| UNITED STATES OF AMERICA |
| Before the |
| SECURITIES AND EXCHANGE COMMISSION |
| SECURITIES EXCHANGE ACT OF 1934 |
| Release No. 76938 / January 20, 2016 |
| ACCOUNTING AND AUDITING ENFORCEMENT |
| Release No. 3733 / January 20, 2016 |
| ADMINISTRATIVE PROCEEDING |
| File No. 3-17060 |
| In the Matter of |
| Ocwen Financial Corp. |
| Respondent. |
| ORDER INSTITUTING CEASE-AND- |
| DESIST PROCEEDINGS, PURSUANT TO |
| SECTION 21C OF THE SECURITIES |
| EXCHANGE ACT OF 1934, MAKING |
| FINDINGS, AND IMPOSING REMEDIAL |
| SANCTIONS AND A CEASE-AND-DESIST |
| ORDER |
| |
| I. |
| The Securities and Exchange Commission (“Commission”) deems it appropriate that |
| cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the |
| Securities Exchange Act of 1934 (“Exchange Act”) against Ocwen Financial Corp. (“Ocwen” or |
| “Respondent”). |
| II. |
| In anticipation of the institution of these proceedings, Respondent has submitted an Offer |
| of Settlement (“Offer”) which the Commission has determined to accept. Solely for the purpose |
| of these proceedings and any other proceedings brought by or on behalf of the Commission, or to |
| which the Commission is a party, and without admitting or denying the findings herein, except as |
| to the Commission’s jurisdiction over them and the subject matter of these proceedings, which |
| are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist |
| Proceedings, Pursuant to Section 21C of the Exchange Act of 1934, Making Findings, and |
| Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. |
| III. |
| On the basis of this Order and Respondent’s Offer, the Commission finds1 that: |
| |
| 1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any |
| other person or entity in this or any other proceeding. |
| 2 |
| |
| Summary |
| 1. This matter involves Ocwen’s related party transactions and its valuation of |
| certain related company liabilities from 2012 to 2014. First, Ocwen disclosed that it had policies, |
| procedures and practices that, among other things, required that its then-Executive Chairman of |
| the Board (the “Executive Chairman”), who also served as the Chairman of the Board of two |
| related companies, Home Loan Servicing Solutions Ltd. (“HLSS”) and Altisource Portfolio |
| Solutions S.A. (“Altisource”), be recused from approving transactions with HLSS and |
| Altisource. In fact, there were no written policies or procedures regarding recusal and the |
| practice that existed was flawed, inconsistent, and ad hoc. Second, Ocwen’s erroneous valuations |
| of its financing liability on certain mortgage servicing rights sold to HLSS contributed to Ocwen |
| materially misstating its financial results for the last three quarters in 2013 and the first quarter of |
| 2014. These misstatements resulted from an internal accounting controls failure that caused the |
| company to rely on a valuation methodology that did not conform to U.S. Generally Accepted |
| Accounting Principles (“GAAP”). |
| 2. In its Form 10-K for the year 2012, Ocwen disclosed in the 1A “Risk Factors” |
| section that it had “adopted policies, procedures and practices to avoid potential conflicts |
| involving significant transactions with related parties such as Altisource, including [the |
| Executive Chairman’s] recusal from negotiations regarding, and credit committee and board |
| approvals of such transactions.” In the same section of its Form 10-K for the year 2013, Ocwen |
| similarly disclosed that it had “adopted policies, procedures and practices to avoid potential |
| conflicts with respect to [its] dealings with Altisource [and] HLSS [among other related entities], |
| including [its] Executive Chairman recusing himself from negotiations regarding, and approvals |
| of, transactions with these entities.” The Executive Chairman’s recusal was to be one of several |
| safeguards against potential conflicts due to his multiple roles at Ocwen and its related entities. |
| 3. Ocwen had no written related party transactions policies or procedures. And, |
| although the Executive Chairman had a practice of recusing himself from negotiations and |
| certain approvals of related party transactions, that practice was inconsistent and ad hoc. Ocwen |
