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NOTE
29
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COMMITMENTS
AND CONTINGENCIES
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Litigation
Contingencies
In
September 2006, the Bankruptcy Trustee in Chapter 7
proceedings involving American Business Financial Services,
Inc. (ABFS) brought an action against multiple defendants,
including Ocwen, in Bankruptcy Court. The action arises out
of Debtor-in-Possession financing to ABFS by defendant
Greenwich Capital Financial Products, Inc. and the subsequent
purchases by Ocwen of MSRs and certain residual interests in
mortgage-backed securities previously held by ABFS. The
Trustee filed an amended complaint in March 2007 alleging
various claims against Ocwen including turnover, fraudulent
transfers, accounting, breach of fiduciary duty, aiding and
abetting breach of fiduciary duty, breach of contract, fraud,
civil conspiracy and conversion. The Trustee seeks
compensatory damages in excess of $100,000 and punitive
damages jointly and severally against all defendants. In
April 2008, Ocwen filed an answer denying all charges and a
counterclaim for breach of contract, fraud, negligent
misrepresentation and indemnification in connection with the
MSR purchase transaction. On August 30, 2012, the Bankruptcy
Court entered an order granting Ocwen’s motion for
partial summary judgment and denying the Trustee’s
motion for partial summary judgment. This order effectively
rejects the bulk of the Trustee’s damage claims against
Ocwen. In light of this order, the parties entered into a
definitive written settlement agreement that provides for a
final resolution and termination of this matter. This
settlement, which is subject to the approval of the
Bankruptcy Court, will not have a material effect on our
financial condition, results of operations or cash
flows.
We are
subject to various other pending legal proceedings, including
those subject to loss sharing and
indemnification provisions of our various
acquisitions. In our opinion, the resolution of those
proceedings will not have a material effect on our financial
condition, results of operations or cash flows.
Tax
Matters
India
tax authorities issued income tax assessment orders with
respect to assessment years 2006 - 2007 and 2007 - 2008. The
proposed adjustments would impose upon OFSPL additional tax
and interest of INR 156,718 ($2,809), and penalties may be
assessed. Ocwen and OFSPL intend to vigorously
contest the assessments and do not believe they have
violated any statutory provision or rule. OFSPL has
submitted appeals in both cases to the India Income Tax
Appellate Tribunal and petitioned for Competent Authority
assistance under the Mutual Agreement Procedures of the
U.S./India income tax treaty. OFSPL has furnished bank
guarantees of INR 205,473 ($3,684) related to transfer
pricing matters, paid INR 7,647 ($137) towards non-transfer
pricing issues and obtained abeyance on the demand of INR
4,376 ($78) relating to non-transfer pricing matters.
Due to uncertainties inherent in the appeals processes, Ocwen
and OFSPL cannot currently estimate any additional exposure
beyond the amount currently assessed and cannot predict when
these tax matters will be resolved. Competent Authority
relief should preserve Ocwen’s right to offset any
potential increase in India tax against Ocwen’s U.S.
taxes.
Regulatory
Contingencies
We are
subject to a number of pending federal and state regulatory
investigations, examinations, inquiries, requests for
information and/or other actions. In July 2010, OLS received
two subpoenas from the Federal Housing Finance Agency as
conservator for Freddie Mac and Fannie Mae in connection with
ten private label mortgage securitization transactions where
Freddie Mac and Fannie Mae have invested. The transactions
include mortgage loans serviced but not originated by OLS or
its affiliates. On November 24, 2010, OLS received a Civil
Investigative Demand (CID) from the FTC requesting documents
and information regarding various servicing activities. On
June 6, 2012, the FTC notified OLS that it had referred this
CID to the CFPB. On November 7, 2011, OLS received a CID from
the Attorney General’s Office of the Commonwealth of
Massachusetts requesting documents and information regarding
certain foreclosures executed in Massachusetts. On January
18, 2012, OLS received a subpoena from the New York
Department of Financial Services (NY DFS) requesting
documents regarding OLS’ policies, procedures and
practices regarding lender-placed or
“force-placed” insurance which is required to be
provided for borrowers who allow their hazard insurance
policies to lapse. Separately, on December 5, 2012, we
entered into a Consent Order with the NY DFS in which we
agreed to the appointment of an independent Monitor to
oversee our compliance with the Agreement on Servicing
Practices. A process is underway
with respect to the selection and appointment of a Monitor by
the NY DFS, and we intend to continue to cooperate with
respect thereto. On August 13, 2012, OLS received a
request from the Multi-State Mortgage Committee of the
Conference of State Bank Supervisors (MMC) to provide
information and data relating to our loan servicing
portfolio, including loan count and volume data, loan
modifications, fees assessed, delinquencies, short sales,
loan-to-value data and rating agency reports. The MMC, along
with the CFPB, certain state Attorneys General and other agencies who were involved in
the National Mortgage Settlement executed on February 9, 2012
by the five large banks, also requested that we
indicate our position on behalf of OLS and Litton on the
servicing standards and consumer relief provisions contained
in that settlement.
