InvestmentsMortgage

SEC charges Home Loan Servicing Solutions over relationship with Ocwen

Also charges HLSS for misstating its net income

The Securities and Exchange Commission announced Monday that it charged Home Loan Servicing Solutions for making “material misstatements” about its relationship with Ocwen Financial (OCN) as well as misstating its net income on several occasions.

According to the SEC, Home Loan Servicing Solutions, which was purchased by New Residential Investment (NRZ) in April, misstated how it handled transactions involving Ocwen.

In Aug. 2014, Ocwen disclosed that it received a subpoena from the SEC over its relationship with several of its affiliated companies, including Altisource Residential (RESI), Altisource Asset Management Corp (AAMC), Altisource Portfolio Solutions (ASPS), and Home Loan Servicing Solutions.

At issue in that SEC investigation was the fact that Ocwen founder William Erbey served as chairman of the board of Ocwen, Altisource Residential, Altisource Asset Management, Altisource Portfolio Solutions and Home Loan Servicing Solutions, and whether conflicts of interest subsequently existed.

The relationship between those companies was also the subject of intense investigation from the New York Department of Financial Services, which also questioned whether conflicts of interest existed due to Erbey’s roles at each company.

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 new SEC charges, from 2012 to 2014, HLSS stated that it required its chairman, Erbey, to recuse himself from transactions involving the company and other related parties to avoid conflicts of interest.

The SEC investigation found that statement to be untrue.

The SEC investigation revealed that not only did HLSS have no written policies or procedures requiring recusals on related party transaction, Erbey also approved “many” transactions between HLSS and Ocwen.

Additionally, the SEC found that HLSS 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.

According to the SEC, HLSS’ senior management and its audit committee “failed to adequately review” whether the valuation methodology complied with GAAP despite internal concerns that the valuation methodology might result in material differences between the carrying value and the third-party’s fair value estimate.

“As a result of its lax internal controls environment, HLSS failed to properly value its primary asset and to make accurate and complete disclosures in its public filings,” said Michael Osnato, chief of the SEC enforcement division’s Complex Financial Instruments Unit. “It failed to meet requirements that are fundamental to ensuring that investors receive reliable information, including in matters involving complex assets.”

As a result of the investigation, HLSS agreed to pay a $1.5 million penalty to settle the SEC’s charges and agreed to cease and desist from disclosure and books and recordkeeping violations.

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