Spring might be a time of renewal, but for Ocwen Financial Corp., this spring has been a time of renewed challenges. The West Palm Beach, Fla.-based holding company, with subsidiaries Ocwen Loan Servicing LLC and Ocwen Mortgage Servicing Inc., is battling the Consumer Financial Protection Bureau (CFPB) and some state regulators. Ocwen says it will vigorously defend itself and calls the claims unfounded.
On April 20, the CFPB filed a lawsuit in the U.S. District Court in the Southern District of Florida. In the complaint, the agency charged that Ocwen violated federal consumer financial laws and that Ocwen “improperly calculated loan balances, misapplied borrower payments, failed to correctly process escrow and insurance payments, and failed to properly investigate and make corrections in response to consumer complaints.” The plaintiff said it wanted permanent injunctive relief, restitution, refunds, disgorgement, damages, civil monetary penalties and other relief.
For its part, Ocwen maintains that many of the issues were addressed in the National Mortgage Settlement in 2013 and that the suit is the bureau’s politically motivated attempt to grab headlines to counter recent scrutiny. On April 26, Ocwen announced it had filed two motions to seek an early court ruling that the CFPB is unconstitutional. In a press release, Ocwen noted that it was seeking to get this issue resolved early “because it should be relieved of having to defend this unfair action from an unconstitutional agency.”
On June 2, the court ruled against the early request, and Ocwen said it will move to get that case dismissed. John Lovallo, spokesperson for Ocwen, said by email, “We have reviewed the order, which addresses how the court would like to have the constitutional attack presented to it. We look forward to including that argument with all of the other reasons CFPB’s suit is unjustified and should be dismissed.”
The idea that the CFPB is unconstitutional is similar to the defense another financial institution is using in an unrelated but closely watched case. In PHH Corp. vs. the Consumer Financial Protection Bureau, a three-judge panel on the D.C. Circuit Court of Appeals found that the CFPB is unconstitutionally structured because it has one director who can be dismissed by the president only for cause. The CFPB petitioned for a rehearing en banc, which means for the decision to be reviewed by the entire D.C. Circuit Court of Appeals.
The battles against the CFPB will almost certainly affect other financial institutions.
“If you don’t have accountability, you tend to get bureaucratic arrogance,” says Sam Kazman, general counsel for the Competitive Enterprise Institute (CEI). “Until the issue is resolved, you’ve got banks being affected by an agency whose constitutionality is in question.”
In March, the State National Bank of Big Spring, the 60 Plus Foundation and the CEI filed a brief as amici curiae (friends of the court) in support of PHH. The brief noted that all three entities are plaintiffs in a separate action, State Nat’l Bank of Big Spring v. Lew, filed in 2012. In that case, the Texas bank claimed that the CFPB was unconstitutional and its various powers would cause harm. The District Court for the District of Columbia ruled that these preemptive challenges were unusual, as the case was about possible future damages.
“It was tossed for lack of standing,” Kazman says. “We appealed, and we won a significant reversal. Our lawsuit against CFPB was reinstated.”
That suit is on hold, pending the outcome of the PHH vs. CFPB case.
The CFPB is not the only one filing actions against Ocwen. Also on April 20, several state regulators issued public regulatory orders or charges, including some cease and desist orders. The orders are prohibitions against Ocwen acquiring mortgage servicing rights and mortgage originations “until the company is able to prove it can appropriately manage its existing mortgage escrow accounts,” according to an announcement by the Conference of State Bank Supervisors.
The 22 states that filed these on April 20 were Arkansas, Connecticut, the District of Columbia, Florida, Hawaii, Idaho, Illinois, Maine, Massachusetts, Mississippi, Montana, Nebraska, Nevada, North Carolina, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, West Virginia, Wisconsin, and Wyoming. Later Indiana, Michigan and Oregon filed their own orders.
The state actions contend that some past problems were recurring. For example, in Nevada, the state maintains that regulators were closely monitoring Ocwen for a year and were concerned about Ocwen’s handling of consumer accounts, as well as Ocwen’s “ability to manage itself,” according to the FAQ on the State of Nevada Department of Business & Industry Division of Mortgage Lending’s website.
In North Carolina, the Commissioner of Banks determined that Ocwen “has engaged in, or is engaging in, or is about to engage in,” violations of state and federal law and applicable regulations and has ordered Ocwen to cease acquiring new mortgage servicing rights.
In Florida, the attorney general and Florida Office of Financial Regulation Commissioner filed a federal civil consumer protection lawsuit against Ocwen, noting that although a court approved a $2.1 billion settlement between Ocwen and 49 states, the District of Columbia, and the CFPB in 2014, the attorney general’s office was still fielding complaints about Ocwen and mortgage servicing failures.
Other states filed actions and made their own announcements. In Maryland, the Commissioner of Financial Regulation announced it was summarily suspending the mortgage lending licenses for Ocwen and its subsidiaries and that Ocwen must submit a Financial Condition Plan.
Ocwen filed motions in states and is seeing some success in restraining the cease and desist orders. In Illinois, Ocwen received a stay on April 28, halting the state’s cease and desist order and its move to put Ocwen licenses on probation, pending an administrative hearing. There is a July 27 court date for a status conference.
In Massachusetts, Ocwen reached an agreement in principle with the Division of Banks to cancel the hearing and to amend the cease and desist order. Ocwen can resume originations so long as it does not service the loans.
In its first-quarter 2017 presentation for investors, Ocwen noted that it has lower complaint volumes compared with peers, on a per-loan basis. It also maintained that Duff & Phelps, Murray Analytics and Moody’s gave Ocwen positive reviews. Also, Ocwen noted that it incurred a net loss of $32.6 million for the three months ended March 31, 2017 – an improvement compared with a net loss of $111.2 million for the three months ended March 31, 2016. Also, the California and New York monitorships ended, and California lifted its restrictions against bulk mortgage servicing rights purchases.
Also, the recently announced agreement with New Residential Corp. is, according to another Ocwen announcement, “expected to strengthen and extend our business relationship and improve our near-term liquidity.” With that deal, Ocwen and New Residential will enter a five-year subservicing contract, and New Residential will make an upfront payment of $425 million to Ocwen as it transfers mortgage servicing rights to New Residential. Also, New Residential will make an equity investment in Ocwen and become a 4.9% owner.
Ocwen would not comment on the agreement because it is not yet final. The company does have its defenders, though. Christopher Whalen, a Wall Street analyst and chairman of Whalen Global Advisors LLC, says Ocwen was demonized for innocent errors, with no opportunity to appeal.
“There is no due process,” Whalen says. “They call you up and say, ‘Pay this fine.’ They don’t even give you notice. They announce an enforcement action and call the media.”
Whalen anticipates that Ocwen not only will survive the latest round of attacks, but also will likely outlast the CFPB.
“Come Thanksgiving, [Richard] Cordray will scuttle back to Ohio to run for governor,” he says. “The trial lawyers will support him. The CFPB has been a bonanza for trial lawyers.”