwen Financial (OCN) has run afoul of regulatory agencies like the Securities and Exchange Commission and the New York Department of Financial Services, but receiving letters from the NYDFS and subpoenas from the SEC is nothing compared to Ocwen’s chairman being forced out and the company being ordered to pay $150 million to homeowners.

Many industry observers were waiting for the other shoe to drop when it came to Ocwen, and Monday it finally fell, right onto the head of William Erbey, Ocwen’s now-former chairman.

In a shocking development, the NYDFS forced Erbey to resign from his position as chairman of the board of directors of Ocwen, and each of its four related companies: Altisource Portfolio Solutions S.A. (ASPS), Altisource Residential Corporation (RESI), Altisource Asset Management Corporation (AAMC), and Home Loan Servicing Solutions, Ltd. (HLSS), over allegations into Ocwen’s servicing practices and its relationships with its affiliated companies.

Ocwen was also ordered to pay $150 million in “hard-dollar” assistance, including $50 million in direct, hard-dollar restitution payments to former and current Ocwen homeowners in New York for Ocwen’s handling of foreclosures.

Among the charges levied at Ocwen by the NYDFS was that Ocwen’s servicing platform and loss mitigation structure had significant deficiencies, including robo-signing, inaccurate affidavits and failure to properly validate document execution processes, missing documentation, wrongful foreclosure, failure to properly maintain books and records, and initiation of foreclosure actions without proper legal standing.

And that doesn’t even include the backdating of letters to borrowers, which the NYDFS accused Ocwen of doing in a letter sent to the company in October.

A deeper look at the NYDFS investigation reveals just what Ocwen did wrong and the additional sanctions that could crush Ocwen’s business.

First and foremost, Ocwen is now forbidden from acquiring any additional mortgage servicing rights without approval from the NYDFS. From the NYDFS: “Ocwen may not begin to acquire additional MSRs until and unless it receives prior approval from NYDFS, and meets benchmarks developed by the independent monitor concerning the adequacy of Ocwen’s onboarding process for newly acquired MSRs and its ability to adequately service both those newly acquired MSRs and its existing loan portfolio.”

So what led to Erbey being forced out, the company being forced to fork over $150 million and led to the company’s banishment from the MSR acquisition business?

According to the NYDFS, Ocwen’s core servicing functions rely on “inadequate systems.”

As part of a two-year investigation into Ocwen’s servicing practices, the NYDFS placed in independent monitor with Ocwen to review Ocwen’s practices.

“In the course of its review, the Monitor determined that Ocwen’s information technology systems are a patchwork of legacy systems and systems inherited from acquired companies, many of which are incompatible,” the NYDFS said.

“A frequent occurrence is that a fix to one system creates unintended consequences in other systems. As a result, Ocwen regularly gives borrowers incorrect or outdated information, sends borrowers backdated letters, unreliably tracks data for investors, and maintains inaccurate records.”

The NYDFS also details how convoluted Ocwen’s servicing practices are within the company itself. According to the NYDFS, Ocwen uses comment codes entered either manually or automatically to service its portfolio. Each of those codes initiates a process, such as sending a delinquency letter to a borrower, or referring a loan to foreclosure counsel, but as a result of Ocwen’s precipitous growth, the company now has more than 8,400 of those codes.

“Often, due to insufficient integration following acquisitions of other servicers, there are duplicate codes that perform the same function,” the NYDFS said. “Despite these issues, Ocwen continues to rely on those systems to service its portfolio of distressed loans.”

The NYDFS also said that Ocwen is overly reliant on technology, which has led to the company employing fewer trained personnel than its competitors.

And many of those undertrained personnel are located overseas. In fact, a recent report from Fitch Ratings showed that Ocwen has 73% of its servicing staff offshore, operating out of India, the Philippines and Uruguay.

According to the NYDFS, the prevalence of Ocwen’s offshore servicing staff is a serious problem.

“Ocwen’s Chief Financial Officer recently acknowledged, in reference to its offshore customer care personnel, that Ocwen is simply ‘training people to read the scripts and the dialogue engines with feeling,’” the NYDFS said.

The NYDFS said that Ocwen requires its offshore staff to follow the scripts closely, and has penalized and terminated customer support staff who failed to stick to the script.

“In some cases, this policy has frustrated struggling borrowers who have complex issues that exceed the bounds of a script and have issues speaking with representatives at Ocwen capable of addressing their concerns,” the NYDFS said. 

