The Securities and Exchange Commission (“SEC”) is investigating mortgage servicers for allegedly trying to collect debt prematurely from delinquent mortgage loan borrowers. According to a Bloomberg report, the SEC’s probe will determine whether mortgage servicers are boosting their profits by unleashing debt collectors too early on borrowers.
Mortgage servicers process home loan payments from borrowers and write off bad loans, which are then sent to outside collectors. If the bad loans are sent prematurely to collectors, it may help a servicer to shrink costs. Also, a servicer may get a portion of the amount recovered by outside collectors, which may be higher than the usual fees.
This likely provides enough inducement to mortgage servicers to adopt unfair collections practices like sending loans to collectors too soon, thereby harming the bond holders and banks that own the home loans. Per the Bloomberg report, the SEC will probe “whether borrowers are getting enough time to make good on their home equity loans once they fall behind.”
According to a source, the non-bank servicers such as Ocwen Financial Corp. OCN and Nationstar Mortgage Holdings Inc. NSM will be under the SEC radar. Ocwen had earlier revealed about the SEC probe into its operations in an annual securities filing.
According to the filing, Ocwen was informed of the SEC investigation on Feb 11, 2016, “relating to fees and expenses charged in connection with liquidated loans and real estate owned properties held in non-agency residential mortgage-backed securities trusts.”
Prior to this, Ocwen had received a letter from the SEC last year regarding an investigation relating to the use of collection agents by mortgage loan servicers. The company believes such a letter was also sent to other companies in the servicing industry.
Last year, the Office of the Comptroller of the Currency imposed restrictions on business activities related to mortgage servicing of six banks, including JPMorgan Chase & Co. JPM and Wells Fargo & Company WFC, as they failed to comply with the consent orders related to faulty foreclosures in the past.
Also, with Basel III regulations, rising bad subprime mortgage loans as well as managing delinquencies and defaults increasing the costs of holding mortgage servicing business, the traditional lenders have reduced their exposure to the same.
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