Yesterday, the Florida Attorney General and the Consumer Financial Protection Bureau hit Ocwen Financial Corporation with twin lawsuits for the company’s allegedly improper mortgage-servicing practices. Regulators from nearly two dozen states are either issuing cease-and-desist orders against Ocwen or yanking its licensing. At the heart of the company’s problems lies a vexing issue: its software platform, which it developed itself, is supposedly junk.
Ocwen, which is based out of West Palm Beach, Florida, is one of the nation’s largest non-bank mortgage servicers. It specializes in subprime mortgages and delinquent loans. To process the payments it receives from borrowers, Ocwen uses proprietary software known as REALServicing. To the company’s dismay, REALServicing has proven so bug-ridden and ineffective that one of Ocwen’s C-level executives once described the program as “an absolute train wreck.” Difficulties arise when Ocwen receives a mortgage for servicing and the company must then incorporate prior information about the loan into its databases. Mismatches in datafields make this process, called on-boarding, especially difficult.
Ocwen has known of these problems for years, and it has hired teams of consultants to examine them. But, according to the CFPB complaint, huge defects still remain. That situation created an opening for what is called swarm litigation–in which numerous regulators simultaneously mob a common target.
In a written statement, Ocwen does not deny that it has software problems, claiming instead that consumers have not suffered substantial harm as a result of those difficulties. The CFPB’s lawsuit, the company asserts, “can only be viewed as a politically-motivated attempt . . . to grab headlines in reaction to the change of administration and recent scrutiny of the [bureau’s] activities.”
That fiery rhetoric contrasts with Ocwen’s more measured response to state regulators’ actions, which the company does not describe as politically-motivated. Ocwen pledges to “continue to work cooperatively [with the state agencies] to achieve an acceptable resolution” to the problems the states identified.
What lessons can be learned from Ocwen’s steaming mess? There are at least four:
- Yes, Ocwen has major legal problems right now, but it also faces a public-relations nightmare of epic proportions. Smart companies in situations like this will act swiftly and decisively to counter awful narratives like these. Ocwen’s press releases are contradictory and poorly thought out: the CFPB is guilty of political overreach, but the states are well-meaning yet impatient. Ocwen’s castigating of the CPFB does little to dilute the newsworthiness of the story.
- Servicing high-risk mortgages is extraordinarily complex and likely cannot be done with software that might be suitable for non-subprime loans.
- Before these lawsuits were filed, Ocwen had extended discussions with the CFPB and state authorities about possible settlement terms. The terms demanded of Ocwen must have been exorbitant and, in the company’s view, far outside what it could possibly afford.
- In asserting its allegations against Ocwen, the CFPB relied, in part, on its authority to police unfair, deceptive, and abusive acts and practices. That authority often functions as a gap filler for practices the bureau wants to eliminate but does not have a perfect weapon against.