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Similar to the $25 billion mortgage settlement announced in 2012, the nation’s largest non-bank mortgage servicer, Ocwen Financial Corp. (OCN - Analyst Report) announced a settlement with the Consumer Financial Protection Bureau (CFPB) and other regulators, along with 49 states and the District of Columbia.

The settlement pertains to resolution of the alleged charges against the company’s handling of mortgages. However, Oklahoma is not a part of the settlement. Ocwen will pay nearly $2.1 billion in relief to distressed homeowners.

Of the total amount, Ocwen will utilize roughly $2 billion in offering principal reduction programs to underwater and delinquent borrowers over the next three years. Being just a mortgage servicer, the company collects payments from borrowers and offers customer services on behalf of loan originators. Hence, it will incur only operating expenses for arranging principal reductions.

The balance of $127.5 million will be paid to a consumer relief fund to be disbursed to eligible distressed borrowers by the independent monitoring body. The money will be provided to those who lost their homes between 2009 and 2012 and whose mortgages were serviced by Ocwen, Homeward Residential Holdings or Litton Loan Servicing. The company had acquired Litton Loan Servicing in 2011 and Homeward Residential in 2012.

Notably, Ocwen will pay $66.9 million to the above-mentioned fund, while the remaining amount will be paid by the previous owners of servicing portfolios, which were acquired and integrated to Ocwen’s servicing platform. Further, the company had created a reserve of $66.4 million in the second quarter of 2013 for the same.

Going by the allegations, Ocwen used deceptive and unfair means while working with borrowers who were delinquent and underwater. The company was accused of misrepresenting facts while filing foreclosure documents, charging unjustified fees for default-related services and forcing borrowers to buy unnecessary insurance policies, among others.

The terms of the settlement are similar to the 2012 mortgage settlement announced between Bank of America Corp. (BAC - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report), Wells Fargo & Co. (WFC - Analyst Report), Ally Financial Inc. and Citigroup Inc. (C - Analyst Report) and 49 states as well as other mortgage regulators. Ocwen is required to inform distressed homeowners about the various options available to prevent foreclosures. Moreover, the company will have to wait for 60 days after acquiring a loan before it can proceed with foreclosure process.

The settlement now awaits consent of the US District Court of the District of Columbia. Ocwen will also have to follow explicit guidelines on servicing mortgages and its progress will be overseen by Joseph Smith Jr – the same person who monitors the 2012 settlement.

We believe as Ocwen is fully prepared to meet additional expenses related to the settlement, there will not be significant rise in operating expenses going forward.

Currently, Ocwen carries a Zacks Rank #5 (Strong Sell).

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