CIT Group, Inc. (NYSE: CIT), the financial holding company which last year purchased the parent company of now-defunct reverse mortgage lender Financial Freedom, reported a delay in filing its annual financial results for 2015, citing a “material weakness” linked to the company’s acquired reverse mortgage interests.
Last August, CIT Group acquired IMB HoldCo, LLC, the parent company of OneWest Bank, which as a result of the transaction, merged with the company’s Utah-state chartered bank and wholly owned subsidiary, CIT Bank. The approximately $3.4 billion acquisition also included the absorption of OneWest Bank subsidiary, Financial Freedom.
While CIT Group excluded the acquisition of IMB from its 2015 year-end evaluation of the its effectiveness of internal control over financial reporting and disclosure procedures, company management identified a material weakness in the Financial Freedom reverse mortgage servicing business of IMB—which has discontinued operations as of Dec. 31, 2015.
“A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis,” CIT Group stated Tuesday in a notification of late filing with the Securities and Exchange Commission.
“In connection with the preparation of the Company’s financial statements, which will be included in the annual report on Form 10-K, we identified errors in the estimation process of the HECM Interest Curtailment Reserve that resulted in a measurement period adjustment,” CIT added.
Management determined the weakness existed in OneWest’s internal control over financial reporting related to the HECM Interest Curtailment Reserve. Specifically, CIT Group noted such controls are not adequately designed and maintained to ensure the accuracy of key judgements and assumptions developed from loan file reviews, or that the data used in the estimation process is complete and accurate.
“This control deficiency could result in misstatements of the aforementioned accounts and disclosures that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected,” CIT Group stated.
The realization of the deficiency resulted in adjustments to the calculation of the HECM Interest Curtailment Reserve. After performing an analysis of the underlying data and assumptions, CIT concluded that the amounts and disclosures listed within its financial results for the third quarter ended September 30, 2015, are not materially misstated.
Following the company’s February 2, 2016, earnings release, CIT made additional adjustments unrelated to the aforementioned material weakness, which increased its goodwill balance further to $663 million, including an increase in goodwill of $13 million, an $8 million increase in other assets and a decrease in tangible assets of $21 million as of Dec. 31, 2015.
There was no change to the company’s statement of income since the Feb. 2, 2016 earnings release.
CIT group is currently in the process of designing procedures and controls to remediate the material weakness, including three-point plan to implement a data quality control program; enhance controls over documentation of detailed data sources; as well as simplify the reserve estimation process and improve governance, controls and documentation.
“Management believes that the new or enhanced controls, when implemented and when tested for a sufficient period of time, will remediate the material weakness described above,” CIT Group states in Tuesday’s SEC filing. “However, the company cannot provide any assurance that these remediation efforts will be successful.”
OneWest Bank acquired Financial Freedom in 2009 as part of its acquisition of IndyMac. Two years later, OneWest exited the reverse mortgage market, effectively shutting down Financial Freedom’s origination business in March 2011. In 2010, Financial Freedom ranked among the top-10 reverse mortgage industry lenders, endorsing 3,314 HECMs, according to historical data recorded by Reverse Market Insight.
As a result of the identified weaknesses, CIT Group said it been unable to complete the review of its annual Form 10-K by the prescribed filing deadline of Feb. 29, without “unreasonable effort and expense.”
The company expects to complete and file the Form 10-K on or before March 15, 2016.
Written by Jason Oliva