Note 1 – Organization, Business Environment and Basis of Presentation

Organization

Ocwen Financial Corporation (NYSE: OCN) (Ocwen, we, us and our) is a financial services holding company which, through its subsidiaries, originates and services loans. We are headquartered in West Palm Beach, Florida with offices located throughout the United States (U.S.) and in the United States Virgin Islands (USVI) and with operations located in India and the Philippines. Ocwen is a Florida corporation organized in February 1988.

Ocwen owns all of the common stock of its primary operating subsidiary, Ocwen Mortgage Servicing, Inc. (OMS), and directly or indirectly owns all of the outstanding stock of its other primary operating subsidiaries: Ocwen Loan Servicing, LLC (OLS), Ocwen Financial Solutions Private Limited (OFSPL), Homeward Residential, Inc. (Homeward) and Liberty Home Equity Solutions, Inc. (Liberty).

We perform primary and master servicer activities on behalf of investors and other servicers, including the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the GSEs), the Government National Mortgage Association (Ginnie Mae) and private-label securitizations (non-Agency). As primary servicer, we may be required to make certain payments of property taxes and insurance premiums, default and property maintenance payments, as well as advances of principal and interest payments before collecting them from borrowers. As master servicer, we collect mortgage payments from primary servicers and distribute the funds to investors in the mortgage-backed securities. To the extent the primary servicer does not advance the scheduled principal and interest, as master servicer we are responsible for advancing the shortfall, subject to certain limitations.

We originate, purchase, sell and securitize conventional (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency loans) and government-insured (Federal Housing Administration (FHA) or Department of Veterans Affairs (VA)) forward and reverse mortgages. The GSEs or Ginnie Mae guarantee these mortgage securitizations.

We had a total of approximately 9,400 employees at March 31, 2017 of which approximately 6,000 were located in India and approximately 800 were based in the Philippines. Our operations in India and the Philippines provide internal support services, principally to our loan servicing business as well as to our corporate functions. Of our foreign-based employees, nearly 80% were engaged in supporting our loan servicing operations as of March 31, 2017.

Business Environment

We are facing certain challenges and uncertainties that could have significant adverse effects on our business, financial condition, liquidity and results of operations. The ability of management to appropriately address these challenges and uncertainties in a timely manner is critical to our ability to successfully operate and grow our business.

In the current regulatory environment, we have faced and expect to continue to face, heightened regulatory and public scrutiny as an organization as well as stricter and more comprehensive regulation of the entire mortgage sector. Significant recent regulatory developments impacting our business include the following:

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On February 17, 2017, we entered into three consent orders (collectively, the 2017 CA Consent Order) with the California Department of Business Oversight (CA DBO) that terminated a 2015 consent order with the CA DBO, including terminating the engagement of an independent third-party auditor (the CA Auditor) and rescinding the prohibition on Ocwen acquiring mortgage servicing rights (MSRs) for loans secured in California.


•	On March 27, 2017, we entered into a consent order with the New York Department of Financial Services (NY DFS) that provided for the termination of the engagement of the third-party operations monitor and for a determination on whether the restrictions on acquisition of MSRs should be eased following completion of a scheduled servicing examination.

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On April 20, 2017, the Consumer Financial Protection Bureau (CFPB) filed a lawsuit in the federal district court for the Southern District of Florida against Ocwen, OMS and OLS alleging violations of federal consumer financial laws relating to our servicing business. The CFPB does not claim specific monetary damages, although it does seek consumer relief, disgorgement of allegedly improper gains and civil money penalties. We believe we have factual and legal defenses to the CFPB’s allegations and intend to vigorously defend ourselves. We have asked the federal court to consider making an early ruling that the CFPB is unconstitutional and the enforcement action should be dismissed for that reason. We also informed the district court that the Department of Justice recently stated its official conclusion that the CFPB is unconstitutionally structured, and so we asked the district court to invite the Department to participate in the legal briefing in our case.

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On April 20, 2017, the Florida Attorney General filed a lawsuit in the federal district court for the Southern District of Florida against Ocwen, OMS and OLS alleging violations of federal and state consumer financial laws relating to our servicing business. On April 28, 2017, the Massachusetts Attorney General filed an action against OLS in the Superior Court for the Commonwealth of Massachusetts alleging violations of state consumer financial laws relating to our servicing business. Ocwen strongly disputes the claims of these Attorneys General and intends to vigorously defend itself in these actions.

