New York's Lawsky Catches Mortgage Servicers by Surprise
On a June morning in 2012, New York bank examiners paid surprise visits to the offices of Ocwen Financial Corp. (OCN), the biggest non-bank mortgage servicer.
That break with tradition -- examiners typically set up appointments in advance of inspections -- was ordered by Benjamin Lawsky, superintendent of New York’s Department of Financial Services. A year earlier, Lawsky had approved Ocwen’s purchase of Litton Loan Services on the condition that the new owner fix Litton’s mishandling of foreclosures. Now Lawsky’s examiners in Houston, Texas, and West Palm Beach, Florida, were checking to see if Ocwen had kept its promise.
The examiners “started seeing things immediately,” Lawsky said in an interview. “The company had not lived up to the agreement.”
Lawsky, 43, a former assistant U.S. attorney in the Southern District of New York, said his unannounced probe of Ocwen was “something out of the SDNY playbook.” It’s emblematic of the approach Lawsky has taken to the job he began three years ago, using a newly formed state agency that has influenced the way national regulators do their jobs.
While his purview is confined to New York state, he’s used his leverage over licensing in the country’s financial hub to dictate business practices to global banks, consulting firms and non-bank lenders. Since 2011, Lawsky has threatened to revoke the license of Standard Chartered Plc (STAN) in New York, censured Deloitte Financial Advisory Services LLP and led opposition to an effort by the insurance industry to allow firms to shift reserves to special purpose entities.
“He’s become a national force and expanded that office in ways no one could imagine,” said Neil Barofsky of law firm Jenner & Block and the former inspector general of the Troubled Asset Relief Program. “What he’s done in the last three years is take a regulator that was a sleepy regional office, and now it’s a national player among insurance and banking regulators.”
Lawsky’s expansive use of his powers has sparked opposition. American International Group Inc. filed a lawsuit Thursday in federal court in Manhattan challenging his authority to probe the suspected sale of insurance overseas without a state license.
In the suit, AIG questioned the premise behind a $60 million settlement reached on Monday between MetLife Inc. and the state regulator. AIG’s complaint argued that Lawsky’s enforcement of state law against the American Life Insurance Company, a former AIG subsidiary acquired by MetLife in 2010, was unconstitutional.
“AIG may not want to cooperate with our probe, but they are not above the law, no matter how big or powerful they may be,” Lawsky spokesman Matthew Anderson said. “We will respond in court.”
Lawsky, who grew up in Pittsburgh, was the captain of his high school basketball team. His philosophy as a regulator, he said, is similar to a lesson he learned playing point guard: always find an open spot on the floor.
“We try not to move into areas where there’s a lot of financial regulation,” said Lawsky. “We try to go where there’s a gap, where you have an opening.”
He saw such a void with non-bank loan servicers.
In 2011, the 10 largest mortgage servicers were banks, which are heavily regulated, Lawsky said in a February speech to the New York Bankers Association. Today, four non-bank servicers are in the top 10, and they tend to be “lightly regulated,” Lawsky said.
Ocwen, Nationstar Mortgage LLC and other non-bank servicers have been buying servicing rights as lenders such as Citigroup Inc. and Wells Fargo & Co., facing tighter regulations and profit pressures, retreat from the almost $10 trillion business of collecting mortgage payments and overseeing foreclosures.
“Non-bank servicers see a tremendous business opportunity in this regulatory arbitrage, and are moving quickly to gobble up distressed MSRs,” he said to the bankers. “As regulators, when we see such rapid growth, and when we see regulated institutions boasting that they can perform services at a fraction of their prior cost, it raises red flags.”
At Ocwen, Lawsky’s examiners discovered during their unannounced visit instances where the firm failed to send borrowers a 90-day notice before taking action to repossess the property. They also found examples where Ocwen had begun the foreclosure process on subprime loans without documenting its right to do so, according to a Dec. 5, 2012 consent order with the firm.
“Bank examiners are gentlemen, and they do gentlemen’s hours and make appointments in advance,” said John Coffee, a professor at Columbia University School of Law. “They don’t do surprise visits unless there’s a suspicion.”
Lawsky ordered Ocwen to hire an independent monitor to conduct a comprehensive review of its mortgage servicing practices for the company’s approximately 40,000 loans on residential properties in New York, according to the consent order.
On Feb. 6, Ocwen disclosed that the superintendent had asked it to place its planned acquisition from Wells Fargo & Co. of $39 billion in servicing rights on indefinite hold. Then on Feb. 26, Lawsky sent a letter to Ocwen Chairman William Erbey about possible conflicts of interest involving his ownership stakes in some of the firm’s vendors, drawing on information gathered by the monitor.
“These agreements are fully disclosed in our public filings, and we believe them to be on an arms-length basis,” Katarina Wenk-Bodenmiller, a spokeswoman for Ocwen at Sommerfield Communications, said in an e-mailed statement. “We look forward to addressing the matters raised by NY DFS and will fully cooperate.”
Shares of Ocwen dropped 7 percent to $36.76 on Feb. 26, from the previous day’s close.
A week later on March 5, Lawsky focused on Nationstar, the servicing company owned largely by Fortress Investment Group. (FIG) In a letter to the firm, he noted that the company’s loan business had more than doubled in one year and asked for extensive data on its servicing results, practices and staffing.
