SEC said to probe mortgage servicing fees tied to bad debt

The Securities and Exchange Commission is looking at whether mortgage servicers are boosting profits by prematurely unleashing debt collectors on delinquent home equity borrowers, a person with direct knowledge of the matter said.

The probe is focusing on servicers that are not owned by banks, including Ocwen Financial Corp., the person said. It is part of the investigation that Ocwen disclosed last month, when it said that the SEC was looking at fees and expenses tied to liquidated loans.

Mortgage servicers get paid to process home loan payments from borrowers. When loans go bad, the firms can write them off and send them to outside collectors.

One of the questions the SEC is probing is whether borrowers are getting enough time to make good on their home equity loans once they fall behind, the person said. A servicer may be entitled to a receive a percentage of whatever outside collectors recover, which may be higher than the usual fees it would receive, the person said. Sending loans to collectors prematurely may also cut a servicer’s costs.

These collections practices may hurt the bond holders and banks that own the home loans by cutting into their income from the mortgages.

Ocwen and Nationstar Mortgage Holdings Inc. are the two biggest servicers that are not banks. Their industry has grown rapidly after financial reform laws spurred big banks to shrink parts of their subprime mortgage businesses, leaving an opportunity for companies like to acquire assets. With that growth has come greater scrutiny. Federal and state authorities have previously looked at Ocwen for issues including mishandling foreclosures.

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