| therefore failed to devise and maintain its disclosed internal controls sufficient to ensure that the |
| Executive Chairman recused himself from all approvals involving potential conflicts of interest |
| in Ocwen’s related party transactions. |
| 4. Due to these control failures, the Executive Chairman repeatedly approved |
| transactions between Ocwen and HLSS in both his Ocwen- and HLSS-related capacities. In |
| addition, as to Altisource, the Executive Chairman voted, as a member of the Ocwen Board of |
| Directors, to approve a $75 million bridge loan from Altisource to Ocwen. And, due to other |
| internal accounting control deficiencies, Ocwen had either no documentation or insufficient |
| documentation of approvals of five transactions between Ocwen and HLSS. |
| 5. Separately, Ocwen materially misstated its net income for three quarters in 2013 |
| and the first quarter of 2014 by relying on HLSS’s improper valuation of rights to mortgage |
| servicing rights (“Rights to MSRs”) that were acquired from Ocwen and still accounted for by |
| Ocwen as a financing liability. 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. |
| 3 |
| |
| Ocwen’s Executive Chairman 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. In addition, Ocwen’s |
| management and its Audit Committee failed to adequately review whether HLSS’s valuation |
| methodology, which Ocwen relied upon, complied with GAAP. |
| Respondent |
| 6. Ocwen is a Florida corporation that, as of October 2015, has its principal place of |
| business in West Palm Beach, Florida. Ocwen’s common stock is registered with the |
| Commission pursuant to Section 12(b) of the Exchange Act and trades on the New York Stock |
| Exchange. Between 2012 and 2014, Ocwen’s Executive Chairman owned approximately 13 |
| percent of Ocwen’s common stock. |
| Other Relevant Entities |
| 7. Altisource is a Luxembourg corporation with its principal executive offices in |
| Luxembourg. Altisource comprises certain business divisions divested from Ocwen, and it |
| became registered with the Commission pursuant to Section 12(b) of the Exchange Act in 2009. |
| It trades on the NASDAQ Global Market. The Executive Chairman of Ocwen became |
| Altisource’s Chairman at the time of its formation and owned approximately 26 percent of |
| Altisource’s common stock between 2012 and 2014. |
| 8. HLSS is a Cayman Islands corporation with its principal executive offices in the |
| Cayman Islands. HLSS’s common stock became registered with the Commission pursuant to |
| Section 12(b) of the Exchange Act in February 2012 and, from that date until approximately |
| April 2015, traded on the NASDAQ Global Market. HLSS was founded by Ocwen’s Executive |
| Chairman in 2010 and conducted an initial public offering in February 2012. The Executive |
| Chairman of Ocwen also became HLSS’s Chairman in 2010 and owned 100 percent of HLSS’s |
| ordinary shares of common stock prior to the initial public offering, 5 percent after the offering, |
| and approximately 1 percent between 2013 and 2014. |
| Background |
| A. Ocwen’s Related Party Transactions |
| Ocwen’s Relationship with Altisource and HLSS |
| 9. Ocwen is a servicer of mortgages that have been securitized and are owned by |
| residential mortgage-backed securities trusts. As such, Ocwen collects and remits principal and |
| interest payments received from homeowner borrowers and manages loans that are delinquent or |
| in foreclosure or bankruptcy. In addition, as one of its obligations in managing delinquent loans, |
| Ocwen advances funds to the trusts to cover payments missed by borrowers. |
| 10. In 2009, Ocwen spun-off certain business lines to a newly-created entity, |
| Altisource, and entered into long-term agreements for Altisource to provide technology products |
| and services to Ocwen including, among other things, home valuations, property preservation |
| and inspection services, sales of foreclosed properties, mortgage charge-off collection services, |
| 4 |
| |
| and insurance services. Ocwen’s Executive Chairman also became Chairman of Altisource, and |
| several Ocwen managers left Ocwen to become executives and members of the board of |
| directors at Altisource. |
| 11. In 2010, Ocwen’s Executive Chairman sought to make Ocwen “capital-light” by |