“Moreover, Ocwen’s customer care representatives in many cases provide conflicting responses to a borrower’s question,” the NYDFS continued. 

“Representatives have also failed in many cases to record in Ocwen’s servicing system the nature of the concerns that a borrower has expressed, leading to inaccurate records of the issues raised by the borrower.”

But that’s just the beginning of Ocwen’s issues. The NYDFS investigation also “uncovered a number of conflicts of interest” between Ocwen and its affiliated companies, something that has been on the radar of the NYDFS since February.

According to the NYDFS, Erbey did not recuse himself from the approval process of transactions between the related companies. “Mr. Erbey, who owns approximately 15% of Ocwen’s stock, and nearly double that percentage of the stock of Altisource Portfolio, has participated in the approval of a number of transactions between the two companies or from which Altisource received some benefit, including the renewal of Ocwen’s forced placed insurance program in early 2014,” the NYDFS said.

That’s the very forced placed insurance program that Altisource announced it was discontinuing in November, citing “uncertainties with industry-wide litigation and the regulatory environment.”

The NYDFS also said that the dealings between Ocwen and Altisource led to increased fees being passed onto consumers. “In one example, Altisource Portfolio subsidiary Hubzu, an online auction site, hosts nearly all Ocwen auctions,” the NYDFS said. “In certain circumstances, Hubzu has charged more for its services to Ocwen than to other customers — charges which are then passed on to borrowers and investors.”

And the conflicts of interest don’t just stop at Erbey’s desk. The NYDFS said that during its review, it discovered that ‎Ocwen’s Chief Risk Officer also served as the Chief Risk Officer of Altisource Portfolio.

“The Chief Risk Officer reported directly to Mr. Erbey in both capacities,” the NYDFS said. “This individual seemed not to appreciate the potential conflicts of interest posed by this dual role, which was of particular concern given his role as Chief Risk Officer.”

Now, as a result of all of these failings, Erbey is out as Ocwen’s chairman, the company can’t acquire any more MSRs without approval from the NYDFS and the company must also pay $150 million to homeowners.

But that’s not all Ocwen is now required to do for homeowners.

Additionally, Ocwen must also provide customer relief in the following forms:

  • Ocwen will provide upon request by a New York borrower that borrower’s complete loan file, which includes all information from all systems, including comment codes, at no cost to the borrower, regardless of whether such borrower’s loan is still serviced by Ocwen
  • Ocwen will provide every New York borrower who is denied a modification, short sale, or deed-in-lieu of foreclosure, a detailed explanation of the reasons for denial
  • For all New York borrowers who have been reported negatively by Ocwen to credit agencies since January 1, 2010, Ocwen will provide upon request at no cost a copy of such borrower’s credit report (including credit scores), regardless of whether such borrower’s loan is still serviced by Ocwen

Additionally, the independent monitor placed at Ocwen by the NYDFS will have oversight over “significant operational reforms” at Ocwen. Included in those is:

  • Information technology systems and personnel, including with respect to record keeping and borrower communications
  • Number of personnel and the training and expertise of its personnel in all servicing operations
  • Onboarding process for newly acquired mortgage servicing rights, including Ocwen’s ability to onboard newly acquired MSRs without interruption to servicing newly acquired loans or its existing loan portfolio
  • Controls in identifying and correcting errors made by Ocwen’s personnel or system
  • Risk management functions
  • Contracts or proposed contracts with third parties, including but not limited to related parties
  • Fees charged by Ocwen to borrowers or mortgage investors
  • The Ocwen borrower experience.

Ocwen’s board of directors is also now required to consult with the monitor to determine whether any additional members of senior management should be terminated or whether additional officers should be retained to achieve the goals of complying with the agreement — and all other applicable laws, regulations, and agreements — as well as creating a corporate culture of ethics, integrity, compliance, and responsiveness to borrowers, the NYDFS said.

And most notable in the agreement is this: “Nothing in today's agreement shall excuse Ocwen from paying additional required restitution to any borrowers harmed by its improper or illegal conduct, including the backdating of letters to borrowers.”

So Ocwen isn’t anywhere close to being out of the woods yet, for backdating letters or for anything else it may have done.

Ocwen’s stock, by the way, closed at $16.01 on Monday, down $5.89 (and nearly 27%) for the day. For the year, Ocwen’s stock is down 71.61%, costing Ocwen shareholders more than $40 per share.

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