Richard Cordray, director of the Consumer Financial Protection Bureau. (T.J. Kirkpatrick/Getty…)
WASHINGTON -- Federal regulators hit four national private mortgage insurance companies Thursday with a combined $15.4 million in fines to settle allegations of making improper kickbacks to lenders to steer consumer business to them.
The fines, which the companies have agreed to as part of proposed consent orders, could be followed by penalties against lenders as the Consumer Financial Protection Bureau continued an investigation into so-called reinsurance kickbacks.
"The mortgage insurance business can be lucrative, and our investigation indicates that lenders sought to leverage their control over the business to capture some of those revenues for themselves," said Richard Cordray, the bureau's director.
"Based on our investigation, we believe that the exertion of this pressure led these mortgage insurance companies to funnel many millions of dollars to lenders for well over a decade," he said. "In essence ... the lenders were extracting financial kickbacks from the mortgage insurers in exchange for referring business to them."
The fines hit some of the largest companies providing private mortgage insurance to homeowners.
Genworth U.S. Mortgage Insurance and United Guaranty Corp. each agreed to pay $4.5 million in penalties. Radian Guaranty Inc. agreed to pay $3.75 million and Mortgage Guaranty Insurance Corp. agreed to pay $2.65 million.
Banks and other lenders generally require buyers with less than a 20% down payment to take out private mortgage insurance to cover the additional risk of the loan.
The lender usually selects the mortgage insurance company. Starting in the mid-1990s, a system was developed to allow for illegal kickbacks to lenders for lucrative business referrals, the bureau said.
Lenders set up so-called captive reinsurance arrangements -- subsidiaries that provided insurance to the mortgage insurance company.
But the payments for the reinsurance were much greater than the insurance provided and were used to funnel kickbacks to the lender in exchange for a company being selected to provide mortgage insurance, the bureau said.
In effect, the lender was steering lucrative business to its own subsidiary. The reinsurance "was essentially worthless but was designed to make a profit for the lenders," the bureau said.
The result likely was inflated costs for consumers, though Kent Markus, the bureau's assistant director for enforcement, would not estimate how much extra money homeowners paid. He also would not name the lenders that are under investigation.
The mortgage insurance companies were at fault even if they had to pay the kickbacks to secure business, he said.
"In every kickback situation, there’s somebody paying and there’s somebody receiving. It takes two to tango," Markus said. "Today we’re dealing with those who paid the kickbacks and in particular trying to make sure the practice is stopped and consumers don’t continue to be victimized in this way, but we have more work to do in this matter."
As part of the consent orders, which are awaiting court approval, the companies would be prevented from engaging in the practice and prohibited from entering into any new reinsurance arrangements with affiliates of lenders for 10 years.
“We are pleased to put this behind us,” said Radian president Teresa Bryce Bazemore.
She said that the company believed its reinsurance arrangements complied with federal law and "caused no harm to consumers" but agreed to the settlement" to eliminate distractions at an acceptable cost."
Rohit Gupta, chief executive of Genworth U.S. Mortgage Insurance, a subsidiary of Genworth Financial, also said the company agreed to settle the allegations to resolve uncertainties and potential litigation.
Gupta said Genworth followed guidance on captive reinsurance from the Department of Housing and Urban Development and that "consumers paid the same amount for the underlying insurance whether or not their loan was part of a captive reinsurance arrangement.”
Spokespeople for the other two companies could not immediately be reached for comment.
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