In December 2013, the Consumer Financial Protection Bureau and 49 states issued a $2.1 billion consent order against Ocwen, one of America’s largest mortgage companies, for “violating consumer financial laws at every stage of the mortgage servicing process.” Three and a half years later, the CFPB sued Ocwen in federal court for, well, violating consumer financial laws at every stage of the mortgage servicing process.
Why are we here again? Why did Ocwen continue to harm thousands of borrowers, years after first being caught? Part of the answer lies in the irresponsibly weak 2013 settlement, the vast majority of which Ocwen didn’t even have to pay itself. Thursday’s lawsuit, in fact, is an indictment of the way the government fails to police financial institutions, letting problems linger and allowing companies to devastate customers for years without intervention.
The picture that emerges from the 93-page lawsuit, based on internal audits, company e-mails, third-party reviews by investors and consultants, and employee testimony, is that Ocwen has no ability to execute the basic functions of mortgage servicing. A servicer operates as an accounts-receivable department for home loans. This is the company you make your check out to. At a bare minimum, servicers issue monthly statements noting the amount due and overall loan balance, collect the checks, and apply them to a customer’s account. Ocwen didn’t get any of that right, routinely, for years and years.
To understand this, you need to recognize how Ocwen became such a huge servicer. Prior to the foreclosure crisis, the biggest mortgage servicers were divisions of the big banks. But those institutions were caught committing massive amounts of fraud in the foreclosure process, paying tens of billions in fines. Subsequent legal settlements led to a new set of compliance standards that increased costs. And new global capital rules gave unfavorable treatment to mortgage-servicing rights (or MSRs, as they are commonly known), making the business a balance-sheet liability.
So the big banks sold off MSRs to non-bank servicers like Ocwen, which grew eightfold from 2010 to the beginning of 2014. And they clearly couldn’t handle the increase in scale.
An outside review concluded that Ocwen’s REALServicing computer system “lacks the basic system architecture and design necessary to properly service loans,” which is, you know, the entire job. REALServicing routinely generated inaccurate loan information, spitting out thousands of communications to borrowers with the wrong interest rate or loan terms. Ocwen’s own head of servicing called the system “an absolute train wreck” in an internal e-mail. An Ocwen report last March found that 90 percent of the loans studied “contained errors or incomplete information and required corrections.” REALServicing also couldn’t stay online, burdened by the glut of new loans. In 2014, the system was down for an astonishing 17,000 work hours, according to an internal report. (Note: There are only 8,760 hours in a year.)