In the latest fallout from regulatory investigations of Ocwen Financial and affiliated companies, Ocwen has agreed to pay $2 million to settle charges over its valuation of billions of dollars in mortgage servicing rights (MSRs) and its relationship with former Chairman William Erbey.
Ocwen sold the rights to service certain mortgages to Home Loan Servicing Solutions, which was formed by Erbey to acquire MSRs. According to the U.S. Securities and Exchange Commission, the firm misstated its financial results by relying on HLSS’s improper valuation of the rights to MSRs, which were still accounted for by Ocwen as a financing liability.
“Ocwen’s filings led investors to believe the company was valuing complex mortgage assets using GAAP rather than relying on a related company’s accounting methodology that later proved to be flawed,” Michael J. Osnato, chief of the SEC Enforcement Division’s complex financial instruments unit, said Wednesday in a news release announcing the settlement.
“Ocwen released inaccurate financial statements because its internal controls were inadequate and its audit committee failed to scrutinize whether the methodology was an appropriate way to measure fair value,” he added.
The SEC also said in an administrative order that Ocwen represented to investors that it required Erbey to recuse himself from deals with HLSS to avoid conflicts of interest when, in fact, it had no recusal policies in place and Erbey himself approved many such transactions.
In October, HLSS agreed to pay a civil penalty of $1.5 million to settle similar charges. It was accused of failing to value MSRs, its primary asset, in accordance with GAAP.
In the charges against Ocwen, the SEC alleged that “although Ocwen reported that it accounted for the rights to MSRs at amortized cost and that the carrying value of the rights to MSRs ‘approximate[d] fair value,’ the valuation for the rights to MSRs assigned by HLSS was not a fair value estimate.”
Erbey, the SEC said, “anticipated that the variance between the HLSS valuation and a fair value estimate provided by a third party would be significant; however, he did not share his views with anyone at Ocwen or with Ocwen’s external auditors.”