| creating HLSS, a company that would be publicly traded and that would finance a substantial |
| part of Ocwen’s servicer advances. HLSS was to purchase Ocwen’s mortgage servicing rights |
| (“MSRs”), and thereby receive the future servicing fees owed to Ocwen in connection with those |
| MSRs and, as a result of that purchase, would be responsible for funding servicer advances. As a |
| part of this arrangement, HLSS would retain Ocwen as the subservicer for all mortgages |
| underlying the MSRs purchased by HLSS. Ocwen’s Executive Chairman also became HLSS’s |
| Chairman, and certain managers and members of the board of directors at Ocwen left Ocwen to |
| become executives and board members at HLSS. |
| 12. Due to difficulties encountered with transferring title to the MSRs to HLSS, |
| Ocwen retained title and HLSS agreed to acquire the Rights to the MSRs through a financing. |
| Ocwen and HLSS executed a master purchase agreement and master subservicing agreement in |
| February 2012. On March 5, 2012, Ocwen completed an initial sale to HLSS of Rights to MSRs |
| on mortgages with an unpaid principal balance (“UPB”) of $15.2 billion. Under this |
| arrangement, Ocwen serviced the mortgages, collected the servicing fees from borrowers and |
| remitted the fees to HLSS. From the total servicing fees remitted, HLSS paid Ocwen a base fee |
| for its services and a performance fee when Ocwen met certain targets for advance levels. |
| Because of his role at HLSS, the Executive Chairman recused himself from negotiating and |
| voting on the approval of the master agreements and initial purchase. |
| Ocwen’s Control Breakdowns Relating to Related Party Transactions |
| 13. Although several internal documents created by Ocwen personnel referred to a |
| related party transactions policy, there were no written policies or procedures governing when an |
| officer or director with a conflict of interest was required to be recused from negotiating or |
| approving a related party transaction. While the Executive Chairman routinely recused himself |
| from negotiations with Altisource and HLSS and recused himself from approvals of transactions |
| in certain instances, including the master purchase and master subservicing agreements and the |
| initial sale of Rights to MSRs to HLSS, Ocwen personnel never developed guidelines under |
| which such recusal was appropriate. This caused a number of control deficiencies. |
| 14. First, the responsibility for determining whether recusal was appropriate was left |
| largely to the Executive Chairman, the person with the conflict of interest. While Ocwen’s in- |
| house counsel occasionally provided advice on whether the Executive Chairman could |
| participate in a related party transaction, there was no meaningful oversight of the Executive |
| Chairman’s determination. |
| 15. Second, Ocwen personnel lacked a clear understanding of when recusals were |
| required. Ocwen stated in its 2012 Form 10-K that it had “adopted policies, procedures and |
| practices to avoid potential conflicts” present in “significant” related party transactions. |
| However, Ocwen personnel had conflicting understandings of what types of transactions could |
| qualify as significant, and they never attempted to reconcile these conflicting understandings. |
| 5 |
| |
| When Ocwen removed the term “significant” from its disclosure in its 2013 Form 10-K, some |
| Ocwen personnel continued to view the Executive Chairman’s recusal as required only in |
| transactions determined to be significant. Yet, there was no guidance or common understanding |
| for making such a determination. In addition, the Executive Chairman and a member of Ocwen |
| senior management both believed that the need to approve transactions in the Virgin Islands for |
| tax reasons may have been grounds for participating in the approval. Ocwen’s disclosures, |
| however, do not include this exception, and this belief was not given sufficient consideration |
| internally. |
| Ocwen’s Executive Chairman Approved a Transaction with Altisource |
| 16. In December 2012, Ocwen entered into an agreement to borrow $75 million from |
| Altisource as an unsecured bridge loan to serve as part of the consideration paid by Ocwen in |
