Ocwen Consent Order Article 1

Another Slap on the Wrist for a Company
That Abused Homeowners

By David Dayen @ddayen
The year just wouldn’t be complete without one final dubious financial fraud settlement. A
consent order between the Consumer Financial Protection Bureau, every state but Oklahoma, and
the mortgage servicing company Ocwen again shows the continued, systemic mistreatment of
American homeowners. Ocwen stands accused of “violating consumer financial laws at every
stage of the mortgage servicing process,” according to CFPB Director Richard Cordray. But
under this settlement, their executives will face no criminal charges, the firm will not actually
pay the large majority of the penalties themselves, and they did not even have to admit
wrongdoing in the case. Merry Christmas.
Ocwen built their servicing empire in part by purchasing the rights to handle mortgage accounts
from big banks like JPMorgan Chase, Bank of America and Ally Bank, the same ones that
settled their own cases of mortgage servicing abuse in the $25 billion National Mortgage
Settlement in February 2012. So to recap, big bank servicers abused homeowners, paid a
nominal fine, and sold their servicing operations to non-bank servicers like Ocwen, who
routinely engaged in identical practices. This game of Whack-a-Mole, with customer accounts
passed around from one rogue business to another like a hot potato, shows that the problem lies
with the design of the mortgage servicing industry itself, not the individual companies.
“Too often trouble began as soon as a loan transferred to Ocwen,” said CFPB Director Cordray
on a conference call announcing the enforcement action. The complaint, filed in federal district
court in D.C., alleges that Ocwen charged borrowers more than stipulated in the mortgage
contract; forced homeowners to buy unnecessary insurance policies; charged borrowers
unauthorized fees; lied in response to borrower complaints about excessive and unauthorized
fees; lied about loan modification services when borrowers requested them; misplaced
documents and ignored loan modification applications, causing homeowners to slip into
foreclosure; illegally denied eligible borrowers a loan modification, then lied about the reasons
why—the list goes on.
These violations are almost exactly what big bank servicers did to homeowners, triggering the
National Mortgage Settlement. As a result, homeowners who found themselves in trouble during
the Great Recession could not get an effective shot at saving their home, were improperly
shuffled through the foreclosure process with false documents, and were stolen from up and
down the line. Ocwen’s conduct affected an estimated 185,000 borrowers who faced foreclosure
from 2009 to 2012, as well as millions more still hanging on in their homes.
If the crimes are familiar, the punishment is similarly reminiscent of the toothless way regulators
and law enforcement penalize financial firms. Ocwen does not have to admit wrongdoing in the
consent order, shielding them and their executives from any legal exposure. Foreclosure victims
who already lost their homes from Ocwen’s abuse will get a share of $127.3 million in
restitution. Florida Attorney General Pam Bondi admitted on the conference call that this is
likely to translate into a $1,200 check per family, which sounds more like an insult than just
compensation for the pain and suffering of an illegal eviction. An additional $2 billion will go
toward principal reduction for “underwater” homeowners who owe more on their loans than their
houses are worth.
But Ocwen will pay that penalty with someone else’s money. As a non-bank servicer, they don’t
actually own any of the loans. They merely service loans, collecting monthly payments and
dealing with loan modifications and foreclosures, for investors who purchased them as part of
mortgage-backed securities. So principal reductions on these loans hit the investors, not Ocwen.
While it’s true that principal reductions often generate better outcomes for investors than letting
a home go into foreclosure, Ocwen itself suffers no actual penalty for what was solely their
misconduct. Ocwen also noted in a regulatory filing that they would split nearly half of the
$127.3 million cash payout to foreclosure victims with the servicers who previously serviced the
loans. So their total exposure for all this is $66.9 million, which they have already mostly
covered with a dedicated cash reserve.
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The CFPB’s Richard Cordray objected to this critique, claiming that arranging the principal
reductions will cost Ocwen in manpower and administrative expenses, and that if the company
does not achieve the $2 billion in principal reductions within three years, they will have to pay
the balance off in cash. But that’s hardly a big hurdle, and I don’t think any reasonable observer
would argue that trivial administrative costs—which Ocwen undertakes as a matter of course in
its role as a loan servicer—fit the crime of turning hundreds of thousands of homeowners into the
street under false pretenses, and cheating millions of others.
As with the recent JPMorgan Chase settlement that mandated principal reductions, it’s
homeowners who may suffer the most. The Mortgage Forgiveness Debt Relief Act is set to
expire December 31, and after that, any principal reduction will be treated as earned income for
the homeowner, exposing them to large tax bills they cannot afford. Attorney General Bondi at
least stressed the need to extend the relief and protect homeowners from huge tax liabilities.
“Struggling homeowners are depending on this relief,” she said on the call. Bondi co-authored a
letter to Congress signed by 42 attorneys general asking for an extension. But the House has
already left for the year, and Senate Republicans blocked consideration of an extension on
Thursday.
Ocwen’s unlawful procedures are symptomatic of the entire industry. They grew to become the
nation’s fourth-largest servicer, and the largest one that’s not also a bank, by scooping up
servicing rights discarded by those also caught abusing homeowners. If the new standards
become too burdensome, presumably Ocwen will just dump off servicing rights to a new fleet of
fly-by-night operations with even worse business practices. And homeowners, who don’t get to
choose their servicer, will get caught in the middle.
Indeed, the wrongdoing alleged in the Ocwen case occurred through 2012, showing that this
misconduct is ongoing, despite a massive settlement with the industry’s biggest players earlier
that year. A recent CFPB report discovered similar ongoing abuses among servicers, and
overseers of the National Mortgage Settlement have documented non-compliance with their
court-mandated rules. New York Attorney General Eric Schneiderman sued Wells Fargo for
violating settlement terms. Banks are still robo-signing and illegally foreclosing on borrowers.
This just seems like an endless race that regulators never win.
CFPB believes the new servicing rules which trigger January 10 will give them more leverage to
battle misconduct, with higher penalties. For the first time, non-bank servicers like Ocwen will
be covered under the rules (making the servicing standards Ocwen must adhere to in this
settlement mostly redundant). And settlements like this, Richard Cordray said, will gradually
extend protections and secure relief over the whole market. “We intend to improve the
performance of the mortgage servicing industry for all homeowners,” Cordray said.
But constantly finding violations of exactly the same type over and over again suggests that
servicing itself is the culprit. Its business model relies on the types of fees generated by defaults
and foreclosures; they would rather foreclose on a loan than modify it. And CFPB’s new
servicing rules do not change the compensation structure that creates these mismatched
incentives.
Until the entire business of mortgage servicing is overhauled, we’re likely to see more and more
one-off settlements that come too late for abused homeowners, and which seemingly offer no
deterrent for the abusers. “There’s no one solution to this enormous problem that we’ve seen for
homeowners,” acknowledged Iowa Attorney General Tom Miller. Actually, with the current
thinking among regulators, there’s no solution at all.

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Another Slap on the Wrist for a Company

That Abused Homeowners

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