S&P Raises Rankings on Ocwen Loan Servicing to Average (OCN)

August 9, 2016 3:52 PM EDT

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S&P Global Ratings raised its overall rankings on Ocwen Loan Servicing LLC (Ocwen) to AVERAGE from BELOW AVERAGE as a residential mortgage primary, subprime, special, and subordinate-lien servicer. As part of the ranking actions, we raised our management and organization subrankings for all four rankings to AVERAGE from BELOW AVERAGE, and we affirmed our AVERAGE loan administration subrankings. The outlooks for all four rankings are stable.

The rankings reflect our opinion of Ocwen's strengthened internal control environment, good management and staff experience levels, manageable staff and management turnover rates, improved nonreimbursable tax penalties, and the company's continued monitoring and supervision by the New York Department of Financial Services (NY DFS), California Department of Business Oversight (CA
DBO), and National Mortgage Settlement (NMS).

On June 18, 2015, we lowered our overall residential rankings on Ocwen to BELOW AVERAGE to reflect weaknesses we noted in the company's internal control environment, as well as regulatory inquiries by the NY DFS and CA DBO. Since our last review, Ocwen has improved its control environment, and it has reduced the number of high-risk internal audit findings. While we continue to observe high- and medium-risk internal audit findings, the number and criticality of the findings, in our view, is now more consistent with other AVERAGE servicers we rank. In addition, management says the NY DFS and CA DBO continue monitoring Ocwen's operations. Management did not disclose any issues to us regarding the NY DFS or CA DBO. We will continue to monitor any developments from both state regulators.

The NMS Office of Mortgage Settlement Oversight (OMSO) issued an updated compliance report on Ocwen's progress in April 2016 that identified one outstanding metric. Ocwen says it resolved this metric by completing corrective action plans in August 2015 and March 2016. Additionally, the monitor's report noted that Ocwen completed its $2 billion consumer relief obligation under the settlement. Furthermore, Ocwen reported it received a letter from the SEC in February 2016 requesting information relating to fees and expenses charged in connection with liquidated loans and real estate-owned
(REO) properties held in nonagency residential mortgage-backed securities (RMBS) trusts. We will continue to monitor reports from the OMSO and the SEC as additional details are available.

Since our prior review (see "Ocwen Loan Servicing LLC," published Sept. 30, 2015), Ocwen has made these key changes:

Created a risk committee at the board of directors level;
Created an independent review committee of the board of directors to
provide independent review, approval, and oversight of related party
transactions, such as the Altisource vendor relationship;
Added three new outside parties to the Ocwen Financial Corp. (OFC) board
of directors: One was previously a Federal Housing Administration
commissioner, the second previously served as the chief of the
homeownership preservation office at the U.S. Department of the Treasury
(who now acts as the chairwoman of the OFC board), and the third
individual was previously a chief risk officer at an investment banking
Replaced the chief compliance officer (CCO) and several senior-level
management positions reporting to the CCO;
Hired 70 additional compliance staff members and further enhanced key
components of the compliance management system;
Replaced the chief internal auditor position with an existing
industry-experienced internal staff member;
Implemented a new system application to manage the organization, review,
and approval processes of its policies and procedures;
Completed the deployment of a governance, risk, and compliance system and
tool used by all lines of defense to track and manage identified risk
issues across the operations;
Developed a mandatory risk management training program for staff;
Implemented a model governance system and process to manage models in the
origination and servicing operations;
Closed the residential servicing customer contact center in Houston;
Created an initiative to promote diversity and inclusion throughout the
organization and workforce and to focus on its culture;
Enhanced employee engagement efforts through surveys and associated
management action plans;
Implemented electronic signature technology for key loss mitigation
application documents;
Implemented a mobile phone application to enable customers to take photos
and submit loss mitigation application documents;
Implemented a case management software tool for complaint tracking and
management, designed so customer-facing staff can resolve customer issues
more efficiently; and
Replaced the vice president of the collateral-based solutions (short-sale
and deed-in-lieu of foreclosure) department with an industry-experienced
outside staff member.

Our outlooks are stable for all four rankings. We believe Ocwen has strengthened its internal control environment and reduced the number and criticality of internal audit findings, and we believe the first and second lines of defense will continue to season to provide adequate risk management. In our view, Ocwen also continues to invest in staff, training, and technology to further develop its operations. The company's executive and senior management appears focused on the continued improvement of Ocwen's internal controls environment and loan servicing performance.

However, we believe the regulatory outlook for Ocwen is somewhat uncertain as the NY DFS and CA DBO have yet to resolve their monitoring activities. In addition, the NMS monitoring activities will remain through 2017. We will continue to monitor the internal control environment's progress, as well as developments from the aforementioned regulatory and monitoring bodies. We believe new regulatory or investor issues, an increase in internal audit findings, or a degradation of the internal controls environment and service levels provided to borrowers could negatively affect our current rankings or outlooks, and we will take ranking actions as appropriate.

The financial position is SUFFICIENT, and we will add Ocwen to the Select Servicer List.

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