| connection with Ocwen’s acquisition of another mortgage servicer. The Executive Chairman |
| voted to approve Ocwen’s entry into the loan agreement. In his role as Chairman of Altisource, |
| the Executive Chairman recused himself from the decision to approve the loan. However, he |
| reviewed and approved the Altisource board presentation before it was circulated to the |
| Altisource Board of Directors for the vote. Ocwen disclosed the loan in a Form 8-K, dated |
| December 28, 2012, and in its annual report for 2012 filed on Form 10-K. |
| Ocwen’s Executive Chairman Approved Transactions with HLSS |
| 17. After Ocwen and HLSS executed the master purchase and master subservicing |
| agreements and the initial sales of the Rights to MSRs, Ocwen made additional sales, known as |
| “Flow Transactions,” to HLSS in 2012 and 2013. Ocwen disclosed in its Form 10-K for 2012 |
| that “[t]he [2012] HLSS [t]ransactions have improved Ocwen’s liquidity and cash flows . . . |
| [and] lowered Ocwen’s capital requirements since HLSS is acquiring not only the Rights to |
| MSRs but also the servicer advances related to the Rights to MSRs and assuming responsibility |
| for funding servicer advances in the future.” The disclosure added that Ocwen expected “the |
| reduction in equity required to run the servicing business” resulting from its sales to HLSS |
| would improve the return on equity of Ocwen’s servicing business over time. |
| 18. While Ocwen and HLSS based the purchase price for the Rights to MSRs for each |
| Flow Transaction on an appraisal by a third party valuation firm, other terms varied. For |
| example, for each Flow Transaction, Ocwen and HLSS negotiated HLSS’s retained fees, which |
| were the servicing fees retained by HLSS from those collected and remitted to it by Ocwen after |
| payment of the base and performance fees owed back to Ocwen. The retained servicing fee for |
| each Flow Transaction was based on the agreed-upon advance target for Ocwen and other |
| assumptions that were jointly set by Ocwen and HLSS such as the prepayment rate on the |
| underlying loan balances, financing cost and advance borrowing rate. |
| 19. The Flow Transactions with HLSS were approved at Ocwen by different methods. |
| The Flow Transactions in 2012 were approved by the unanimous written consent of Ocwen’s |
| Executive Committee, which was appointed by the Board and composed of the Executive |
| Chairman, another member of the Board of Directors, and Ocwen’s CEO. In 2013, Ocwen |
| personnel submitted proposals for approval of these transactions to the Ocwen Credit |
| Committee, which was responsible for the financial direction and oversight of Ocwen’s servicing |
| 6 |
| |
| business operated by its wholly owned subsidiary in the Virgin Islands. Approval by the Credit |
| Committee was necessary for a Flow Transaction to be consummated. In addition to his other |
| roles, the Executive Chairman was also a member of HLSS’s Credit Committee, which |
| performed an analogous role to that of the Ocwen Credit Committee. |
| 20. The routine process for Credit Committee review and approval of the Flow |
| Transactions was to circulate a memorandum that presented analysis of the proposed price of the |
| Rights to MSRs, the retained fees and the varying underlying assumptions. The memoranda |
| circulated typically included a signature page to indicate approval by each of the committee |
| members. The committee members either executed the signature pages or indicated their |
| approval of the transactions by email. |
| 21. In 2012, Ocwen entered into five Flow Transactions with HLSS totaling |
| approximately $67.5 billion in UPB. The Executive Chairman approved two of these transactions |
| as a member of the Executive Committee in separate written consents. Contemporaneously, the |
| Executive Chairman approved all of these transactions in his capacity as a member of the HLSS |
| Credit Committee. |
| 22. In 2013, Ocwen entered into four Flow Transactions with HLSS totaling |
| approximately $120 billion UPB. The Executive Chairman recused himself from the first |
| transaction but then approved the second one for both Ocwen and HLSS. Even when the |
