Altisource Portfolio Solutions is discontinuing a lender-placed insurance brokerage it purchased from Ocwen Financial earlier this year, citing uncertainties with industrywide litigation and the regulatory environment.

Benjamin Lawsky, the superintendent of New York's Department of Financial Services, questioned the move by Ocwen in August, citing concerns about potential conflicts of interest and whether transactions are priced fairly. Ocwen spun off Altisource in 2008.

Former Ocwen executives lead Altisource, and Ocwen's executive chairman William Erbey owns 26% of Altisource. Lawsky's office also has been investigating Ocwen on other fronts, including allegations that it sent thousands of backdated foreclosure warnings to borrowers without giving them adequate time to pay down their balances.

Mortgage companies servicing loans buy lender-placed insurance policies when a borrower is not paying for homeowner's insurance so they can protect the property. The mortgage company's lack of control over the property as compared to the borrower leads insurers to charge notably more for the insurance, but due to abuses some costs have been so high not even the increased risks can justify the cost.

Conflicts of interest involving affiliated businesses and kickbacks have further intensified these concerns and prompted regulatory reform aimed at addressing them.

The Federal Housing Finance Agency banned banks and mortgage servicers earlier this year from accepting commissions on force-placed insurance policies issued by affiliated companies. There also has been a considerable amount of litigation targeting excessive charges and kickbacks in lender-placed insurance.

Homeowners with insurance policies placed via this program will experience no impact to their coverage as a result of this decision, according to Ocwen. The discontinuation of this business line is expected to reduce Altisource's quarterly diluted earnings per share by an estimated 50 to 65 cents for the period Oct. 1, 2014 through Dec. 31, 2015.

"We cannot imagine ASPS is dropping a line of business that appeared to be so significant to EPS just to avoid future litigation…We think OCN is inching closer to a settlement [with Lawsky]," said Sterne AG real estate finance analyst Henry Coffey Jr. in a report Wednesday. Sterne is reducing its $6.25 Altisource EPS estimate for 2015 by more than 35% as a result of the move.

The trading price of Altisource's stock at 12:30 p.m. on Wednesday was down more than 20% on the day at just over $58 per share.

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