The Consumer Financial Protection Bureau announced on April 4 four enforcement actions to end what the CFPB said it believes to be “improper kickbacks paid by mortgage insurers to mortgage lenders in exchange for business.” The CFPB filed complaints and proposed consent orders against four national mortgage insurance companies in order to stop these practices, which have been prevalent for more than 10 years, the bureau said. The proposed orders require the four mortgage insurers collectively to pay $15.4 million in penalties to the CFPB.
“Illegal kickbacks distort markets and can inflate the financial burden of homeownership for consumers,” said CFPB Director Richard Cordray. “We believe these mortgage insurance companies funneled millions of dollars to mortgage lenders for well over a decade.”
The CFPB alleges that four mortgage insurance companies violated federal consumer financial law by engaging in widespread kickback arrangements with lenders across the country. The four companies are Genworth Mortgage Insurance Corporation, United Guaranty Corporation, Radian Guaranty Inc., and Mortgage Guaranty Insurance Corporation.
Mortgage insurance is typically required on loans when homeowners borrow more than 80 percent of the value of their home. It protects the lender against the risk of default. Generally, the lender, not the borrower, selects the mortgage insurer. The borrower pays the insurance premium every month in addition to the mortgage payment.
While mortgage insurance can help borrowers get a loan when they cannot make a 20 percent down payment, it also adds to the cost of monthly payments for borrowers. As such, the CFPB said mortgage insurance can be especially harmful when its cost is inflated by illegal kickbacks. Increasing the burden on borrowers who already have little equity increases the risk that they will default on their mortgages, the CFPB said.
The kickbacks at issue were paid to the lenders through “captive reinsurance arrangements.” “Reinsurance” is insurance for insurance companies. Many insurance companies purchase reinsurance in order to cover their own risk of unexpectedly high losses. When a mortgage lender sets up a subsidiary company to provide reinsurance to the mortgage insurers, it becomes a “captive” arrangement. It is “captive” because the lender both originates the loan and, through its own subsidiary, provides the reinsurance.
The Office of Inspector General at the Department of Housing and Urban Development initiated this investigation of reinsurance practices, and in July 2011, HUD’s authority over the investigation transferred to the CFPB. Since then, HUD has given the CFPB valuable assistance in this matter.