Although Ocwen Financial agreed to pay more than $2 billion to settle allegations it mishandled foreclosures and mortgages for thousands of borrowers, it could have been even worse for the country's largest nonbank servicer.
Under new rules to go into effect next month, all servicers will face greater responsibilities. Had those regulations already been in effect, Ocwen likely would have paid even more.
If "Ocwen's practices had occurred under our new rules, even more violations would have been identified," said Consumer Financial Protection Bureau Director Richard Cordray in a conference call to announce the settlement.
As it was, the CFPB as well as attorneys general and regulators from 49 states and the District of Columbia hammered Ocwen and a subsidiary, Ocwen Loan Servicing, over nearly every part of the servicing process. The company agreed to pay $2 billion in relief to underwater homeowners plus another $125 million to borrowers who had lost their home in recent years.
The action was the CFPB's largest partnered order to date, and a big milestone for state and federal efforts to clamp down on shoddy mortgage servicing practices, including robo-signing for foreclosures.
Although the settlement requires Ocwen to overhaul its practices, Cordray said that the order largely tracks the changes the CFPB is requiring for all mortgage servicers.
"Both set forth specific rules of the road about handling loss mitigation applications," he said. "Both mitigate the harms of dual tracking by prohibiting borrowers from being referred to foreclosure before an application can be reviewed. Both demand prompt crediting of payments. Both protect borrowers from unnecessary force-placed insurance charges. And both require servicers to take steps to ensure compliance with current state foreclosure laws, including bans against the robo-signing of documents."
The order against Ocwen comes after most AGs and federal regulators settled with the largest bank mortgage servicers last year. Between that action, the Ocwen order and the new rules, Cordray said the mortgage servicing process has been significantly revamped to boost protections for borrowers.
"We're gradually extending the reach over the rest of the market including now new mortgage servicing rules, which take effect Jan. 10, patterned very closely off the national mortgage servicing settlement to see to it that the same protections are afforded to consumers' across the entire market," Cordray said. "And that is a big change for the market and it's an important change and it all happened because of the combined work of the folks that were involved here."
The CFPB and state authorities charge that Ocwen provided false and misleading information to borrowers about their accounts, denied loan modifications to eligible borrowers, robo-signed court documents through the foreclosure process, and miscalculated interest rates and other fees.
The case, which started through examinations by the Florida Office of Financial Regulation and other state regulators, spiraled into the largest proposed settlement of a mortgage servicer after last year's multi-servicer settlement that included just a portion of Ocwen's portfolio.
"We are committed to smart, effective regulations of financial services industries and insuring those who sell mortgages are held to the absolute highest standards we can get," Drew J. Breakspear, Florida commissioner of financial regulation, said during the call.
Cordray said that Ocwen, which specializes in servicing subprime or delinquent loans, grew substantially following the housing crisis by taking on the servicing of mortgages at large banks and buying competitors including Homeward Residential and Litton Loan Servicing.
"Because Ocwen bought the mortgage servicing rights to millions of existing accounts, for many borrowers Ocwen was not their first servicer. For these struggling homeowners, the consumer bureau believes that too often trouble began as soon as a loan transferred to Ocwen, with Ocwen failing to honor trial modifications that were agreed upon by previous servicers," Cordray said. "We believe that Ocwen violated federal consumer financial laws at every stage of the mortgage servicing process."
Ocwen is the fourth-largest mortgage servicer in the country. It also serviced mortgages for about half the loans that were not previously in the national mortgage servicing settlement involving the five largest mortgage servicers at that time, Cordray said.
Joseph A. Smith Jr., the monitor of the national mortgage servicing settlement, will oversee Ocwen's compliance with the settlement through the Office of Mortgage Settlement Oversight.
Ocwen must provide the $125 million in refunds to consumers who lost their home to foreclosure from 2009 to 2012, estimated to be up to 185,000 consumers. It must also modify loans to underwater borrowers by reducing their principal by a total of $2 billion over a three-year period. If Ocwen does not reach the $2 billion reduction by that time period, any remaining amount will be paid as a penalty to the CFPB and state authorities.
"When principal reduction is done correctly, the homeowner pays less than they would have before but the investor receives more than they would have by foreclosure," said Iowa Attorney General Tom Miller. "The whole idea is principal reduction works and it works very well."
The only state not participating in the case is Oklahoma. Roughly 17% of the principal reduction is going to underwater homeowners in Florida, which now ranks as having the largest delinquency rate in the country, said Florida Attorney General Pam Bondi.
"We expect principal reductions will average $50,000 per loan," she said. "That is a substantial savings and it will hopefully help ease the burden considerably by helping homeowners to stay in their homes."
Bondi also urged Congress to extend a part of the Mortgage Forgiveness Debt Relief Act of 2007 that's set to expire at the end of the year, which gave tax exemptions to borrowers whose mortgage debt was forgiven after a foreclosure, short sale or modification. Bondi said she has co-sponsored a letter signed by more than 40 attorneys general asking Congress to extend the tax exemption.
"It's urgent that Congress acts before it expires at the end of this year," she said. "Struggling homeowners are depending on this relief."