| Executive Chairman recused himself from the Credit Committee decision, he still received the |
| Credit Committee memorandum because, according to him, “I’m interested in valuation [and] I |
| still thought I had the right to say, ‘No, this isn’t going to happen.’” |
| 23. In 2014, the Executive Chairman approved another type of transaction between |
| Ocwen and HLSS concerning early buy-out loans, which are delinquent loans eligible for |
| purchase by the mortgage servicer. In this transaction, Ocwen sold HLSS early buy-out loans |
| worth approximately $672 million that Ocwen recently had purchased. In a February 2014 email |
| addressed to members of both Ocwen and HLSS senior management, the Executive Chairman |
| approved this purchase on the condition that it did not trigger losses. |
| Ocwen’s Failure to Document Approvals |
| 24. As to the latter three of the five Flow Transactions between Ocwen and HLSS in |
| 2012 and two of the four Flow Transactions in 2013, Ocwen was unable to locate final executed |
| Executive Committee resolutions, Credit Committee memoranda or approving emails. |
| Contemporaneous emails for the last of these transactions in October 2013, however, show a |
| request to schedule a phone call for both Credit Committees to discuss the analysis contained in |
| the memorandum and a subsequent modification of the retained servicing fee based on a change |
| to an underlying assumption. |
| 25. Documentation of Ocwen’s Credit Committee approval process again broke down |
| in February 2014 in connection with the early buy-out loan sale agreement between Ocwen and |
| HLSS. Ocwen was unable to locate all Credit Committee approvals for this transaction. |
| 7 |
| |
| B. Improper Valuation of Rights to MSRs |
| 26. For each transfer of Rights to MSRs from Ocwen to HLSS, HLSS recorded a |
| Note Receivable – Rights to MSRs, and Ocwen recorded a corresponding note payable on its |
| books, entitled Financing Liability – MSRs Pledged. HLSS purported to carry the asset at fair |
| value. Ocwen’s filings stated that it recorded the liability at amortized cost and amortized the |
| liability over the estimated life of the underlying MSRs using the interest method. For purposes |
| of applying the interest method, Ocwen disclosed to investors that the balance of the liability was |
| reduced each quarter based on the change in the present fair value of the estimated future cash |
| flows. Because the calculation of amortization of the financing liability had a fair value |
| component to it, Ocwen’s 2013 Form 10-K Note 5 provided that “[t]he carrying value of the |
| Financing Liability – MSRs Pledged approximates fair value” and that “[t]he net present value of |
| these future cash flows represents the fair value of the Financing Liability – MSRs Pledged.” |
| Ocwen’s quarterly and annual filings with the Commission also stated that its financial |
| statements were prepared in accordance with GAAP. |
| 27. Ocwen did not independently value the Rights to MSRs that it accounted for as a |
| financing liability. Rather, in consultation with its external auditors, Ocwen relied on HLSS to |
| value the Rights to MSRs and assigned them the value that was derived from HLSS’s valuation |
| methodology, which was later proven to be flawed. |
| 28. FASB Financial Accounting Standards Codification Topic 820 (“ASC 820”) – |
| Fair Value Measurements and Disclosures defines fair value as the price that would be received |
| to sell an asset or paid to transfer a liability in an orderly transaction between market participants |
| at the measurement date. Because Rights to MSRs are not frequently bought or sold, there rarely |
| are observable market prices for them. Rights to MSRs are therefore considered to be a Level 3 |
| asset in the fair value hierarchy, which are assets that do not have observable inputs for a fair value |
| measurement. While Level 3 assets are more difficult to value, the fair value measurement |
| objective remains the same, that is, an exit price from the perspective of a market participant that |
| holds the asset. |
| 29. As stated in a previous settled order concerning HLSS, see In re HLSS, Admin. |
| Proc. File No. 3-16882 (October 5, 2015), HLSS retained a third party with expertise in valuing |
