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.
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.