The U.S. Securities and Exchange Commission (SEC) charged Home Loan Servicing Solutions Ltd. (HLSS) for making material misstatements regarding the handling of related party transactions and the value of its primary asset and for having inadequate internal accounting controls.

The company has agreed to pay a $1.5 million penalty to settle the SEC’s charges. It has also 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, one of the most prominent being Ocwen Financial Corp. (NYSE: OCN), whose chairman also served as HLSS’s chairman. Ocwen has been under fire for the past year regarding its mishandling of clients’ mortgages.

From 2012 to 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.

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Michael J. Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, commented on the situation:

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. It failed to meet requirements that are fundamental to ensuring that investors receive reliable information, including in matters involving complex assets.

The SEC also detailed in its release:

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 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.

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