We are
cooperating with and providing
requested information to each of the agencies involved
in the foregoing actions. Specifically in response to the
request from the MMC, CFPB, state Attorneys Generaland other agencies, we indicated
our willingness to adopt the servicing standards set out in
the National Mortgage Settlement with certain caveats. We
further indicated our willingness to undertake various consumer
assistance commitments in the form
of loan modifications and other foreclosure avoidance
alternatives. On February 26, 2013, the MMC, CFPB and
state Attorneys General requested that we consider a proposal
to contribute to a consumer relief fund that would provide
cash payments to borrowers foreclosed upon by OLS and various
entities we have acquired. We believe the maximum liability
under this proposal would be approximately $135 million. We
do not believe such a contribution from us is warranted under
the circumstances and have so notified the requesting
parties. It is reasonably possible that legal proceedings
could ensue with regard to this matter and, if so, we will
defend vigorously. At this time, the amounts, if any, that
ultimately could be incurred with regard to this matter are
not reasonably estimable.
On
November 30, 2012, prior to our completion of the Homeward
Acquisition, two CIDs were issued to Homeward Residential,
Inc. (HRI) by the U.S. Department of Justice, Eastern
District of Texas, as part of an investigation of whether HRI
violated the False Claims Act in connection with its
participation in the Home Affordable Mortgage Program (HAMP).
We were advised by HRI that documents and information have
been provided pursuant to these CIDs. The investigation
remains open, and we intend to cooperate in the event there
are further informational requests.
As
part of the ResCap Acquisition, OLS will be required to
service the ResCap loans in accordance with the requirements
of the National Mortgage Settlement, although OLS is not
responsible for any payment,
penalty or financial obligation, including but not limited
to providing Ally’s share of financial relief to
borrowers under that settlement. The Office of Mortgage
Settlement Oversight, which is responsible for monitoring
compliance with obligations under the National Mortgage
Settlement, issued a report on February 14, 2013 confirming
that Ally/ResCap have completed its minimum consumer relief
obligations.
One or
more of the foregoing regulatory actions or similar actions
in the future against Ocwen, OLS, Litton or Homeward could
cause us to incur fines, penalties, settlement costs,
damages, legal fees or other charges in material amounts, or
undertake remedial actions pursuant to administrative orders
or court-issued injunctions, any of which could adversely
affect our financial results or incur additional significant
costs related to our loan servicing operations.
In
addition to these matters, Ocwen receives periodic inquires,
both formal and informal in nature, from various state and
federal agencies as part of those agencies’ oversight
of the mortgage servicing sector. Such ongoing inquiries,
including those into servicer foreclosure processes, could
result in additional actions by state or federal governmental
bodies, regulators or the courts that could result in an
extension of foreclosure timelines, which may be applicable
generally to the servicing industry or to us in particular.
In addition, a number of our match funded advance facilities
contain provisions that limit the eligibility of advances to
be financed based on the length of time that advances are
outstanding, and two of our match funded advance facilities
have provisions that limit new borrowings if average
foreclosure timelines extend beyond a certain time period,
either of which, if such provisions applied, could adversely
affect liquidity by reducing our average effective advance
rate. Increases in the amount of advances and the length of
time to recover advances, fines or increases in operating
expenses, and decreases in the advance rate and availability
of financing for advances would lead to increased borrowings,
reduced cash and higher interest expense which could
negatively impact our liquidity and profitability.
Loan
Put-Back and Related Contingencies
Ocwen
has been a party to loan sales and securitizations dating
back to the 1990s. The majority of securities issued in
these transactions have been retired and are not subject to
put-back risk. There is one remaining securitization with an
original UPB of approximately $200,000 where Ocwen provided
representations and warranties and the loans were originated
in the last decade. Ocwen performed due diligence on
each of the loans included in this securitization. The
outstanding UPB of this securitization was $41,240 at
December 31, 2012, and the outstanding balance of the notes
was $41,132. Ocwen is not aware of any inquiries or claims
regarding loan put-backs for any transaction where we made
representations and warranties. We do not expect loan
put-backs, if any, in these transactions to result in any
material change to our financial position, operating results
or liquidity.