| MSRs to calculate the fair value of its Rights to MSRs. Each quarter, the third-party valuation |
| firm performed an analysis of the Rights to MSRs and provided HLSS with a valuation report. |
| The valuation reports included an estimate of the fair-value based on inputs that affected the fair |
| value of the MSRs, such as then-current prepayment rates, pre-tax discount rates, and costs to |
| service. This estimate was represented as a specific price that was reflected in basis points.2 |
| Multiplying this specific price, which was the third-party valuation firm’s best-point estimate, by |
| the UPB for HLSS’s Rights to MSRs would provide a fair-value measurement for those Rights |
| to MSRs. In a prefatory note, the valuation reports stated that a sale of the Rights to MSRs in an |
| orderly market should not differ by more than 7.5, or in some instances 10, basis points from the |
| best-point estimate provided. |
| |
| 2 A basis point is one hundredth of one percent. |
| 8 |
| |
| 30. In addition to the fair value measurement provided in the valuation report, HLSS |
| independently determined the carrying value of its Rights to MSRs. As part of this |
| determination, HLSS calculated an “Inception BPS,” also reflected in basis points, by dividing |
| the UPB of the mortgages underlying the MSRs as of the date of their acquisition by HLSS’s |
| purchase price of the Rights to MSRs. Over time, the UPB of the mortgages generally decreased |
| as borrowers paid down their mortgages. At the end of each quarter, HLSS calculated the |
| carrying value for the Rights to MSRs by multiplying the Inception BPS by the amount of the |
| UPB as of the end of the quarter. This amortization was driven entirely by the decline in size of |
| the mortgages’ UPB and was not affected by any of the factors that would affect a fair value |
| measurement. |
| 31. Because the value of the MSRs for which HLSS had obtained the rights |
| historically had been fairly stable, HLSS developed a valuation methodology that used the |
| carrying value of the Rights to MSRs as the presumptive fair value measurement. This |
| methodology was reviewed by HLSS’s and Ocwen’s external auditors. For each reporting date, |
| HLSS compared the carrying value of its Rights to MSRs (as calculated above) to the third-party |
| valuation report’s best-point estimate and would record an adjustment to the value of the Rights |
| to MSRs, which HLSS disclosed reflected fair value, only if there was a variation in price of at |
| least 5 percent. |
| 32. To illustrate, the third-party valuation firm provided a report with a valuation date |
| of November 29, 2013 estimating the price of HLSS’s Rights to MSRs, which had underlying |
| mortgages with an UPB of approximately $159.56 billion, at 37.08 basis points. Multiplying the |
| UPB by the estimated price, the third party valued the Rights to these MSRs at approximately |
| $592 million. Under HLSS’s valuation methodology, HLSS would apply 5 percent bands around |
| the third-party valuation firm’s best-point estimate of 37.08 basis points, which would create a |
| range from 35.23 basis points (5 percent below) to 38.93 basis points (5 percent above), and |
| would report the carrying value of its Rights to MSRs as their fair value so long as the carrying |
| value was within the range of values created by the 5 percent bands. In other words, so long as |
| HLSS’s carrying value was within approximately $562 million (35.23 basis points multiplied by |
| the UPB) and approximately $621 million (38.93 basis points multiplied by the UPB), it would |
| report the carrying value as fair value. Based on Ocwen’s financial results for the fourth quarter |
| of 2013, this approximately $56 million range was equivalent to 10 percent of its total revenues |
| and 41 percent of its net income. |
| Ocwen Used HLSS’s Valuations |
| 33. Ocwen amortized the Financing Liability using HLSS’s calculation. Under ASC |
| 820, Ocwen was required to update its expectations of cash flows at each reporting period to |
| determine the current net present value of the cash flows. Ocwen did not independently |
| determine the current net present value of the cash flows. Rather, it automatically used for each |
