Keys To Understanding The Legal Battle Brewing Between Ocwen And The CFPB

Ocwen Financial Corp (NYSE: OCN) shares are down 54.3 percent in the past week after more than 20 states issued cease-and-desist orders against the company related to alleged mismanagement of escrow accounts and the company’s poor financial state; the Consumer Financial Protection Bureau also filed a lawsuit against Ocwen for similar alleged abuses.

Restraining Orders And Injunctions

On Wednesday, Ocwen issued a press release informing shareholders the company has filed motions for restraining orders and injunctions against mortgage regulators in Massachusetts and Illinois and plans to respond to each of the other 20 states in the days ahead.

The press release elaborated:

“Over the course of almost two years, Ocwen and the Company's Board of Directors have been in regular communication with its state mortgage regulators, including those in Illinois and Massachusetts. During those communications, Ocwen shared information regarding the significant operational and programmatic enhancements that the Company has made. For example, as it relates to borrower escrow accounts, one of the primary areas of concern in the orders at issue, independent reviews have consistently confirmed Ocwen's escrow practices are in line with common industry standards for timeliness and accuracy.”

According to Height Securities, Ocwen’s legal response to Massachusetts and Illinois was expected.

“We expect that many of the issues raised by IL, MA, and the CFPB have been addressed or are in the process of being addressed given that OCN reached an agreement with the New York Department of Financial Services (NYDFS) in December 2014 and, in March 2017, NYDFS agreed to terminate the monitoring of OCN’s activities,” Height explained.

What's Going On Here?

Ocwen may be trying to drag its heels until President Donald Trump can replace the current leadership of the CFPB. Republicans recently revealed a new bill called the Financial Choice Act, which could potentially repeal and replace many provisions of the Dodd-Frank Act. Among the proposed changes is limiting the authority of the CFPB and making its funding subject to congressional appropriations.

“For conducting unlawful activities, abusing his authority, denying market participants due process, [CFBP director] Richard Cordray should be dismissed by our president,” U.S. Rep. Jeb Hensarling (R–Texas) said at a hearing earlier this month.

“Not only must Mr. Cordray go, but this CFPB must go as well.”

For now at least, Ocwen’s future may be tied to the fate of the CFPB. If the lawsuit proceeds, Height analyst Edwin Groshans says Ocwen may have an impossible path forward.

“We believe that any risk manager reading the CFPB’s complaint would be very concerned not just about the claims but also the pervasiveness of the claims throughout the servicing process, and that risk manager would consider switching servicing platforms to mitigate the risks to which his or her firm could be exposed,” Groshans said.

Other stocks are getting hammered in the wake of Ocwen’s downfall as well. Altisource Portfolio Solutions S.A. (NASDAQ: ASPS), which owns Ocwens servicing platform REALService, plummeted 46.8 percent in the past week. In addition, New Residential Investment Corp (NYSE: NRZ) which owns some of Ocwen’s servicing rights, is down 3.5 percent since news of the lawsuit broke.

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