Why regulators waited years before hitting Ocwen again
State regulators felt they were strung along by the mortgage servicing giant Ocwen Financial after years of promises that were never fulfilled, resulting in successive enforcement actions against the company, according to interviews with nearly a dozen officials.
After settling with Ocwen three years ago over issues related to loan modifications and foreclosures, regulators filed new actions last month on flaws with the firm's escrow services. Ocwen calls the actions "politically motivated," and has questioned the Consumer Financial Protection Bureau's constitutional authority. But state regulators say the West Palm Beach, Fla., company has only itself to blame.
"Regulators were working with the company to allow them time to fix the issues," said Melanie Hall, commissioner of the Montana division of banking and financial institutions, who led talks with Ocwen. "Eventually there comes a point in time when enough has happened and you have to move forward in a more formal fashion."
Kirsten Anderson, a licensing manager at Oregon's Department of Consumer and Business Services, agreed that the states had to act after the company failed to fix its problems — and other issues emerged.
"When orders don't work, you have to look at future consequences," Anderson said. "We use orders as a way of punishing companies for doing what they're not supposed to be doing, and to encourage future compliance."
So far, 31 states have filed cease-and-desist orders against Ocwen, a piling-on spurred after 22 states coordinated their actions on April 20, when the CFPB and the state of Florida both filed lawsuits.
Court documents paint a brutal portrait of Ocwen's servicing practices, including allegations that the company wrongly foreclosed on more than 1,000 people, mishandled thousands of escrow accounts, failed to obtain state licenses for its operations in India and the Philippines and self-identified 3 million violations of consumer protection laws.
Ocwen claims the states' accusations against it are baseless. The subprime servicer has asked the Justice Department to intervene and quash the lawsuit.
Ocwen is "continuing to work with state regulators to resolve any valid concerns," said John Lovallo, a spokesman.
The allegations against Ocwen are all the more surprising given that the company has been the recipient of more than $2 billion (and counting) in so-called "success payments," doled out by the Treasury Department in the aftermath of the financial crisis.
Regulators have been frustrated and stymied at holding the largest servicer of distressed loans accountable while also making sure it helps struggling borrowers.
"The federal government is paying them billions of dollars to follow the rules, but there's this pattern of breaking the rules," said Christy Romero, the special inspector general for the Troubled Asset Relief Program.
'A messy situation'
It is unusual for regulators to go after the same company twice in three years.
Yet the latest allegations against Ocwen are significantly different from those that led to a national mortgage settlement, signed in 2014, which focused exclusively on Ocwen's handling of foreclosures and loan modifications.
This time around, regulators allege that Ocwen's proprietary system of record is so unreliable that it does not produce accurate escrow statements, a stunning charge given that managing escrow accounts is the bread and butter of mortgage servicing.
"It's a very messy situation," said Kevin Barker, a senior research analyst at Piper Jaffrey & Co. "Escrow accounts are essentially like savings accounts. If you're a bank and you do not correctly account for someone's savings account, that's a real issue."
State regulators began telling Ocwen in 2015 to invest in a new system of record, and Ocwen gave them assurances that it was fixing the problems during a meeting at the company's headquarters, state officials said.
Instead, Owen continued to use workarounds for its system, which is outsourced and operated by Altisource Portfolio Solutions, a Luxembourg-based spinoff of Ocwen founded by William Erbey, Ocwen's former chairman. Those manual-entry workarounds resulted in even more errors, according to the CFPB.
Erbey was forced to resign from Ocwen and four related companies, including Altisource, in 2014 as part of a settlement with Benjamin Lawsky, who was then the superintendent of the New York State Department of Financial Services. The CFPB is investigating the relationship between Ocwen and Altisource, the company disclosed in regulatory filings.
"Ocwen will have to be forced to change the way they do business, including changing their system of record," Barker said.
In its lawsuit, the CFPB quoted a former Ocwen head of servicing who testified that "every business unit in the entire organization lacks sufficient controls to prevent mistakes and to detect when mistakes occurred."
One state banking official said, "By definition, Ocwen cannot service loans correctly or legally, if their system of record is not accurate."
Talks break down
After initially pressing Ocwen executives to fix their problems, state regulators eventually soured on management. They had so little faith that when they began negotiating a new settlement, they insisted negotiations be with the board of directors.
Since December, Ocwen has been operating under a secret regulatory sanction that required it to have accurate escrow accounts and to provide regulators with a financial analysis of its operations, including all liabilities. The memorandum of understanding, rarely used for nonbanks, was designed to give Ocwen a chance to privately work out its problems.