| quarter the resulting estimates produced by HLSS’s improper valuation methodology. As a |
| result, Ocwen would adjust the net present value amounts only if the difference of carrying |
| amount was larger than 5 percent of the third-party valuation firm’s best-point estimate. |
| 9 |
| |
| 34. Ocwen’s quarterly and annual filings listed “Fair Value Measurements” as a |
| “Critical Accounting Policy.” The Fair Value Measurements section referenced the amortization |
| of MSRs and the accounting and valuation for the Financing Liability – MSRs Pledged. |
| Ocwen’s Internal Accounting Controls Deficiencies Relating to Valuation |
| 35. While Ocwen relied upon HLSS’s valuation methodology and used HLSS’s |
| calculation to account for its financing liability associated with the Rights to MSRs, neither |
| Ocwen’s management nor its Audit Committee independently reviewed HLSS’s valuation |
| methodology for the Rights to MSRs. |
| 36. Before HLSS implemented the valuation methodology, Ocwen’s Executive |
| Chairman (who also served as HLSS’s Chairman) perceived a problem with it. Because the 5 |
| percent bands created a very large range in terms of dollars, the Executive Chairman anticipated |
| that there would be significant differences between the third party best-point estimate and |
| HLSS’s carrying value that were still within the 5 percent bands. |
| 37. The Executive Chairman did not share these concerns with Ocwen’s Audit |
| Committee, his fellow Ocwen Directors, Ocwen management, or Ocwen’s external auditors. |
| 38. The Audit Committee of Ocwen’s Board of Directors also failed to give sufficient |
| independent consideration to the automatic use of estimates derived from HLSS’s valuation |
| methodology. The Audit Committee’s charter, which was reviewed by the Board of Directors |
| and the Audit Committee in March 2012, provided that the Audit Committee shall: |
| (j) Review with management, the Company’s independent |
| auditors and the director of the Company’s internal auditing |
| department, the following: |
| (i) critical accounting policies and such other accounting |
| policies of the Company as are deemed appropriate for review by |
| the Committee prior to any interim or year‐end filings with the |
| SEC or other regulatory body, including any financial reporting |
| issues which could have a material impact on the Company’s |
| financial statements . . . . |
| 39. While Ocwen’s Audit Committee routinely reviewed the financial information |
| that resulted from HLSS’s valuation methodology, it did not review the valuation methodology |
| itself with Ocwen’s external auditors and did not review with Ocwen management whether it |
| was appropriate to use the estimates derived from HLSS’s valuation methodology to value |
| Ocwen’s financing liability of the Rights to MSRs. As a result, the Audit Committee did not |
| consider whether HLSS’s valuation methodology was an appropriate fair value measurement |
| under GAAP, nor did it consider whether the valuation methodology could result in a variance |
| between the third party valuation firm’s best-point estimate and the carrying value that was |
| material to Ocwen’s reported results. |
| 10 |
| |
| Ocwen Restated Its Financials |
| 40. The best-point estimate in the valuation reports fluctuated from quarter to quarter; |
| however, under its valuation methodology, HLSS did not make any adjustment to the fair value |
| of its Rights to MSRs because the Inception BPS used to calculate carrying value did not differ |
| by 5 percent or more from the best-point estimate. Consequently, Ocwen did not make any |
| adjustments to the net present value of the liability. |
| 41. HLSS revisited the use of its valuation methodology in 2014 and determined that |
| the carrying value of the Rights to MSRs was not a fair value measurement under GAAP. HLSS, |
| therefore, determined that it was required to restate the value of its Rights to MSRs to the best- |
| point estimate of fair value provided in the valuation reports. |
| 42. HLSS management then relayed this information to Ocwen’s management. |
| Ocwen’s management, after discussions with its external auditors, determined that it should also |
| use the third-party’s best-point estimate, which would have resulted in a material variance for |