On March 5, Nationstar shares dropped 2.5 percent to $30.30, from the previous day’s close.
“We intend to comply fully and transparently with Mr. Lawsky’s request,” Nationstar’s CEO Jay Bray said in a statement.
Bray said Nationstar had helped more than 100,000 of its 2.3 million customers with loan modifications and other workouts last year, and refinanced mortgages for more than 60,000 homeowners in 2013.
“We have a proven track record of helping homeowners succeed and avoid foreclosure,” the CEO said.
Kyle Bass, founder of Hayman Capital Management, which owns a 5 percent stake in Nationstar, criticized Lawsky for sending copies of his letters to the media.
“When a regulator asks for information, and his data request is sent to the press and industry publications on an embargoed basis and he has scheduled an interview on CNBC, what do you think the regulator is trying to do?” he asked.
Lawsky had already been booked for the TV appearance to discuss virtual currencies, Anderson, his spokesman, said.
“Lawsky has caused undue harm to public shareholders and companies alike by going about his job in such a public manner,” Bass said.
Bass said non-banks do a better job than large lenders in servicing loans. In a March 10 report, Compass Point Research & Trading LLC, citing data from the Consumer Financial Protection Bureau, said Ocwen, Nationstar and Walter Investment Management Corp. had fewer customer complaints as a percentage of their delinquent loans than big banks.
Complaints are just one of a variety of factors Lawsky uses to evaluate servicers and their impact on homeowners, Anderson said.
By holding up the Ocwen-Wells Fargo deal, Lawsky might be making matters worse for homeowners in distress, said Kevin Barker, senior equity analyst at Compass Point.
“By inserting himself in the process, he’s potentially held up other deals that could have happened, or made banks hesitant to engage in such transactions.”
Lawsky graduated from Columbia University School of Law in 1995 and later took a position as a trial lawyer with the Justice Department’s civil division in Washington. From 1999 to 2001, he got a taste of politics, serving as chief counsel to New York democratic senator Charles Schumer and the Senate Judiciary Committee. He then shifted to the U.S. Attorney’s office in Manhattan.
In 2007, he went to work for Andrew Cuomo, beginning a four-year collaboration with a rising star in the Democratic Party. Cuomo, who had just been elected Attorney General of New York, hired Lawsky as a special assistant.
He led Cuomo’s investigation of bonus payments made by Merrill Lynch & Co. at the end of 2008, and Merrill’s subsequent acquisition by Bank of America. The investigation resulted in a civil suit against Bank of America and its then-chief executive, Kenneth Lewis. Lewis and the bank settled the matter last month for $25 million without admitting wrongdoing.
When Cuomo ran for governor of New York in 2010, Lawsky joined his campaign as general counsel, and subsequently became his chief of staff. Based on some of the abuses in the financial markets Cuomo had seen as attorney general, he persuaded the legislature in 2011 to combine the state’s departments of banking and insurance into one entity, and nominated Lawsky to head it.
In his three years overseeing the financial industry in New York, Lawsky has developed a reputation for aggressiveness among the banks and insurance firms he supervises, and his fellow regulators, Barofsky, the former inspector general, said.
In August 2012, after negotiations over sanctions violations between Standard Chartered and the U.S. Treasury Department, Federal Reserve, Justice Department and Manhattan District Attorney had been going on for about a year, Lawsky acted pre-emptively.
In an Aug. 6 letter, he threatened to pull Standard Chartered’s license to operate in New York unless the bank could explain at a hearing why it had facilitated $250 billion worth of wire transfers on behalf of Iranian clients over a six-year period without following proper procedures. Disclosure of his action caused the bank’s stock to drop 16 percent in one day.
In a consent order signed Sept. 21, 2012, the bank admitted to the conduct and agreed to pay $340 million to the state of New York. The bank also agreed to hire an independent monitor.
One detail from the Standard Chartered case caught Lawsky’s attention: the role played by Deloitte Financial Advisory Services.
Lawsky determined that Deloitte had acceded to the bank’s request that it remove an internal recommendation advising the bank against executing certain types of wire transfers that would attract regulatory attention, according to a June consent order. He also determined that Deloitte had improperly shared with Standard Chartered confidential supervisory information from its work with other banks, according to the order.
As a result of his findings, Lawsky fined Deloitte $10 million last June and banned it from practicing in front of the Department of Financial Services for one year. Deloitte consented to the findings and pledged to implement reforms.
The Deloitte settlement spurred Congress and bank regulators to review the industry’s reliance on outside consultants, said Barofsky.
“You see national regulators following a New York regulator and traditionally, it would be the other way around,” he said.
Bass, the investor, said Lawsky’s public campaign against mortgage servicers suggests an interest in elective office.
“When you have a regulator acting in that manner, he has political ambitions,” Bass said.
Barofsky said Lawsky, whom he considers a friend, hasn’t acted like someone who is seeking higher office because he appears unafraid of the political consequences of his decisions.
“He’s taken on industry and taken on powerful interests in Washington,” said Barofsky, who has clashed with officials in Washington. “That’s not consistent with someone looking to move up the ranks.”
Lawsky disavowed any ambitions beyond his current position.
“I feel so lucky to have gotten this job,” he said. “Our success is because of a lot of great people working awfully hard.”
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