Four U.S. mortgage insurers will pay $15.4 million in penalties and end the practice of providing millions of dollars in kickbacks to mortgage lenders in exchange for business, according to consent orders released Thursday by the U.S. Consumer Financial Protection Bureau.
The CFPB said it filed the complaints and the proposed orders to stop these kickback practices, which have been prevalent for more than 10 years.
The mortgage insurers received lucrative business referrals from lenders in schemes that were common in the years leading up to the financial crisis. These four companies were key players during that time, the bureau said.
The kickbacks to lenders arranged by the four companies — Genworth Mortgage Insurance Corp., Mortgage Guaranty Insurance Corp., Radian Guaranty, and United Guaranty Corp. — violated federal consumer protection laws, the CFPB said.
The mortgage insurers provided kickbacks by purchasing captive reinsurance that was essentially worthless, but was designed to make a profit for the lenders.
“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 orders announced today put an end to these types of arrangements…”
Mortgage insurance is usually required on loans with a loan-to-value of more than 80 percent. 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.
Mortgage insurance can help borrowers get a loan when they cannot make a 20 percent down payment, but it also adds to the cost of monthly payments for those who have little equity in their homes.
Add illegal kickbacks and the mortgage insurance premiums become inflated, costing homeowners even more.
Widespread defaults, in turn, can be damaging for communities and the housing market, the CFPB said.
The four mortgage insurers have agreed to the following under the proposed agreements:
- End the practice: If approved by the court, the proposed orders will prevent these four mortgage insurers from engaging in this practice going forward. The mortgage insurers are prohibited from entering into any new captive mortgage reinsurance arrangements with affiliates of mortgage lenders, and from obtaining captive reinsurance on any new mortgages, for a period of ten years. As pre-existing reinsurance arrangements come to a close, the mortgage insurers will forfeit any right to the funds not directly related to collecting on reinsurance claims. The mortgage insurers will also be prohibited from paying illegal kickbacks or otherwise violating the Real Estate Settlement Procedures Act. Any violation of these prohibitions could result in additional fines.
- Payment of more than $15 million in penalties: The four mortgage insurers will pay the CFPB a total of $15.4 million in penalties. The amount of the penalties reflects a number of factors, including each mortgage insurers’ finances, the pervasiveness of its conduct, its relative culpability, and its cooperation with the Bureau.
- Compliance monitoring and reporting: These companies will be subject to monitoring by the CFPB and required to make reports to the CFPB in order to ensure their compliance with the provisions of the orders.
Here’s the text of each of the proposed consent orders: