For some people, especially those living in California, Colorado, Oregon, and Washington, April 20 (4-20) is a day to celebrate, shall we say. But for Ocwen Financial, April 20, 2017 was a day that saw its business go up in smoke.
First, nearly two dozen state banking regulators blasted Ocwen’s mortgage servicing practices, saying that the company could not appropriately manage its consumer mortgage escrow accounts.
Each of the 22 state regulators issued cease-and-desist orders that prohibit Ocwen from acquiring new mortgage servicing rights, and some states effectively banned the company from operating in the state altogether.
Then, within one hour of the state banking regulators’ joint announcements, the Consumer Financial Protection Bureau announced that it was suing Ocwen Financial for “failing borrowers at every stage of the mortgage servicing process.”
The CFPB’s lawsuit alleges that Ocwen cost borrowers money, and in some cases, their homes, with its years of “widespread errors, shortcuts, and runarounds.” In its lawsuit, the CFPB said that Ocwen “botched basic functions like sending accurate monthly statements, properly crediting payments, and handling taxes and insurance.”
On the same day, the state of Florida also announced that it separately sued Ocwen, which is based in West Palm Beach, along with the company’s subsidiaries Ocwen Loan Servicing and Ocwen Mortgage Servicing, for “mortgage servicing misconduct.”
According to the complaint filed by Florida Attorney General Pam Bondi and Florida Office of Financial Regulation Commissioner Drew Breakspear, Ocwen “harmed Floridians by filing illegal foreclosures, mishandling loan modifications, misapplying mortgage payments, failing to pay insurance premiums from escrow and collecting excessive fees.”
Later in the month, the number of state banking regulators taking action against Ocwen swelled to nearly 30, and Massachusetts, which had already prohibited Ocwen from acquiring new MSRs, prohibited it from originating new loans, prohibited it from servicing any mortgages in the state, and ordered Ocwen to transfer all mortgages it services to other servicers, piled on by suing Ocwen for widespread “abusive” mortgage servicing practices.
The tidal wave of regulatory actions left the nonbank fighting for its right to do business in courtrooms from coast to coast.
The news could not have come at a worse time for Ocwen, which was on the verge of being able to acquire mortgage servicing rights again, thanks to a recently signed agreement with the New York Department of Financial Services.
The NYDFS put Ocwen out of the MSR acquisition business in 2014, restricting the company’s right to acquire MSRs as part of a $150 million settlement over the company’s servicing practices and its relationships with its affiliated companies, Altisource Portfolio Solutions, Altisource Residential, Altisource Asset Management, and Home Loan Servicing Solutions.
The news got a little better earlier this year when the California Department of Business Oversight removed the state’s mortgage servicing restrictions on Ocwen, which stemmed from licensing issues in the state.
To get out from under the California restrictions, Ocwen is required to make a cash payment of $25 million. The company is also required to provide an additional $198 million in debt forgiveness through loan modifications to existing California borrowers over a three-year period.
Despite the release of the California restrictions, the NYDFS settlement still precluded Ocwen from buying new MSRs.
It seemed like there might finally be some light at end of the MSR tunnel for Ocwen, after the nonbank announced in late March that it reached a new agreement with the NYDFS that would have paved the way for the complete removal of the MSR restrictions.
Then April 20th happened.
THE CFPB ACCUSES OCWEN OF TOTAL FAILURE AS A MORTGAGE SERVICER
In its announcement, the CFPB claims that it uncovered “substantial evidence that Ocwen has engaged in significant and systemic misconduct at nearly every stage of the mortgage servicing process.”
The CFPB also claims that Ocwen “illegally foreclosed on struggling borrowers, ignored customer complaints, and sold off the servicing rights to loans without fully disclosing the mistakes it made in borrowers’ records.”
The lawsuit charges Ocwen with a raft of servicing violations, including (excerpted in full from the CFPB, emphasis added by HousingWire):
• Serviced loans using error-riddled information: Ocwen uses a proprietary system called REALServicing to process and apply borrower payments, communicate payment information to borrowers, and maintain loan balance information. Ocwen allegedly loaded inaccurate and incomplete information into its REALServicing system. And even when data was accurate, REALServicing generated errors because of system failures and deficient programming. To manage this risk, Ocwen tried manual workarounds, but they often failed to correct inaccuracies and produced still more errors. Ocwen then used this faulty information to service borrowers’ loans. In 2014, Ocwen’s head of servicing described its system as “ridiculous” and a “train wreck.”
