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Nov. 2015-Opportunity Knocks

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Th e M Rep o RT | 47 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SERVICING local edition local edition sec charges Home loan servicing solutions for material misstatements related to Ocwen HLSS, purcHaSed by New reSideNtiaL iNveStmeNt tHiS year, agreed to a $1.5 miLLioN SettLemeNt. GEORGIA // The Securities and Exchange Commission announced in October that it charged Home Loan Servicing Solutions (HLSS) for making "material misstate- ments" about handling transactions with related parties, including Atlanta-based Ocwen Financial Corp. The charges also included "inadequate internal accounting controls" within HLSS. According to the SEC, HLSS, which was purchased by New Residential Investment in April, misstated its handling of transac- tions with related parties, includ- ing Ocwen. Other implicated companies by HLSS were not mentioned by the SEC. In February, HLSS was under fire for a similar cause when a Los Angeles law firm announced a new class action lawsuit against the company over its relationship with Ocwen. Glancy Binkow & Goldberg, LLP, alerted HLSS shareholders in early October about the suit, which targets HLSS for not being open about the company's close relation- ship with Ocwen, which suffered from wave after wave of regulatory setbacks in the last year. HLSS said it required William Erbey, chairman of the board and executive chairman of Ocwen to recuse himself from transactions with Ocwen and other parties in order to avoid potential conflicts of interest from 2012 to 2014. The SEC deemed this to be false, finding HLSS had no "written policies or procedures concerning recusals for related party transactions" and the chair- man approved "many transactions between HLSS and Ocwen." In addition, the SEC charges found HLSS misstated its net income in 2012, 2013, and the first quarter of 2014. These misstatements resulted from an internal accounting controls failure that allowed the company to adopt a valuation methodology that did not con- form to U.S. Generally Accepted Accounting Principles. "As a result of its lax internal controls environment, HLSS failed to properly value its primary asset and to make accurate and complete disclosures in its public filings," said Michael J. Osnato, chief of the SEC enforcement division's complex financial in- struments unit. "It failed to meet requirements that are fundamental to ensuring that investors receive reliable information, including in matters involving complex assets." HLSS agreed to pay a $1.5 mil- lion penalty to settle the charges and stop disclosure and books and recordkeeping violations. The company did not immedi- ately respond to a comment request. Ocwen's 'B' rating is affirmed, But Outlook is negative Following layoff announcement S&p'S Negative outLook StemS from aNticipated reveNue LoSSeS aS ocweN dowNSizeS itS ServiciNg portfoLio aNd focuSeS oN origiNatioNS. GEORGIA // Standard and Poor's (S&P) Rating Services recently affirmed its Atlanta- based Ocwen Financial Corp. (OCN) 'B' issuer credit rating and removed the rating from CreditWatch negative. In ad- dition, S&P placed Ocwen's outlook as negative. On April 20, 2015, S&P placed Ocwen's ratings on CreditWatch with negative implications after a disclosure that its auditor may include "going concern" language in the 2014 audit. This language included the commitment on a portion of its nonagency mortgage servicing advance lines was in jeop- ardy, and a change to the servicer's ranking could affect earnings. "Our affirmation reflects the resolution of the 2014 audit opin- ion in May 2015, the refinancing of OCN's largest servicing advance facility in September 2015, and our expectation that our down- grade of Ocwen Loan Servicing's servicer ranking to BELOW AVERAGE will not result in the termination of a meaningful amount of servicer contracts, thus providing some stability to cash flow," S&P stated. S&P's negative outlook for Ocwen stems from the likeli- hood of a loss in revenue be- cause of strategic and operational challenges the company will face as it reduces its unpaid principal balance of servicing assets via sales and run-off and relies on mortgage originations to generate servicing assets—all factors that may impact the servicer's lever- age profile negatively. "The negative outlook reflects the uncertainty surrounding OCN's ability to generate suf- ficient revenue to support debt levels," S&P noted. "We be- lieve that OCN faces increased strategic and operational risks as it reduces its servicing port- folio and grows its residential mortgage origination capabilities to generate servicing assets and supplement fee revenue." Ratings Score Snapshot: • Issuer Credit Rating: B/ Negative/ • Business Risk: Weak • Country Risk: Very Low • Industry Risk: Moderately High • Competitive Position: Weak • Financial Risk: Significant In September, Ocwen reduced its workforce by 10 percent at the Waterloo, Iowa residential servic- ing facility as part of an ongoing cost improvement initiative. The company's move will im- pact nearly 300 of its 2,900 total employees. All affected employ- ees will be able to apply at other Ocwen facilities. "We understand the impact that these decisions have on our employees, their families, and the community," said Ronald Faris, president and CEO of Ocwen. "This was not an easy decision to make, but a necessary one as we look to transform Ocwen to ensure long-term success. We appreciate all the support and dedication our Waterloo employ- ees have shown over the years, and we look forward to remain- ing part of the Waterloo business community." SERVICING

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