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Since April 20, 2017, thirty state mortgage and banking regulatory agencies have taken regulatory action against us alleging breaches of various laws, regulations and licensing requirements, including those related to escrow administration and proper licensing of business activities. We intend to vigorously defend against unfounded claims while continuing to work with these regulatory agencies to resolve their concerns. We have agreed with certain regulatory agencies, where necessary, to obtain delays or exceptions to the orders. Additionally, we have revised our operations, where necessary, so as to comply with the orders in the interim period while we attempt to negotiate resolutions. For example, in certain states we are arranging to release servicing on new originations, and we have paused our origination activities in two states. We have also paused foreclosure activity in two states, which currently impacts less than 150 mortgage loans. While we do not currently believe these limitations on our loan origination or servicing activities will have a material impact on our financial results if we can resolve these agencies’ concerns on a timely basis, we do expect our loan origination volumes to decline until such time as we reach resolution. If we are unable to obtain timely resolutions in certain states, more serious consequences could result. For example, we could be required to transfer all of our mortgage servicing in Massachusetts and we could be required to cease mortgage servicing in Rhode Island.

To the extent we are unable to reach a timely resolution with some or all of the state regulatory agencies or attorneys general or should the number or scope of the regulatory actions against us increase or expand, our business, reputation, financial condition, liquidity and results of operations could be adversely affected. See Note 17 – Regulatory Requirements and Note 19 – Contingencies for further information regarding regulatory requirements, regulatory settlements and regulatory-related contingencies.

Among other impacts, the regulatory actions taken by the CFPB and the state mortgage regulators and attorneys general were a catalyst for actions taken by the rating agencies with respect to our corporate credit ratings and our servicer ratings or rankings (collectively, servicer ratings). Between April 20 and April 25, 2017, each of Standard & Poor’s Rating Services (S&P), Moody’s Investors Services, Inc. (Moody’s), Fitch Ratings Inc. (Fitch), Morningstar, Inc. (Morningstar) and Kroll Bond Rating Agency (Kroll) took action with respect to our corporate credit ratings and servicer ratings as follows:


•	S&P, Fitch and Kroll downgraded our corporate credit rating and S&P, Moody’s, Fitch and Kroll changed the outlook for our corporate credit rating to on CreditWatch with Negative implications, on Review for Downgrade, on Rating Watch Negative and on Watch Downgrade status, respectively.


•	Moody’s, Fitch and Morningstar changed the outlook for our servicer ratings to on Review for Downgrade, to Negative and to On Alert, respectively. No changes were made to our actual servicer ratings. See Note 8 – Mortgage Servicing for further information.

These and any additional actions by rating agencies could have a material adverse impact on our business, financial condition and liquidity, including through adverse changes to the terms on which we may be able to fund our operations or borrow money or through adverse impacts on our dealings with counterparties and regulators, including our status as an approved seller/servicer with the GSEs. We are required under our agreements with New Residential Investment Corp. (NRZ) to maintain certain primary servicer ratings with S&P or Moody’s. See Note 4 — Sales of Advances and MSRs for additional information.

We incurred a net loss in first quarter of 2017, which followed losses in each of the last three fiscal years. While these losses have eroded stockholders’ equity and weakened our financial condition, it is important to note that we generated positive operating cash flow in each of these periods. We are reinvesting cash flows generated by our Servicing business to grow not only our residential mortgage lending business but also to grow other new business lines such as our Automotive Capital Services (ACS) business to diversify our income profile and drive improved financial performance over time. We believe asset generation, through our lending businesses, will be Ocwen’s primary driver of growth for the future. We are also focused on improving our operations to enhance customer experiences and improve operating effectiveness, both of which we believe will drive stronger financial performance through lower overall costs and improved customer retention.

With regard to the current maturities of our borrowings, we have approximately $1.1 billion of debt coming due in the next 12 months, related to our servicing match funded liabilities and our mortgage loan warehouse facilities. Portions of our match funded liabilities and all of our mortgage loan warehouse facilities have 364-day terms consistent with market practice. We have historically renewed these facilities on or before their expiration in the ordinary course of financing our business. We expect to renew, replace or extend all such borrowings to the extent necessary to finance our business on or prior to their respective maturities consistent with our historical experience.