• Illegally foreclosed on homeowners: Ocwen has long touted its ability to service and modify loans for troubled borrowers. But allegedly, Ocwen has failed to deliver required foreclosure protections. As a result, the Bureau alleges that Ocwen has wrongfully initiated foreclosure proceedings on at least 1,000 people, and has wrongfully held foreclosure sales. Among other illegal practices, Ocwen has initiated the foreclosure process before completing a review of borrowers’ loss mitigation applications. In other instances, Ocwen has asked borrowers to submit additional information within 30 days, but foreclosed on the borrowers before the deadline. Ocwen has also foreclosed on borrowers who were fulfilling their obligations under a loss mitigation agreement.
• Failed to credit borrowers’ payments: Ocwen has allegedly failed to appropriately credit payments made by numerous borrowers. Ocwen has also failed to send borrowers accurate periodic statements detailing the amount due, how payments were applied, total payments received, and other information. IT has also failed to correct billing and payment errors.
• Botched escrow accounts: Ocwen manages escrow accounts for over 75% of the loans it services. Ocwen has allegedly botched basic tasks in managing these borrower accounts. Because of system breakdowns and an over-reliance on manually entering information, Ocwen has allegedly failed to conduct escrow analyses and sent some borrowers’ escrow statements late or not at all. Ocwen also allegedly failed to properly account for and apply payments by borrowers to address escrow shortages, such as changes in the account when property taxes go up. One result of this failure has been that some borrowers have paid inaccurate amounts.
• Mishandled hazard insurance: If a servicer administers an escrow account for a borrower, a servicer must make timely insurance and/or tax payments on behalf of the borrower. Ocwen, however, has allegedly failed to make timely insurance payments to pay for borrowers’ home insurance premiums. Ocwen’s failures led to the lapse of homeowners’ insurance coverage for more than 10,000 borrowers. Some borrowers were pushed into force-placed insurance.
• Bungled borrowers’ private mortgage insurance: Ocwen allegedly failed to cancel borrowers’ private mortgage insurance, or PMI, in a timely way, causing consumers to overpay. Generally, borrowers must purchase PMI when they obtain a mortgage with a down payment of less than 20%, or when they refinance their mortgage with less than 20% equity in their property. Servicers must end a borrower’s requirement to pay PMI when the principal balance of the mortgage reaches 78% of the property’s original value. Since 2014, Ocwen has failed to end borrowers’ PMI on time after learning information in its REALServicing system was unreliable or missing altogether. Ocwen ultimately overcharged borrowers about $1.2 million for PMI premiums, and refunded this money only after the fact.
• Deceptively signed up and charged borrowers for add-on products: When servicing borrowers’ mortgage loans, Ocwen allegedly enrolled some consumers in add-on products through deceptive solicitations and without their consent. Ocwen then billed and collected payments from these consumers.
• Failed to assist heirs seeking foreclosure alternatives: Ocwen allegedly mishandled accounts for successors-in-interest, or heirs, to a deceased borrower. These consumers included widows, children, and other relatives. As a result, Ocwen failed to properly recognize individuals as heirs, and thereby denied assistance to help avoid foreclosure. In some instances, Ocwen foreclosed on individuals who may have been eligible to save these homes through a loan modification or other loss mitigation options.
• Failed to adequately investigate and respond to borrower complaints: If an error is made in the servicing of a mortgage loan, a servicer must generally either correct the error identified by the borrower, called a notice of error, or investigate the alleged error. Since 2014, Ocwen has allegedly routinely failed to properly acknowledge and investigate complaints, or make necessary corrections. Ocwen changed its policy in April 2015 to address the difficulty its call center had in recognizing and escalating complaints, but these changes fell short. Under its new policy, borrowers still have to complain at least five times in nine days before Ocwen automatically escalates their complaint to be resolved. Since April 2015, Ocwen has received more than 580,000 notices of error and complaints from more than 300,000 different borrowers.
• Failed to provide complete and accurate loan information to new servicers: Ocwen has allegedly failed to include complete and accurate borrower information when it sold its rights to service thousands of loans to new mortgage servicers. This has hampered the new servicers’ efforts to comply with laws and investor guidelines.