| three quarters in 2013 and the first quarter 2014. |
| 43. In August 2014, Ocwen restated its 2013 Form 10-K and its Form 10-Q for the |
| quarter ended March 31, 2014 as a result of this required adjustment and an unrelated data input |
| error.3 As per the chart below, Ocwen’s use of HLSS’s improper valuation resulted in a material |
| error to Ocwen’s reported results in quarterly and annual filings and in earnings releases filed on |
| Form 8-K. |
| Dollars in thousands |
| |
| Net Income As |
| Restated ($) |
| Adjustment |
| Relating to |
| Accounting |
| Error ($) |
| Adjustment as |
| a % of |
| Restated Net |
| Income |
| 1Q 14 60,486 (8,000) -13% |
| FY 2013 310,418 11,356 4% |
| 4Q 13 135,275 27,582 20% |
| 3Q 13 60,572 (6,831) -11% |
| 2Q 13 65,662 (13,352) -20% |
| 1Q 13 48,909 3,957 8% |
| C. Violations |
| 44. As a result of the conduct described above, Ocwen violated Section 13(a) of the |
| Exchange Act, Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, which require issuers to file |
| true, accurate, and complete annual, quarterly and current reports with the Commission. |
| |
| 3 This data input error related to a subset of the Rights to MSRs as of the fourth quarter of 2013 and the first |
| quarter of 2014. The impact of the data error was $5.9 million and $9.3 million as of December 31 , 2013 and March |
| 31, 2014, respectively. |
| 11 |
| |
| 45. As a result of the conduct described above, Ocwen violated Section 13(b)(2)(A) |
| of the Exchange Act, which requires public companies to “make and keep books, records, and |
| accounts, which, in reasonable detail, accurately and fairly reflect the transactions and |
| dispositions of the assets of the issuer.” |
| 46. As a result of the conduct described above, Ocwen violated Section 13(b)(2)(B) |
| of the Exchange Act, which requires public companies to “devise and maintain a system of |
| internal accounting controls sufficient to provide reasonable assurances that . . . (ii) transactions |
| are recorded as necessary (I) to permit preparation of financial statements in conformity with |
| generally accepted accounting principles or any other criteria applicable to such statements, and |
| (II) to maintain accountability for assets.” |
| IV. |
| In view of the foregoing, the Commission deems it appropriate to impose the sanctions |
| agreed to in Respondent’s Offer. |
| Accordingly, pursuant to Section 21C of the Exchange Act of 1934, it is hereby |
| ORDERED that: |
| A. Respondent Ocwen cease and desist from committing or causing any violations |
| and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act |
| and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. |
| B. Respondent shall, within 10 days of the entry of this Order, pay a civil money |
| penalty in the amount of $2,000,000 to the Securities and Exchange Commission for transfer to |
| the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If |
| timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C § 3717. |
| Payment must be made in one of the following ways: |
| (1) Respondent may transmit payment electronically to the Commission, |
| which will provide detailed ACH transfer/Fedwire instructions upon |
| request; |
| (2) Respondent may make direct payment from a bank account via Pay.gov |
| through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or |
| (3) Respondent may pay by certified check, bank cashier’s check, or United |
| States postal money order, made payable to the Securities and Exchange |
| Commission and hand-delivered or mailed to: |
| Enterprise Services Center |
| Accounts Receivable Branch |
| HQ Bldg., Room 181, AMZ-341 |
| 6500 South MacArthur Boulevard |
| Oklahoma City, OK 73169 |
| 12 |
| |
| Payments by check or money order must be accompanied by a cover letter |
| identifying Ocwen as a Respondent in these proceedings, and the file number of |
| these proceedings; a copy of the cover letter and check or money order must be |
| sent to Michael J. Osnato, Chief, Complex Financial Instruments Unit, Division |
| of Enforcement, Securities and Exchange Commission, Brookfield Place, 200 |
| Vesey Street, Suite 400, New York, NY, 10281. |
| |
| By the Commission. |
| Brent J. Fields |
| Secretary |
