SEC Investigated Prematurely Soured Debt

August 30, 2017 by Nema Daghbandan, Esq.

The Securities and Exchange Commission (SEC) has opened an investigation to determine whether mortgage servicers are prematurely writing off loans. By targeting home equity borrowers and sending debt collectors after them prematurely, mortgage servicers may be attempting to boost their profits at the expense of borrowers.

The investigation places an emphasis on mortgage servicers that are not connected to the big banks. One of these servicers is Ocwen Financial Corporation. Last month, Ocwen announced that the SEC was examining expenses and fees the servicer had associated with liquidated loans. Mortgage servicers profit by collecting and processing borrowers home loan payments. If the borrowers fail to pay the servicer back, then the servicer may send the mortgages to an outside collection service.

However, the SEC expressed concern that the borrowers are not allotted adequate time to catch up on their home equity loan after falling behind on repayment. When a servicer sends the overdue debt to an outside collector, the servicer will be entitled to a certain percentage of the money recovered, which might end up earning the servicer a greater profit than they would have earned otherwise. Also, by prematurely sending loans to debt collectors, the servicer reduces the associated costs of collecting payments themselves.

However, this practice cuts into the earned income from the mortgages to which the banks that own the loans are entitled, as well as pilfering the profits owed to the bond holders.

The two largest non-bank mortgage servicers are Ocwen and Nationstar Mortgage Holdings. After regulations aimed at financial reform had caused many banks to reduce the size of their subprime mortgage departments, these companies seized an opportunity to fill a void in the market and earn additional profits. However, along with progress has come increased critical observation, as both state and federal authorities have already investigated and fined Ocwen Loan Servicing.

In 2015, Ocwen issued a statement revealing that the SEC had begun a probe into the use of debt collection services by mortgage servicing companies. The company noted that it believed that the letter had been sent to other mortgage servicers as well.

In February 2016, Ocwen issued an additional statement announcing that the SEC was conducting a more involved investigation regarding the fees associated with liquidated loans. In the wake of the announcement, Ocwen’s shares dropped more than sixty percent.

A spokesperson for Nationstar, Christen Reyenga, stated that the company had not received any such communication from the SEC.

Earlier this year, the SEC settled with Ocwen over an unrelated issue. The SEC brought an action against Ocwen, alleging the company misrepresented financial results by hiring an interested party for valuation purposes, contrary to what they were telling investors. Ocwen decided to settle the matter by paying a $2 million fine.

For more information on this topic, please contact Nema Daghbandan or call our main office at (949) 298-8050.