The CFPB also accuses Ocwen of failing to “remediate borrowers for the harm it has caused, including the problems it has created for struggling borrowers who were in default on their loans or who had filed for bankruptcy.”
In a statement, CFPB Director Richard Cordray recapped Ocwen’s alleged failings.
“Ocwen has repeatedly made mistakes and taken shortcuts at every stage of the mortgage servicing process, costing some consumers money and others their homes,” Cordray said. “Borrowers have no say over who services their mortgage, so the Bureau will remain vigilant to ensure they get fair treatment.”
OCWEN TAKES THE GLOVES OFF AND FIGHTS BACK
Ocwen hit back at the CFPB in a lengthy statement on the same day, alleging that the CFPB filed the lawsuit against the company to serve as a distraction from the political climate surrounding the bureau, basically stating that the CFPB was trying to prove its worth as Republican sharks circled the long-debated agency.
Ocwen also said that the CFPB’s claims were “inaccurate” and “unfounded.”
“Ocwen strongly disputes the CFPB’s claim that Ocwen’s mortgage loan servicing practices have caused substantial consumer harm. In fact, just the opposite is true,” Ocwen said in its statement.
“Ocwen believes its mortgage loan servicing practices have and continue to result in substantial benefits to consumers above and beyond other mortgage servicers. The substantive allegations in today’s suit are inaccurate and unfounded,” Ocwen continued.
“Indeed, the company is unaware of the CFPB conducting any detailed review of Ocwen’s loan servicing files,” Ocwen added. “Rather, the CFPB suit is primarily based on the CFPB’s flawed review of data and its self-serving conclusion about isolated instances where Ocwen self-identified ways we can do better.”
In its statement, Ocwen said that the company fully cooperated with the CFPB’s inquiries and tried to find a fair and reasonable solution to what the CFPB identified as legitimate concerns.
“Indeed, Ocwen continued to work with the CFPB until the suit was filed,” Ocwen said in its statement. “Under these circumstances, Ocwen has a responsibility to its customers, shareholders, and employees to vigorously defend the Company against these unfounded claims.”
Ocwen claimed that, despite what the CFPB said, a borrower has a much better chance of avoiding foreclosure if their loan is serviced by Ocwen rather than by any other
But, the company said that the CFPB is choosing to “completely ignore” the positive impact that the company has.
“The alleged penalties and relief the CFPB seeks, if awarded, would likely harm the very consumers whom the CFPB is sworn to protect because they would needlessly divert money and time which would be better spent on helping our customers better afford and remain in their homes,” Ocwen said. “This unreasonable action is an unfortunate example of overreaching by the CFPB.”
According to Ocwen, many of the issues brought up by the CFPB were previously addressed by the company as part of its participation in the National Mortgage Settlement.
“In addition, Ocwen believes the CFPB’s allegations concern only a small percentage of Ocwen’s 1.3 million customers, and Ocwen has repeatedly assured the CFPB that it will remediate, and in many instances already has remediated, any legal harm experienced by these customers,” Ocwen said.
Then, Ocwen dropped the hammer.
“Given these facts, today’s suit can only be viewed as a politically-motivated attempt by the CFPB to grab headlines in reaction to the change of administration and recent scrutiny of the CFPB’s activities,” Ocwen said.
OCWEN TURNS ITS CFPB CHALLENGE UP TO 11
Ocwen wasn’t content to simply wage a PR battle against the CFPB. It also fought back in court.
Just as PHH did recently, Ocwen tried to play the unconstitutional card in its fight against the CFPB, asking the U. S. District Court for the Southern District of Florida to declare the CFPB unconstitutional and toss out the CFPB’s lawsuit against the company.
In a series of court filings, Ocwen asked the court to render an expedited ruling on the CFPB’s constitutionality and asked that the Department of Justice be allowed to contribute to the case so the court could “consider fully the attorney general’s (recent) conclusion that the CFPB is unconstitutionally structured.”
The DOJ filed an amicus brief in the PHH vs. CFPB case, asking the court to rule the CFPB’s leadership structure unconstitutional and grant President Donald Trump the authority to fire the CFPB director at will, and Ocwen wanted the court to allow the DOJ to weigh in on its case as well.
