Shares of Ocwen Financial Corp. (OCN) fell 36.2% after the news of the California regulators considering suspension of the company’s mortgage license hit the market. The end of 2014 failed to bring an end to the company’s boundless troubles with the regulatory bodies, for which it paid a hefty price in the form of a 72% share price decline in the previous year alone.
Current Issue
After a long run-in with the New York regulators, Ocwen is now embroiled in a tussle with the California Department of Business Oversight (DBO). The California DBO seems dissatisfied with the company’s failure to disburse required information to prove compliance with the state laws.
The California DBO commenced a regulatory examination of the mortgage servicer in Jan 2013 to ensure that the company’s operations are in conformity with the Homeowners Bill of Rights – a package of laws devised for protection of homeowners’ interests.
Ocwen’s insufficient document filing and inadequate responses in spite of repeated written requests compelled the state regulator to deem the company in violation of subpoena and regulatory orders. A request to suspend the company’s license was submitted with an administrative law judge in Oct 2014, the hearing of which is scheduled for July this year.
Ocwen issued a press release claiming that since receiving notification of the administrative action, it has extended full cooperation to the California DBO to resolve the matter and also provided all the requested information. However, the damage to the company’s share price was already done.
Regulatory Troubles
With a fine of $150 million levied in Dec 2014 as part of the settlement with the New York Department of Financial Services (DFS) to the $2.1 billion settlement charged in Dec 2013 for violations of mortgage servicing laws, the regulatory issues took a toll on Ocwen’s profitability.
In Feb 2014, Benjamin Lawsky, superintendent of New York’s DFS, halted Ocwen’s deal to buy residential mortgage-servicing rights (MSRs) from Wells Fargo & Co. (WFC). The deal, which was later cancelled in Nov 2014, was put on hold indefinitely driven by regulator’s concerns over the mortgage servicer's ability to handle the increase in servicing volume.
Since then, the financial regulator has been keeping a close watch on Ocwen, which helped uncover many loopholes in its servicing systems and processes. The regulatory investigation on Ocwen revealed unfair foreclosures, inadequately documented measures, omitted paperwork and inappropriately maintained records.
Our Take
Regulatory probes and litigations have become an integral part of the major U.S. banks such as Wells Fargo and Bank of America Corporation (BAC) and JPMorgan Chase & Co. (JPM). The increasing regulatory burden has overshadowed the growth potential of Ocwen – the leading non-bank servicer of subprime loans in the U.S.
If the mortgage license is revoked, the company will suffer tremendously as California is a major source of business. This is apprehended to further dent its goodwill as well as profitability.
Currently, Ocwen holds a Zacks Rank #5 (Strong Sell).
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