Four national mortgage insurers have agreed to settlements totaling more than $15 million over alleged improper kickbacks paid to mortgage lenders in exchange for business. But the companies say the arrangements had the blessing of the Department of Housing and Urban Development.
Last June, the Consumer Financial Protection Agency started issuing civil investigative demands to the nation’s mortgage insurance companies.
The demands were tied to alleged violations of the Real Estate Settlement Procedures Act of 1974 as a result of captive reinsurance arrangements with mortgage lenders. Such arrangements involve lenders that both originate loans and provide reinsurance through subsidiaries.
HUD originally began investigating the companies in 2008 then transferred the investigation to the CFPB in July 2011.
The CFPB’s demands followed several federal lawsuits alleging RESPA violations for reinsurance arrangements including one in Pennsylvania against Bank of America, a class action filed against JPMorgan Chase &Â Co. and a complaint filed in Pennsylvania against Fifth Third Bank and six mortgage insurers.
Now the consumer regulator is taking legal action of its own.
The CFPB announced Thursday that complaints and proposed consent orders with Genworth Mortgage Insurance Corp., Mortgage Guaranty Insurance Corp., Radian Guaranty Inc. and United Guaranty Corp. have been filed in U.S. District Court for the Southern District of Florida.
The kickbacks have been prevalent in the business for more than a decade, according to the statement.
“The CFPB believes the mortgage insurers named in today’s enforcement actions provided kickbacks to mortgage lenders by purchasing captive reinsurance that was essentially worthless but was designed to make a profit for the lenders,” the announcement said.
But the mortgage insurance companies see it differently.
Genworth issued a statement indicating that it obtained guidance from HUD when it developed its captive reinsurance arrangements.
“HUD indicated that these arrangements are permissible if certain requirements are met,” Genworth stated. “Genworth followed the guidance, and had the arrangements tested by independent third parties to verify that the HUD requirements were met. Further, consumers paid the same amount for the underlying insurance whether or not their loan was part of a captive reinsurance arrangement.”
MGICÂ Investment Corp. said that its reinsurance arrangements were structured in accordance with HUD’s guidance, which was issued in 1997.
“MGIC obtained actuarial opinions from independent actuaries reflecting that the reinsurance premiums paid by MGIC were reasonably related to the risk assumed by the captive reinsurers,” the Milwaukee-based firm stated. “In addition, borrowers received notice from their lender that the borrower’s loan might be reinsured by an affiliate of the lender. As part of the notice, each borrower was given an ‘opt-out’ right to exclude his or her loan from the captive reinsurance transaction.”
Radian also said it relied on long-standing HUD guidance in structuring the captive reinsurance agreements. It also relied on analyses and opinions from reputable actuarial firms that its reinsurance agreements met HUD’s standards.
United Guaranty issued a statement indicating that while it believes its practices were legal, it agreed to the settlement “to avoid the distraction and expense of protracted litigation.”
Total penalties for all four firms are $15.4 million.
Genworth issued a statement indicating that its portion was $4.5 million, while MGIC disclosed that its share was $2.65 million, and Radian said it is paying $3.75 million. That leaves United Guaranty’s portion around $4.5 million.
The settlements, if entered by the court, will put an end to the practice and prohibit the companies from paying illegal kickbacks and entering new captive reinsurance arrangements with lender affiliates and from obtaining captive reinsurance on any new loans for ten years.
MGIC said it voluntarily suspended most of its captive arrangements in 2008 in response to market conditions and GSE requests.
Radian’s statement indicated that hit hasn’t not entered into any new captive reinsurance arrangements since 2007.
The insurers will forfeit any right to the funds not directly related to collecting on reinsurance claims as pre-existing reinsurance arrangements come to a close.
The mortgage insurance companies will be subject to CFPB monitoring and required to file reports with the CFPB in order to ensure they are complying with the orders.
Radian noted that it is among multiple mortgage insurers that are still being investigated by the Minnesota Department of Commerce for their captive reinsurance arrangements. Radian is also still fighting private lawsuits over captive reinsurance and said it plans to “vigorously defend the company.”
