Consumer activists say the Department of Veterans Affairs should not have awarded a lucrative contract to Ocwen Financial Corp., a subprime servicer that has been accused of predatory practices.
In an interview, John Taylor, the chief executive of the National Community Reinvestment Coalition, also said the Office of Thrift Supervision, which oversees Ocwen's main subsidiary, and the Department of Housing and Urban Development, which has sanctioned Ocwen three times in the past three years, should have informed the VA about complaints against Ocwen.
For its part, the West Palm Beach, Fla., company says its servicing practices are not only legal but exemplary, and that customer complaints are, in the words of its general counsel, a "fact of life in our business."
In an e-mail, the counsel, Paul Koches, wrote that given the size of its business - at midyear it was servicing more than 337,000 loans totaling $33.5 billion - "the number of accumulated complaints might appear to be significant in absolute terms when in reality it represents but a small fraction" of customers.
He added that in the subprime business, servicers often inherit problems created by originators.
"Too many borrowers are misled into loans … they cannot sustain, yet by the time the borrowers realize they are unable to make their payments, it is the servicer who is left to attempt to rectify the problem," Mr. Koches wrote.
Ocwen announced its win of the VA deal - an 11-month, renewable contract to resell the agency's foreclosed properties - in September. It estimated the revenue from the deal at $95 million to $125 million.
"It's embarrassing for the [Bush] administration," said Mr. Taylor, whose Washington nonprofit is considering litigation against Ocwen next year.
"It shows a lack of communication," Mr. Taylor said. "Obviously the OTS and HUD needed to communicate with another department. Why would you want, when you have a repeated history of problems, to expose VA housing to a potential predator?"
In his e-mail Mr. Koches said that to win the VA contract Ocwen had to "satisfy exacting quality requirements" and show that it could "save the federal government at least $10 million," cut the VA's costs by at least 10%, or both.
But Mr. Taylor said "there should be a standard when there is a repeat offender that they don't get those contracts. That is one of the leverage tools government has."
A spokesman for the VA said that it "checked to see if Ocwen had past performance deficiencies recorded with other federal agencies or any departments, and no negative past performances were documented from HUD or any other agency."
He said the VA is "bound by federal acquisition regulations to specific criteria and found nothing to determine Ocwen 'non-responsible' in accordance with these regulations. We are not aware that HUD has any restrictions on Ocwen in its programs."
HUD suspended Ocwen's license to originate loans for the Title I program three times in the last three years, according to a spokesman for the department, Jereon Brown.
The regulator also extracted a $50,000 settlement from Ocwen in late 2000 for having failed to address complaints on defaulted loans HUD had sold it in 1997, Mr. Brown said.
As for communication with other agencies, he said: "HUD publishes the actions in cases like this in the Federal Register, as is required. Most agencies regularly receive hard copies of the Federal Register and of course it is available online or via Nexis."
Kweku Hanson, a Connecticut attorney who is suing Ocwen in federal court, provided American Banker with documentation of seven complaints to the Federal Trade Commission about Ocwen between 1998 and 2003.
Consumers told the FTC that Ocwen threatened foreclosure and charged late fees even when they had paid on time, forced placement of unnecessary insurance, and charged other unnecessary and unexplained fees, the documents show.
Judy Pepper, the president of Better Business Bureau of Central Florida Inc. in Orlando, said it has received 146 complaints against Ocwen this year, many of which had to do with fee overcharges. There were 42 complaints against it last year and nine in 2001, she said.
Ms. Pepper said that her organization rates Ocwen "unsatisfactory" because, among other problems, consumers have reported "inability to reach the same person at the company in order to discuss their concerns" and "rude employees."
The bureau notified the OTS last year, Ms. Pepper said. "We were told that the company is not granting loans, but is servicing them," she said. "Our understanding was that nothing was forbidding [Ocwen] from making certain charges for consumers. They may be under some different conditions that apply to how they operate their business."
Kevin Petrasic, a spokesman for the OTS, would not discuss the matter except to say he was "not aware" of any complaints from the Better Business Bureau and that the bureau should have forwarded them to his agency.
"That's the way things operate among the banking agencies," Mr. Petrasic said. "They don't need for us to ask."
Mr. Koches acknowledged that "inadvertent errors occur from time to time," and that Ocwen is aware that the OTS has received "consumer inquiries" forwarded by other agencies, including the FTC.
He said Ocwen makes "every effort to respond … within five days" and for the most part resolves matters "to everyone's satisfaction."
The company has "dedicated resources and staff who work with customers and research and resolve problems … in a timely fashion."
Some of the same law firms that sued Fairbanks Capital Corp., the Salt Lake City subprime servicer, have recently filed class actions alleging similar abuses by Ocwen. Last month Fairbanks settled the class actions and a joint federal investigation for $40 million.
Unlike Fairbanks, Ocwen is in relatively good standing with the rating agencies.
Fitch last week affirmed its ratings of Ocwen at RPS2 as a primary servicer, and RSS2 as a special servicer. Both are Fitch's fourth-highest designations. It kept these ratings on its watch list with negative implications pending the outcome of the class actions.
Kathleen Tillwitz, a Fitch analyst, said Ocwen is faring better than Fairbanks - which her agency and others downgraded this year - because Ocwen "has the Office of Thrift Supervision constantly looking at it, and Fairbanks didn't have anyone looking at them."
"All of the disputes and lawsuits are reported to the OTS, and monitored monthly by the OTS," Ms. Tillwitz said. In addition, she said, a number of the class actions have been filed only recently, forcing her rating agency to take a wait-and-see approach until the courts hand down decisions.
Nonetheless, Ms. Tillwitz said, the litigation is particularly dangerous to Ocwen because it has had financial trouble the past few years, though it recently turned a profit.
In an earlier e-mail Mr. Koches noted that "in March of this year Fitch upgraded our corporate rating to 'stable.' Suffice it to say we are confident in our financial condition."
