The Securities and Exchange Commission (SEC) has charged Home Loan Servicing Solutions Ltd. (HLSS) for making material misstatements about its handling of related party transactions and the value of its primary asset and for having inadequate internal accounting controls. Cayman Islands-based HLSS agreed to pay a $1.5 million penalty to settle the SEC’s charges and agreed to cease and desist from disclosure and books and record-keeping violations.
According to the SEC’s order instituting a settled administrative proceeding, HLSS misstated its handling of transactions with related parties, including Ocwen Financial Corporation, whose chairman also served as HLSS’s chairman. From 2012-2014, HLSS disclosed that to avoid potential conflicts of interest, it required its chairman to recuse himself from transactions with Ocwen and other related parties. However, the SEC order found that HLSS had no written policies or procedures on recusals for related-party transactions and that its chairman approved many transactions between HLSS and Ocwen.
HLSS misstated its net income in 2012, 2013, and the first quarter of 2014 because the methodology it used to value its primary asset—billions of dollars of rights to mortgage servicing rights (MSRs) that it purchased from Ocwen—did not conform to generally accepted accounting principles (GAAP), the SEC order also found. Although HLSS disclosed that it valued these assets at their fair value, the order found that its actual approach was to assign a value equal to their carrying value, provided the carrying value was within five percent of a third-party’s fair market value estimate. According to the order, HLSS senior management and the HLSS audit committee failed to adequately review whether the valuation methodology complied with GAAP despite internal concerns that the valuation methodology might result in material differences between the carrying value and the third-party’s fair value estimate.
“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 Instruments Unit. “It failed to meet requirements that are fundamental to ensuring that investors receive reliable information, including in matters involving complex assets.”