Homeward’s
contracts with purchasers of originated loans contain
provisions that require indemnification or repurchase of the
related loans under certain circumstances. Additionally, in
one of the servicing contracts that Homeward acquired in 2008
from Freddie Mac involving non-prime mortgage loans, it
assumed the origination representations and warranties even
though it did not originate the loans. While the language in
the purchase contracts vary, they contain provisions that
require Homeward to indemnify purchasers of related loans or
repurchase such loans if:
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representations
and warranties concerning loan quality, contents of the
loan file or loan
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underwriting
circumstances are inaccurate;
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adequate
mortgage insurance is not secured within a certain period
after closing;
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a
mortgage insurance provider denies coverage; or
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there is
a failure to comply, at the individual loan level or
otherwise, with regulatory requirements.
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We
believe that, as a result of the current market environment,
many purchasers of residential mortgage loans are
particularly aware of the conditions under which originators
must indemnify or repurchase loans and under which such
purchasers would benefit from enforcing any indemnification
rights and repurchase remedies they may have.
As our
lending business grows, we expect that our exposure to
indemnification risks and repurchase requests is likely to
increase. If home values continue to decrease, our realized
loan losses from loan repurchases and indemnifications may
increase as well. As a result, our reserve for repurchases
may increase beyond our current expectations. If we are
required to indemnify or repurchase loans that we originate
and sell, and where we have assumed this risk on loans that
we service, as discussed above, in either case resulting in
losses that exceed our related reserve, our business,
financial condition and results of operations could be
adversely affected.
In
several recent court actions, mortgage loan sellers against
whom repurchase claims have been asserted based on alleged
breaches of representations and warranties are defending on
various grounds including the expiration of statutes of
limitation, lack of notice and opportunity to cure and
vitiation of the obligation to repurchase as a result of
foreclosure or charge off of the loan. Ocwen is not a party
to any of the actions, but we are the servicer for certain
securitizations involved in such actions. Should Ocwen be
made a party to these or similar actions, we may need to
defend allegations that we failed to service loans in
accordance with applicable agreements and that such failures
prejudiced the rights of repurchase claimants against loan
sellers. We believe that any such allegations would be
without merit and, if necessary, would vigorously defend
against them. If, however, we were required to compensate
claimants for losses related to seller breaches of
representations and warranties in respect of loans we
service, then our business, financial condition and results
of operations could be adversely affected.
Lease
Commitments
We
lease certain of our premises and equipment under
non-cancelable operating leases with terms expiring through
2018 exclusive of renewal option periods. Our annual
aggregate minimum rental commitments under these leases are
summarized as follows:
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2013
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$
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13,521
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2014
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13,497
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2015
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13,351
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2016
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13,085
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2017
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6,235
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Thereafter
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4,400
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Total minimum lease payments
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$
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64,089
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We
assumed the obligation for the lease agreements associated
with HomEq Servicing, Litton and Homeward facilities. The
rental commitments in the table above for operating leases
include the remaining amounts due through the earlier of the
lease expiration date or the early termination date. During
2012, we negotiated a buyout of one of the two HomEq leases
and renewed one of the two Litton leases on a temporary
basis. The Homeward facility leases expire on various dates
through 2018.
In
December 2010, we entered into an agreement with Altisource
to sublease of 2,094 square feet of space as our principal
executive office in Atlanta, Georgia. Under the terms of the
agreement, Ocwen is responsible for monthly base rent of $3
plus a proportionate amount of maintenance costs and other
shared services. The sublease is in effect through October
2014.
We
converted rental commitments for our facilities outside the
U.S. to U.S. dollars using exchange rates in effect at
December 31, 2012. Rent expense for 2012, 2011and 2010 was
$14,666, $5,578 and $12,315, respectively.
Genworth
Acquisition
On
October 26, 2012, Ocwen and Genworth Financial, Inc. (NYSE:
GNW) entered into an agreement whereby Ocwen will acquire
Genworth Financial Home Equity Access, Inc. for approximately
$22 million in cash. The company, which will be renamed
Liberty Home Equity Solutions, Inc., is the number one
reverse mortgage originator based on September 2012 industry
data with strong positions in both retail and wholesale
originations. We expect the acquisition to close on April 1,
2013.
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