The U.S. Securities and Exchange Commission (SEC) has approved a settlement with Ocwen Financial Corp. for $2 million to resolve claims that the mortgage servicer misstated its financial results, according to an announcement from the SEC.
An investigation by the SEC revealed that Ocwen misstated its income for the last three quarters of 2013 and the first quarter of 2014 as a result of the servicer’s use of a flawed, undisclosed methodology to determine the value of certain complex mortgage assets. According to the SEC, Ocwen inaccurately disclosed to investors that it independently valued the mortgage assets in question under U.S. Generally Accepted Accounting Principles (GAAP) when in fact it was using valuations provided by a related party to which it sold certain mortgage servicing rights that were a liability. The related party’s valuations deviated from the fair value measures, and Ocwen’s auditing team failed to review the methodology with company management or the outside auditor, according to the SEC.
“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,” said Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “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.”
The SEC also found that Ocwen’s internal controls failed to prevent conflicts of interest involving the servicer’s since-departed chairman and founder, William Erbey. Ocwen disclosed to investors to that Erbey was required to recuse himself on transactions involving companies where he also served in leadership positions, when in fact Ocwen had no written policies or procedures for recusal; hence, Erbey approved a $75 million bridge loan to company for which he also served as chairman of the board.
Erbey was forced to step down as chairman and CEO of Ocwen in January 2015 after 30 years with the company he founded. His departure was part of a $150 million settlement Ocwen reached with the New York Department of Financial Services in December 2014. A two-year investigation by the New York DFS revealed that Ocwen had sent backdated foreclosure notices to thousands of borrowers.
“We are pleased with the resolution of this U.S. Securities and Exchange Commission’s (SEC) investigation,” Ocwen spokesman John Lovallo said. “As previously disclosed in our October 2015 SEC 10-Q filing, funds have already been reserved to address this settlement. Ocwen remains committed to full compliance with all legal and regulatory requirements and will continue to fully cooperate with regulators on any matter brought to its attention.”