OREANDA-NEWS. Ocwen Financial Corporation's 'B-' IDR' and Negative Rating Outlook are not immediately impacted by The California Department of Business Oversight's (CA-DBO) administrative action filed on October 3 of last year, according to Fitch Ratings.

The action seeks to suspend Ocwen's residential mortgage lender and loan servicer licenses for up to 12 months. While the CA-DBO's action is clearly negative, Ocwen's rating is already at a highly speculative rating level. Along with the Negative Rating Outlook, the rating incorporates the potential financial-, compliance- and litigation-related challenges associated with Ocwens heightened regulatory scrutiny.

Depending on how the administrative action progresses, ratings could come under pressure. This is particularly true if Ocwen faces material fines and/or an extended absence from the California market, which materially impacts its profitability and cash flow generation. As of Sept. 30, 2014, Ocwen had approximately \$300 million of cash, \$800 million of annualized cash generated from operations and leverage, on the basis of debt to tangible equity, of 3.8x on a consolidated-affiliate basis. Fitch believes current liquidity, cash flow and consolidated leverage offer Ocwen modest financial flexibility relative to existing ratings.

The CA-DBO's recommendation to suspend Ocwen's licenses follows the company's failure to respond to a March 2014 subpoena in a timely manner, requesting borrower records and information. The records were sought in conjunction with CA-DBO's examination to ensure Ocwen's compliance with the California Homeowner Bill of Rights, which is designed to guarantee fairness and transparency for homeowners in the foreclosure process.

Should Ocwen lose its license and be forced to sell its mortgage servicing rights on loans in California, the sales proceeds could be used to pay fines, service debt and support ongoing operations elsewhere (albeit as a smaller and less profitable company). California is Ocwen's largest single state exposure, representing approximately 24% of the total unpaid principal balance of Ocwen's servicing portfolio as of Sept. 30, 2014.

Ocwen has stated that it is cooperating with the CA-DBO and expects that its ongoing cooperation will result in a satisfactory outcome for all parties. Conferences are expected to occur in February, at which time Ocwen will seek to reach a settlement on the matter. If not resolved by then, hearings on the suspension of the CA license are scheduled for July 2015.

Following Ocwen's New York Department of Financial Services (NY-DFS) settlement in December 2014, Fitch downgraded the company's long-term IDR by one-notch to 'B-' with a Negative Rating Outlook. At the time, the actions reflected increased strategic uncertainty following the announced departure of the firm's Executive Chairman, combined with heightened governance concerns and the expectation of increased earnings pressure as a result of heightened regulatory scrutiny and compliance standards.

At the same time, Fitch maintained the Negative Rating Watch on Ocwen's RMBS servicer ratings following its settlement with the NY-DFS. Fitch noted that the ongoing inquiry by the NY-DFS and issues identified call into question the corporate governance and operational control framework, especially as it relates to oversight of its systems and processes. Additionally, Fitch said that these issues had the potential to bring about other investigations; result in monetary and/or other penalties; and limit Ocwen's operating flexibility.

Fitch expects to resolve the Rating Watch Negative on its RMBS servicer ratings based on its assessment of the operational, governance, and financial condition implications of the Consent Order, Ocwen's ability to comply with all requirements, and operational and strategic changes which may follow in the wake of the announced departure of Ocwen's Executive Chairman.