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The Consumer Financial Protection Bureau (CFPB) and 49 state attorneys general filed a consent order with a federal court requiring Ocwen, which is the nations 4th largest mortgage servicer and largest nonbank servicer, to remedy what the complaint says is ”systemic misconduct at every stage of the mortgage servicing process”  with a $2.125 billion restitution order. Ocwen must provide $2 billion in principal reductions to underwater borrowers and refund $125 million to nearly 185,000 borrowers who were foreclosed on. This was announced on December 26, 2013.

In 2012 the Multistate Mortgage Committee identified potential violations at Ocwen. Additionally, the Federal Trade Commission referred its investigation of Ocwen to the CFPB after the bureau opened in July 2011. Thus, the CFPB teamed up with state attorneys general and state regulators to investigate various issues that were identified as problematic. Those specific violations outlined in the complaint filed with the D.C. federal district court include failing to accurately apply payments, unauthorized fee assessments, impeding borrowers loss mitigation efforts, and robo-signing court documents in foreclosure cases.

The reality of the settlement is not an exact hit to Ocwen. Since Ocwen, as a servicer, does not own the mortgages it collects payments on, the hit falls back on the bondholders. The bondholders own the loans since banks packaged the loans into securities and sold those bonds into the market. When loan servicers modify mortgages they are obligated to do it in a way that does not harm the economic interests of the bondholders. Bondholders generally prefer write-downs to foreclosures which often end up more costly than principal reductions.

The CFPB said in its statement, “The CFPB and its partner states believe that Ocwen was engaged in significant and systemic misconduct that occurred at every stage of the mortgage servicing process. Ocwen’s violations of consumer protections put thousands of people across the country at risk of losing their homes.”

The settlement involves Ocwen and two companies recently purchased by Ocwen: Litton Loan Servicing LP and Homeward Residential Holdings LLC (previously known as American Home Servicing Inc. or AMHSI). Qualifying borrowers include those who had their loan serviced by Ocwen, Litton or Homeward and went into foreclosure between Jan. 1, 2009 and Dec. 31, 2012.

Ocwen stated in a regulatory filing that it established a reserve in the second quarter which will cover most of the direct payment obligations with the agreement.