Ocwen Financial Corporation (Ocwen) is one of the country’s largest nonbank mortgage loan servicers, and it has had its hands full the last six months. On April 20, the Consumer Financial Protection Bureau (CFPB) filed an enforcement action against Ocwen and its subsidiaries for violation of mortgage servicing rules. The CFPB’s suit was filed in the U.S. District Court for the Southern District of Florida, naming Ocwen and two of its subsidiaries--Ocwen Mortgage Servicing, Inc. and Ocwen Loan Servicing, LLC--as defendants. Close on the heels of the CFPB’s suit, the Attorney General for Florida brought a similar action against Ocwen and its subsidiaries--filed the same day, in the same court, bearing the very next civil case number. On top of all that, around the same time the CFPB filed suit on April 20, state mortgage regulators let loose a coordinated broadside against Ocwen:

…22 state mortgage regulators…issued public regulatory orders or charges to subsidiaries of Ocwen...to address violations of state and federal laws, including the mishandling of consumer escrow accounts, unlicensed activity, and a deficient financial condition. The majority of the orders prohibit the acquisition of mortgage servicing rights and the origination of mortgage loans until the company is able to prove it can appropriately manage its existing mortgage escrow accounts. The orders are the culmination of several years of examinations and monitoring by multiple state regulatory agencies that revealed the company is mismanaging consumer mortgage escrow accounts.

As a quick aside, orders from regulators prohibiting a mortgage servicer from acquiring mortgage servicing rights are a big deal because, for a mortgage servicer’s business model to work, the servicer has to be able to continue to acquire new mortgage servicing rights while the existing mortgages it services mature or go into default. Without being able to “replenish” its pool of mortgage servicing rights, its source of revenue starts to dry up.

Since April 20, more state regulators have issued cease and desist orders against Ocwen and its subsidiaries and, on May 1, the Massachusetts attorney general sued Ocwen in Massachusetts state court for violation of mortgage servicing rules, asserting claims in the same vein as those asserted by the CFPB and the Florida A.G. in their April 20 actions (Massachusetts is one of the states that, prior to its May 1 suit, had already issued public regulatory orders relating to Ocwen, including prohibiting it from acquiring new mortgage servicing rights and originating new loans). Why did state regulators come out swinging? In a National Mortgage News article entitled “Why regulators waited years before hitting Ocwen again,” the author, Kate Berry, quoted Melanie Hall, Commissioner of the Montana Division of Banking and Financial Institutions, as follows: “Regulators were working with the company [Ocwen] to allow them time to fix the issues…Eventually there comes a point in time when enough has happened and you have to move forward in a more formal fashion.”

So how did we get to this point? As for the CFPB’s enforcement case filed in April, according to the CFPB (and the Florida AG), a principal culprit is Ocwen’s servicing system of record. More on the system of record issue—and the CFPB’s case specifically--shortly. First, for some case background on what led to the circumstances giving rise to the CFPB’s enforcement action, we’re going to look at the following: (1) the CFPB’s mortgage servicing rules which are at issue in the CFPB’s action; (2) the growth of nonbanks in the mortgage servicing market; and (3) Ocwen’s growth specifically.