Four mortgage insurers will pay more than $15 million in penalties to settle claims they paid illegal kickbacks to lenders in exchange for business, the Consumer Financial Protection Bureau said today.
“Illegal kickbacks distort markets and can inflate the financial burden of homeownership for consumers,” Richard Cordray, the CFPB’s director, said in an e-mailed statement. “We believe these mortgage insurance companies funneled millions of dollars to mortgage lenders for well over a decade.”
The fines represent the first foray into the mortgage insurance market by the CFPB, created by the 2010 Dodd-Frank Act to protect consumers from unfair practices in the financial services industry. The actions come as Congress and the administration of President Barack Obama have pledged to reduce the government’s role in providing mortgage insurance and the housing market is emerging from a long decline.
The four companies involved are Genworth Mortgage Insurance Corp., part of Richmond, Virginia-based Genworth Financial Inc. (GNW:US); United Guaranty Corp., which belongs to New York-based American International Group Inc. (AIG:US); Radian Guaranty Inc., a subsidiary of Radian Group Inc. (RDN:US), of Philadelphia; Mortgage Guaranty Insurance Corp., a unit of Milwaukee-based MGIC Investment Corp. (MTG:US)
Kent Markus, the CFPB’s director for enforcement, declined to specify which lenders received the kickbacks or how much they were paid, because the investigation is continuing.
‘Two to Tango’
“In every kickback situation, there is somebody paying and somebody receiving,” Markus told reporters on a conference call. “It takes two to tango. Today we’re dealing with those paying the kickbacks. But we have more work to do on this matter.”
PHH Corp. (PHH:US), a mortgage lender based on Mount Laurel, New Jersey, last year disclosed it was the target of a CFPB probe on this issue.
Mortgage insurers have rallied this year as home prices climbed and the U.S. signaled it may reduce its role in the housing-finance market. Radian has advanced 63 percent this year, while MGIC has gained 83 percent. Genworth, which also sells life insurance and long-term care coverage, is up 26 percent.
Mortgage insurance is a small portion of business at AIG, which has jumped 6.5 percent.
United Guaranty said in an e-mailed statement that it “believes these practices complied with the law and were fair to consumers, but settled the matter to avoid the distraction and expense of protracted litigation.”
Teresa Bryce Bazemore, president of Radian Guaranty, also said the arrangements were legal. “This settlement was an opportunity to eliminate distractions at an acceptable cost so that we can continue our primary focus of writing new, profitable mortgage insurance,” she said in an e-mailed statement.
MGIC also issued a statement saying it believes the arrangements were legal, and that it wanted to close the matter.
The case concerns mortgage insurance, which is typically required when borrowers put up less than 20 percent of a home’s purchase price. The lender, not the borrower, usually chooses the insurer while the borrower pays the premiums.
The lenders collected revenue from the mortgage guarantors through deals that were called “captive reinsurance agreements,” according to the CFPB. The bureau said the coverage provided by the lenders was “essentially worthless” and a way for the companies to get funds from mortgages insurers without taking on their risks.
The practice is a violation of the Real Estate Settlement Procedures Act, the agency said.
“The impact of illegal kickbacks on consumers is that it raises prices,” Markus said.
Rohit Gupta, president of Genworth’s mortgage insurance unit, said that the reinsurance helped offset losses during the housing crisis, and disputed Markus’ contention of consumer harm.
“Consumers paid the same amount for the underlying insurance whether or not their loan was part of a captive reinsurance arrangement,” Gupta said.
Under the settlement, the four insurers will end the practice, and abstain from creating any similar arrangements for 10 years, according to the consumer bureau. The companies will also have to make reports to the consumer agency detailing their compliance with the enforcement orders.
The portion the of $15.4 million in fines paid by each company will reflect their cooperation with investigators and the pervasiveness of their conduct. United Guaranty and Genworth will both pay $4.5 million, while Radian will pay $3.75 million and MGIC $2.65 million.
Markus said that the four companies are “the only mortgage insurers that are writing policies today” that used these reinsurance structures.
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