“Ocwen believes that the CFPB is unconstitutionally structured because it vests too much unfettered power in the hands of the CFPB’s director and the bureau itself, without any meaningful oversight by the president or Congress,” the company said a in a statement.
In June, the court shot down Ocwen’s challenge to the CFPB’s constitutionality, but the question of allowing the DOJ to participate in the case remains open.
STATE REGULATORS TAKE AIM
While Ocwen fights back against the CFPB, the company is also dealing with the ramifications and implications of the state banking regulators.
The group of state banking regulators zeroed in on the consumer escrow accounts cited by the CFPB, along with the company’s “deficient financial condition.”
The orders prohibit the acquisition of new MSRs and the origination of mortgage loans by Ocwen Loan Servicing, a subsidiary of Ocwen, until the company is “able to prove it can appropriately manage its consumer mortgage escrow accounts.”
According to the main cease-and-desist order from the North Carolina Commissioner of Banks, Ocwen “has engaged in, or is engaging in, or is about to engage in, acts or practices constituting violations of state and federal law and applicable regulations.”
The N.C. Commissioner of Banks’ office stated that the orders are the “culmination of several years of examinations and monitoring that revealed the company is mismanaging consumer mortgage escrow accounts.”
Ocwen is also accused of operating unlicensed mortgage servicing facilities in certain states in apparent violation of state licensing statutes over a period of several years.
Additionally, the announcement states that some of the state orders also require Ocwen to cease any unlicensed activity.
“As regulators, we encourage and advise companies to remain compliant with state and federal laws,” N.C. Commissioner of Banks Ray Grace said. “However, Ocwen has consistently failed to correct deficient business practices that cause harm to borrowers. We cannot allow this to continue.”
According to the order, a multi-state investigation identified “several violations of state and federal law, including, but not limited to, consumer escrow accounts that could not be reconciled and willful and ongoing unlicensed activity in certain states.”
The order also states that the states were unable to gather “comprehensive documentation of the extent of unlicensed activity because Ocwen’s management failed to respond to requests for information in a timely manner,” but the examinations still found that Ocwen subsidiaries were conducting unlicensed servicing activity in numerous jurisdictions.
The examination found that Ocwen was “unable to accurately reconcile many of the consumer escrow accounts in its portfolio,” and that Ocwen “failed to make timely disbursements to pay for taxes and insurance from escrow accounts on numerous loans.”
Ocwen also routinely sent consumers inaccurate, confusing, and/or misleading escrow statements, the investigation found.Additionally, the order claims that in 2015, Ocwen failed to provide key financial documents and reconcilements of its financial statements to regulators.
Based on the findings of the examinations, the order states that the states and Ocwen entered into a “Memorandum of Understanding” on Dec. 7, 2016, which required Ocwen to retain an independent auditing firm to perform a comprehensive audit and reconciliation of all consumer escrow accounts.
But Ocwen didn’t provide that audit, claiming that reconciling the escrow accounts would be extremely cost prohibitive. According to the order, the reconciliation of escrow accounts would cost $1.5 billion. That’s beyond Ocwen’s financial capacity to fund. In short, Ocwen just doesn’t have that kind of money.
The Memorandum of Understanding also stipulated that Ocwen provide a “viable going forward business plan that encompassed an analysis of its financial condition going forward,” but Ocwen’s submitted business plan “did not provide a complete assessment of its financial condition.”
From the order:
If the going forward plan accurately accounted for known or anticipated regulatory penalties and other operational costs, including, but not limited to, the expenses of moving to a new servicing platform and complete reconciliation of consumer escrow accounts with restitution to impacted borrowers, it would indicate that Ocwen continuing as a going concern would be in doubt.
Therefore, the order stipulates the following:
• Ocwen shall immediately cease acquiring new mortgage servicing rights, and acquiring or originating new residential mortgages serviced by Ocwen, until Ocwen can show it is a going concern by providing a financial analysis that encompasses all of the liabilities Ocwen currently maintains, as well as liabilities it has knowledge it will incur in the course of its business
• Ocwen shall immediately cease from acquiring new mortgage servicing rights, and acquiring or originating new residential mortgages serviced by Ocwen, until Ocwen can provide the state regulators with a reconcilement of its escrow accounts showing that consumer funds are appropriately collected, properly calculated, and disbursed accurately and timely.