Our debt agreements contain various qualitative and quantitative events of default provisions that include, among other things, noncompliance with covenants, breach of representations, or the occurrence of a material adverse change. Provisions of this type are commonly found in debt agreements such as ours. Certain of these provisions are open to subjective interpretation and, if our interpretation were contested by a lender, a court may ultimately be required to determine compliance or lack thereof. If a lender were to allege an event of default, whether as a result of recent events or otherwise, and we are unable to avoid, remedy or secure a waiver, we could be subject to adverse action by our lenders, including acceleration of outstanding obligations, enforcement of liens against the assets securing or otherwise supporting our obligations and other legal remedies, any of which could have a material adverse impact on us. See Note 11 – Borrowings for additional information.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions of the Securities and Exchange Commission (SEC) to Form 10-Q and SEC Regulation S-X, Article 10, Rule 10-01 for interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements. In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The results of operations and other data for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2017. The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2016.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions include, but are not limited to, those that relate to fair value measurements, the amortization of mortgage servicing rights, income taxes, the provision for potential losses that may arise from litigation proceedings, representation and warranty and other indemnification obligations, and our going concern evaluation. In developing estimates and assumptions, management uses all available information; however, actual results could materially differ from those estimates and assumptions.

Reclassifications

As a result of our adoption on January 1, 2017 of FASB Accounting Standards Update (ASU) 2016-09, Compensation - Stock Compensation: Improvements to Accounting for Employee Share-Based Payments, excess tax benefits have been classified along with other income tax cash flows as an operating activity in our unaudited consolidated statements of cash flows, rather than being separated from other income tax cash flows and classified as a financing activity. Additionally, cash paid by Ocwen when directly withholding shares for tax-withholding purposes has been classified as a financing activity in our unaudited consolidated statements of cash flows, rather than being classified as an operating activity.

Certain amounts in the unaudited consolidated statement of cash flows for the three months ended March 31, 2016 have been reclassified to conform to the current year presentation as follows:


•	Within the operating activities section, we reclassified Net gain on valuation of mortgage loans held for investment and HMBS-related borrowings from Other to a new separate line item. In addition, we reclassified amounts related to reverse mortgages from Gain on loans held for sale, net to Other.


•	Within the financing activities section, we reclassified Proceeds from exercise of stock options to Other.

These reclassifications had no impact on our consolidated cash flows from operating, investing or financing activities.

Within the total assets section of the unaudited consolidated balance sheet at December 31, 2016, we reclassified Deferred tax assets, net to Other assets.

Recently Adopted Accounting Standard

Compensation - Stock Compensation: Improvements to Employee Shared-Based Payment Accounting (ASU 2016-09)

In addition to the reclassification matters discussed above, ASU 2016-09 requires excess tax benefits associated with employee share-based payments to be recognized through the income statement, regardless of whether the benefit reduces income taxes payable in the current period. Prior to our adoption of this standard, excess tax benefits were recognized in additional paid-in capital and were not recognized until the deduction reduced income taxes payable. Additionally, concurrent with our adoption of ASU 2016-09, we made an accounting policy election to account for forfeitures when they occur, rather than estimating the number of awards that are expected to vest, as we had done prior to our adoption of this standard. Amendments requiring recognition of excess tax benefits in the income statement were adopted prospectively. Amendments related to the timing of when excess tax benefits are recognized and forfeitures were adopted using a modified retrospective transition method by means of cumulative-effect adjustments to equity as of January 1, 2017.

For the timing of the recognition of excess tax benefits, the cumulative-effect adjustment was to recognize an increase in retained earnings of $5.0 million and a deferred tax asset for the same amount. However, because we have determined that our US and USVI deferred tax assets are not considered to be more likely than not realizable, we established an offsetting full valuation allowance on the deferred tax asset through a reduction in retained earnings.

For the change in accounting for forfeitures, we recognized a cumulative-effect adjustment through a reduction of $0.3 million in retained earnings and an increase in additional paid-in capital for the same amount. We also recognized the tax effect of this adjustment through an increase in retained earnings of $0.1 million and a deferred tax asset for the same amount. However, we also fully reserved the resulting deferred tax asset as an offsetting reduction in retained earnings.

Recently Issued Accounting Standards

Business Combinations: Clarifying the Definition of a Business (ASU 2017-01)

In January 2017, the FASB issued ASU 2017-01 to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This standard provides a more robust framework to use in determining when a set of assets and activities is a business and also provides more consistency in applying the guidance, reduces the costs of application, and makes the definition of a business more operable. This standard will be effective for us on January 1, 2018. We do not anticipate that our adoption of this standard will have a material impact on our consolidated financial statements.

Receivables: Nonrefundable Fees and Other Costs (ASU 2017-08)

In March 2017, the FASB issued ASU 2017-08 to amend the amortization period for certain purchased callable debt securities held at a premium. This standard shortens the amortization period for the premium to the earliest call date, rather than generally amortizing the premium as an adjustment of yield over the contractual life of the instrument, as required by current GAAP. This standard will be effective for us on January 1, 2019. We do not anticipate that our adoption of this standard will have a material impact on our consolidated financial statements.