So here it is, 2017, and finally we have a meaningful action against a predatory servicer, Ocwen. As we’ll discuss below, the Consumer Financial Services Protection Bureau said its suit alleged misconduct at every stage of Ocwen’s business. Ocwen’s stock fell 40% on the day.
Yet why has this taken so long? Ocwen was long known to be a particularly abusive servicer in a field rife with misconduct. New kid on the block Benjamin Lawsky, at the New York Department of Financial Services, went after Ocwen, alone, in 2014. As we wrote then:
New York State Superintendent of Financial Services Benjamin Lawsky has forced the resignation of the chairman and CEO of a mortgage servicer, Ocwen over a range of borrower abuses in violation of a previous settlement agreement, including wrongful foreclosures, excessive fees, robosigning, sending out back-dated letters, and maintaining inaccurate records. Lawsky slapped the servicer with other penalties, including $150 million of payments to homeowners and homeowner-assistance program, being subject to extensive oversight by a monitor, changes to the board, and being required to give past and present borrowers access to loan files for free. The latter will prove to be fertile ground for private lawsuits. In addition, the ex-chairman William Erbey, was ordered to quit his chairman post at four related companies over conflicts of interest.
The Ocwen consent order shows Lawksy yet again making good use of his office while other financial services industry regulators are too captured or craven to enforce the law. Unlike other bank settlements, investors saw the Ocwen consent order as serious punishment.
Mind you. abusive foreclosure practices were a major topic in 2010 and 2011, including banks foreclosing on people who didn’t have mortgages, telling borrowers to become delinquent to qualify for assistance programs like HAMP while having procedures almost certain to produce a foreclosure (like losing their paperwork pretty much all the time), not crediting payments so as to make borrowers late and impermissible foreclosures on active-duty servicemembers. Many of the horror stories were incredible, like banks foreclosing on borrowers of burned-down homes by virtue of refusing to accept settlements from insurers and a bank refusing to take a cash payment from a borrower in the branch who had done so for years, assuring a delinquency and eventual foreclosure.
The extent and severity of mortgage servicing misconduct was well known, yet the Obama administration threw its weight behind a “get out of liability nearly free” card in the form of a mortgage settlement that included a servicer settlement that Adam Levitin derided as the equivalent of scolding a child in public, then taking him inside and giving him hugs and kisses.
The reason nothing got better, particularly at Ocwen, was no accident.
Servicers cheat if they run into more than a trivial level of delinquencies. Mortgage servicing is unprofitable unless delinquencies are very low. Servicing is a standardized, high-volume, routinized business. Dealing properly with delinquent borrowers is high touch and costly. Again and again, servicers who experience more than a low level of delinquencies have violated their agreements with borrowers and investors to boost their profits. The most common way is to drive borrowers into foreclosure, since servicers are paid to foreclose, not to modify loans. And they also act against investors by charging excessive fees nominally against the borrower but that are ultimately charged against the investor, like overpriced and/or overly frequent “BPOs” (broker price opinions) which are required for delinquent borrowers.
The software and data underlying servicing is a mess. From 2011 onward, we wrote regularly as to how the underlying systems in these businesses were broken. That was confirmed in our Bank of America whistleblower series, where ultimately nine whistleblowers came forward to discuss the nature of abuses they saw during a botched effort to give wronged borrowers restitution via a program called the Independent Foreclosure Review. The program was shut down before completion as leaks exposed that it was serving, not surprisingly, as a cover up. From our overview:
The reviews confirm what both servicing experts and foreclosure defense attorneys have seen since the crisis: Bank of America’s servicing standards were poorly designed and thus unable to handle the deluge of troubled borrowers (suspense accounts, modifications, bankruptcy, etc.). In addition, BofA had a low level of competence in their servicing area and, as a result, the problems with their servicing was made worse. For instance, reviewers gave examples of types of behavior where Bank of America practices were clearly contrary to the law, yet the bank’s personnel confidently maintained that they were proper.
Note that this took place despite Countrywide, which Bank of America acquired, being widely recognized as having the best software platform in the industry. Yet the whistleblowers state that for some servicers that Bank of America acquired later, there was no data whatsoever in the servicing files. They could also see other signs of abuse, like failure to send out the initial delinquency notices at all or when they did, in a proper legal form (with all the required items included), along with an effort to create new records falsely showing the notice was properly made. Bear in mind these are just the abuses I recall readily.
The industry has refused to change the servicing model to pay for proper default servicing. The bad incentives, of servicers profiting from foreclosure but not for modifications or other efforts to prevent delinquencies, remain. Why? Better servicing would cost more, and thus is believed to increase the cost of borrowing and hence reduce “affordability”. I am not making that up.
No one has gone to jail. Again, this is arguably the most important reason nothing has changed much. Bank servicers stole homes, which are both the most important source of personal stability as well as the most important store of wealth for most households, particularly middle and lower income families. Yet Obama sided with the banks and was willing to help only “responsible” borrowers, which meant those who didn’t become delinquent. Let us not forget that it was the banks’ own “nearly destroy the global economy for fun and profit” exercise that led to the near-depression of late 2008 and 2009 which in turn produced job losses and work cutbacks, and also pushed many small businesses over the brink.
Notice a related idea that seems verboten in the US: if a business is a recidivist, and Ocwen certainly fits the bill, why are regulators unwilling to shut it down? Ocwen is not too big to fail and servicing rights are transferrable.
So while the CFPB suit against Ocwen sounds impressive by virtue of the scope of bad conduct it describes, and the fact that many other states are engaging in parallel cease and desist orders and license revocations, count me as underwhelmed.
Below are highlights from the CFPB’s press release, with the filing embedded at the end of the post.
The CFPB uncovered substantial evidence that Ocwen has engaged in significant and systemic misconduct at nearly every stage of the mortgage servicing process….In its lawsuit, the CFPB alleges that Ocwen:
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. Ocwen has also failed to correct billing and payment errors.
Botched escrow accounts: Ocwen manages escrow accounts for over 75 percent 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 percent, or when they refinance their mortgage with less than 20 percent equity in their property. Servicers must end a borrower’s requirement to pay PMI when the principal balance of the mortgage reaches 78 percent 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 option.
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.