OCWEN’S RESPONSE TO STATE REGULATORS
“As with the recent CFPB enforcement action, Ocwen strongly disputes the key allegations made in the state regulators’ cease and desist orders that Ocwen’s mortgage loan servicing practices have caused substantial consumer harm,” Ocwen said in its statement.
“Ocwen will not sign unfair and unjust consent orders that make impractical demands that no other market participant could rationally accept, and which would harm consumers,” Ocwen continued.
Ocwen also provided detailed responses to each of the state regulators’ charges.
One of the main issues brought up by the state regulators is that Ocwen is “unable to accurately reconcile many of the consumer escrow accounts in its portfolio.”
In a response to the Multi-State Mortgage Committee’s original investigation, Ocwen said that the reconciliation of escrow accounts would cost $1.5 billion, which the company claims is beyond its financial capacity to fund.
But the states regulators did not take that response well, suggesting that Ocwen could potentially have “a vast number of consumers with unaudited and inaccurate escrow accounts.”
In response to the charges, Ocwen said that its escrow administration practices are “subject to frequent review or examination by independent third parties acting on behalf of mortgage loan investors and rating agencies.”
Ocwen said that these independent reviews “consistently confirmed Ocwen’s escrow practices are in line with common industry standards for timeliness and accuracy.”
Ocwen added: “No mortgage servicer is perfect – to the extent mistakes are made, we have a process to identify and remediate consistent with other mortgage servicers.”
Ocwen claims that it provided the estimate of the expected expense of an individual loan escrow account review for approximately 2.5 million loans over a four-year period to be an estimated to be $1.5 billion, or approximately $600 per file, as provided by a third-party.
Ocwen said that it also provided an alternative of a “statistically sound sampling methodology recommended by an independent third party.” According to Ocwen, this option is “consistent with methods used in other regulatory settlements and with the Multi-State Mortgage Committee’s examination manual practices.”
To the charge made by state banking regulators that Ocwen is financially unsound, Ocwen replied:
Ocwen disagrees with any allegation it is not financially sound. Despite significant operating losses from 2014 to 2016 driven by a shrinking portfolio and $171 million of state and national regulatory monitoring expenses, Ocwen generated over $1.4 billion of positive operating cash flow. The company ended 2016 with $257 million of cash on the balance sheet.
Additionally, in December 2016, Ocwen refinanced its corporate debt, significantly extending the maturity dates and demonstrating significant lender confidence in Ocwen. Over this time period, Ocwen reduced its corporate debt by over $942 million, or 58%, dropping its corporate debt-to-equity ratio from an already conservative 1.6x in 2014 to 1.0x in 2016. Ocwen remains one of the least levered non-bank servicers today.
Ocwen said that it provided the state regulators with “remarkable transparency” into its operations.
“Ocwen provides a variety of financial information to select individual states as well as the MMC, such as recurring liquidity reports, monthly results, and future financial and cash projections,” Ocwen said in its statement.
“Additionally, it completed a comprehensive business plan in December 2016, and provided a robust going concern analysis prepared in conjunction with the issuance of Ocwen’s annual report.
“Despite this remarkable transparency, the MMC continues to ask Ocwen how it would handle ‘contingent liabilities’ such as a hypothetical settlement with CFPB and the escrow analysis.”
Another issue brought up by the states is Ocwen’s alleged operating of “unlicensed mortgage servicing facilities in certain states in apparent violation of state licensing statutes over a period of several years.”
Ocwen states that there have been issues in the past with the company’s licensing, but that those issues are settled.
“Ocwen has worked diligently to correct perceived licensing concerns and has entered into recent settlements with three states, without admitting or denying wrongdoing. Ocwen believes it is properly licensed in all states where it conducts business and welcomes the opportunity to demonstrate its compliance to any state regulators who may still have questions or concerns.”
Ocwen added that the company has been in “regular communication” with the state regulators in question for the last two years and progress has been made.
“In fact, the state regulators informed the company that its cooperation and the amount of information provided by the company over the past 18 months had been constructive in building stronger supervisory relationships and solidifying Ocwen’s place as a necessary market participant in servicing mortgage loans and keeping borrowers in their homes,” Ocwen said in its statement