SEC Settles Charges of "Misstated Financial Results" with Mortgage Service Provider

The SEC settled charges against a mortgage servicing provider for "misstated financial results." The mortgage service provider was charged with failing to value mortgage servicing rights appropriately in violation of Securities Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-1, 13a-11 and 13a-13.

Specifically, the SEC Order determined that the mortgage servicing provider:

• falsely represented to investors that it valued these assets independently at fair value using U.S. Generally Accepted Accounting Principles;
• improperly utilized the valuation performed by a related party, to which it sold the rights to service certain mortgages that continued to be financing liabilities under its accounting;
• did not task its audit committee with reviewing this methodology with company management or its outside auditor, which resulted in a failure to prevent the related party's deviation from fair-value measures; and
• consequently misstated its net income for the last three quarters of 2013 and the first quarter of 2014.

The SEC also determined that the provider failed to maintain written policies on recusals for related party transactions. This resulted in conflicts of interest involving the provider's executive chair, who "played a dual role in many related party transactions."

The provider agreed to pay a $2 million penalty.