But Ocwen continued to string the states along, state officials said. Ocwen balked at the states' demands to conduct an independent audit of approximately 2.5 million escrowed loans over a four-year period.
Ocwen told regulators it would cost $1.5 billion to do the audit, which Lovallo, Ocwen's spokesman, called "unprecedented and financially unrealistic."
Instead, Ocwen submitted a 300-page response on Jan. 13, proposing that the company audit just 457 loans. By April 20, Ocwen had raised the sampling size to roughly 1,200 loans. By then, it was too late, and talks had broken down.
"The states called their bluff," said one state official. "They did not think state regulators would take action."
Ocwen also provided significant financial information, including a detailed financial plan that included all contingent liabilities, Lovallo said, but the states were concerned that the company did not include a method for funding a large settlement with the CFPB.
Ocwen has set aside $12.5 million for a CFPB settlement. Barker puts the number at $50 million.
That would be in addition to what it has already paid out — and earned from the government in incentive payments. The company was paid $599.4 million in incentive payments by the Treasury Department through April 2017. It also received a chunk of the $2.3 billion paid to its investors. (Ocwen invests in and services loans.)
By comparison, Ocwen has paid roughly $500 million in settlements and fines so far to state and federal regulators.
'Garbage in, garbage out'
Still, the coordinated actions by the states and the CFPB startled industry analysts because Ocwen was on the verge of being released from a New York consent order and had hoped to resume purchases of mortgage servicing rights.
Over the last few years Ocwen has had various independent monitors from New York, California and the Office of the National Mortgage Settlement reviewing and testing its systems.
"We find it difficult to reconcile their findings with the allegations made by the CFPB and the states,” Lovallo said.
But regulators said the monitors were not in a position to verify the accuracy or reliability of Ocwen's system of record.
"The monitor is there to help them improve their systems, it's not there to run the company for them," said a state banking official.
New York was focused on the backdating of foreclosure letters. The monitor of the national mortgage settlement, Joseph A. Smith Jr., has been testing 34 metrics related to foreclosure and loss mitigation. New York currently is testing the accuracy of escrow accounts, state regulators said. Smith declined to comment.
Cary Sternberg, a retired former servicing executive at Doral Bank, who worked at Ocwen for five years under Erbey, said the quality of loans that Ocwen purchased early on was questionable at best. The company grew rapidly from 2010 to 2014, with the number of loans it serviced jumping sevenfold, to 2.8 million, including its 2013 purchase of Residential Capital.
"The information that was transferred into Ocwen's system was garbage," Sternberg said. "Their undoing was when they started mass acquisitions. They were not careful enough in vetting how accurate the information was."
Ocwen has criticized the CFPB for basing its allegations on self-identified violations, which Ocwen tracked in a risk database and paper spreadsheets. Ocwen also claims the CFPB and states are looking at old issues, dating to between 2013 and 2015.
Yet, in a one-year period ended in April 2016, Ocwen received 53,000 complaints for its handling of escrow accounts, the CFPB's lawsuit states.
Ocwen said the number is inaccurate and misleading. The CFPB got the information from its iCasework database, a system the company began using in early 2015 to track complaints. That system captures a wide range of inquiries from customers, not just complaints, Lovallo said.
For example, if a consumer contacted Ocwen and simply had a question such as “Why did my escrow payment increase?” the question would be logged in the database. A customer who called in multiple times also could be logged as multiple complaints, Lovallo said.
Lovallo said the CFPB has aggregate data over a multiyear period and ignored the fact that Ocwen’s complaint volume, year over year, has steadily declined. But regulators dismiss the company's pushback.
"What is better than using Ocwen's own admission about where they had trouble?" one regulator said.
Regulators are aware of the difficulties of finding specialty servicers and subservicers to take over servicing if Ocwen loses its state licenses, or files bankruptcy because of the lawsuit.
Ocwen remains a top-10 mortgage servicer, with a sizable book of Federal Housing Administration loans.
Meanwhile, Ron Faris, Ocwen's president and CEO, is trying to cut a deal to raise cash. Ocwen is hoping to sell a 5% stake in the company to its biggest client, New Residential Investment, a publicly traded real estate investment trust.
But Ocwen's problems continue to multiply.
On Monday, Ocwen disclosed that it had received a subpoena for documents related to force-placed insurance from the Department of Housing and Urban Development's Office of Inspector General.
"We are fully cooperating," Lovallo said.