Ocwen is amongst the largest mortgage servicers in the country. It holds mortgage debts with a face value more than $400 billion. Ocwen specializes in “default” servicing – meaning that it services loans where the consumer is behind. On April 20th & 21st, state and federal regulators took a range of legal actions against Ocwen that halved its share price. First, the CFPB sued Ocwen in connection with servicing abuses related to its flawed “REALServicing” software. Then members of the Multi-State Mortgage Commission – a group of 22 State mortgage servicing regulators – filed cease and desist orders against Ocwen (see below). Florida’s Attorney General filed a separate suit. So, what is going on?
The CFPB: Ocwen’s Software is Bad and Ocwen Won’t Fix it.
Ocwen has proprietary software, “REALServicing” that it uses to store data about the mortgages it services. The same software is used to make escrow calculations, generate letters, calculate balances and many other functions. No one but Ocwen uses this software and it was originally developed in-house – at Ocwen.
The CFPB complaint alleges that Ocwen executives were fully aware of the depth of the problem. It’s Head of Servicing described it as “an absolute train wreck” in 2014. When interviewed by the CFPB, the Head of Servicing Compliance from 2014-2015 testified that she “frequently” and “loudly” complained about REALServicing. Both Ocwen and external consultants it hired concluded the REALServicing is inadequate.
So, what is actually wrong with REALServicing?
The problems with REALServicing are often described in technicalities – “lack of properly managed data” or “fundamental system architecture and design flaws”. Here is concrete example of a problem: the system has more than 10,000 comment codes and flags – these are coded annotations that could be as simple as “Yes” or “No”, but could also be just numbers and letters – “011” for example of “C41”. These codes are used as short hand for information. But in some cases, Ocwen doesn’t know what the codes are shorthand for. The CFPB notes that Ocwen “lacks a complete data dictionary defining its comment codes, flags and data fields”. In other words, even Ocwen is not sure what information is recorded in its own system.
What’s the consequence of these technical problems?
- 6,000-12,000 times per year, duplicate insurance disbursements were added to consumer’s accounts (i.e. Ocwen’s computer said that Ocwen had paid an insurance premium twice).
- 80% of loan modifications were miscalculated.
- In January 2016, Ocwen discovered that more than $8,000,000 had been paid by consumers, but have not been applied to their loans.
- Ocwen left some $4,500,000 in “suspense accounts” waiting to be paid to investors for anywhere between 3 months and several years.
- Ocwen has told an unknown number of consumers that they owe more money that they actually owe, for any one of a number of reasons, including Ocwen’s inability to correctly apply payments from the United States Trustees Office, or even failure to accurately record what the mortgage itself requires to be paid.
Not Just REALServicing
Not all of Ocwen’s problems can be blamed on REALServicing and Ocwen’s failure to fix it. Ocwen also operated a Philippines-based subsidiary as a servicer.
The States: Ocwen Gets Its Sums Wrong, Loses Money and Doesn’t Answer Questions.
The State Attorneys General each make a variety of allegations against Ocwen. The core allegations are that Ocwen mishandles mortgage escrow accounts, miscalculates and fails to pay escrow items (like insurance premiums and property taxes) on time. As explained in the CFPB complaint, Ocwen also operated an unlicensed subsidiary in some states. They state that Ocwen’s “financial condition” is bad and that Ocwen failed to co-operate with their investigations.
The emphasis varies from state to state, but these strands are common to all. Some other specific grievances were also identified:
Hubzu is an Ocwen-related short-sale auction website. Since 2012, Ocwen forced some borrowers interested in short sales to list their properties on Hubzu. Analysis by the State of Maryland indicated that Hubzu did nothing to increase the amount recovered from short sales and drove up deficiency balances. Ocwen agreed to drop the Hubzu requirement in Maryland as a result.
Property Inspection Fees
In 2014 Ocwen-associated company Altisource increased all property inspection fees to the maximum allowed by the Government Sponsored Entities (i.e. Fannie Mae and Freddie Mac). However, those fees were often more than allowed. In Maryland, these actions by Altisource resulted in Ocwen overcharging Maryland consumers by over $250,000.00.
Failure to Give Notice Prior to Transfer
Federal law requires mortgage servicers to give notice to consumers at least 15 days prior to a transfer of servicing. In 2015, when transferring a large batch of mortgages, Ocwen failed to do this – because it did not provide the third-party company it hired to mail the notices with the right information until 14 days before transfer.
What Do The Orders Do?
The State orders require Ocwen to (a) stop violating the law in the various ways identified above and (b) stop acquiring new servicing rights until the regulators are satisfied that Ocwen can follow the law, and that it won’t collapse in the near future.
There is one notable exception: Massachusetts is effectively terminating Ocwen’s operations by requiring it to transfer its servicing activities to a servicer in good standing with the regulator. That would mean about 34,000 loans, or more than 3% of Ocwen’s portfolio.
What is Ocwen’s Defense?
To the CFPB, Ocwen’s defense appears to be a general denial that the allegations are true, combined with an overtly political attack on the CFPB. Its press release said the action is “politically motivated and a reaction to the change of administration and recent scrutiny of the CFPB’s activities” and that the problems identified by the CFPB merely signs of healthy self-assessment by Ocwen. Ocwen followed up by challenging the CFPB’s constitutionality and inviting the Attorney General to intervene, presumably hoping that the deregulatory political climate will help its case.
On the state actions, Ocwen does not deny that it made mistakes in escrow accounts, but complains about the expense of reviewing every single escrow account, which it claims to be over $1billion.
Ocwen’s Investors Sue
Investors filed a class action following the federal and state actions, and alleged that Ocwen hid its problems from investors in the 2014-2017 period. Investor class actions are currently pending in Florida and Pennslyvania.
List of the State Orders
Wisconsin (Consumer FAQ)