For more than a decade, four mortgage insurance companies paid illegal kickbacks to banks as part of a scheme that greatly inflated insurance costs for distressed homeowners, the nation's top consumer financial regulator said Thursday.
The companies -- Genworth Mortgage Insurance Corporation, United Guaranty Corporation, Radian Guaranty Inc., and Mortgage Guaranty Insurance Corporation -- colluded with the banks, which forced borrowers to purchase policies from specific insurers, according to the Consumer Financial Protection Bureau. The companies agreed to pay $15 million to resolve the charges.
“In essence, the lenders were extracting financial kickbacks from insurers,” CFPB Director Richard Cordray said in a conference call with the media.
In a typical scenario, a homeowner taking out a mortgage must purchase insurance to protect the bank's investment. But CFPB regulators alleged that in some instances, the price of that insurance was inflated because of back-room deals struck between the bank and the insurer. The insurance company would then pay the banks a portion of their profits, regulators said. Such arrangements violate the federal Real Estate Settlement Procedures Act, which the CFPB is in charge of enforcing.
CFPB officials declined to discuss whether the agency was considering legal action against the banks allegedly involved in the kickback schemes. But, Cordray said the agency was "continuing to look into the lender side of these captive reinsurance arrangements."
“Consumers who are taking down mortgages and who put less than 20 percent [down] for the home purchases are generally obligated by the lender to put down mortgage insurance to protect their interest,” Kent Markus, director of enforcement at the CFPB, said.
“The impact on consumers of illegal kickbacks is that it raises prices,” Markus said. “In every kickback situation, there’s somebody paying and somebody receiving. It takes two to tango.”
Fifteen-million dollars is a tiny sum compared to the amount of illegal payments that have likely changed hands between big banks and insurance providers over the years around the country. CFPB officials repeatedly declined on Thursday to provide an estimate of how much money the agency believes was involved in kickbacks in this specific situation, but a previous report by the New York Department of Financial Services estimated that 15 percent of all premiums collected from mortgage borrowers on insurance nationwide migrate from the insurance company back to the bank as illegal kickbacks. The DFS also found the amount in premiums collected in 2010 was 5.5 billion dollars.
Because the fine is split among four companies -- the largest individual fine is for $4.5 million -- it is much smaller charge than the one state agencies have imposed on companies accused of similar actions. In late March, New York fined a single company, Assurant, Inc., $14 million for providing similar kickbacks to banks. In announcing its fine, that state agency noted payments to JPMorgan Chase from Assurant since 2006 had totaled over $600 million.
Markus, the enforcement chief, said the $15 million fine was “appropriate based on our determinations," even when considering the losses millions of consumers could have suffered through captive reinsurance fraud.
Markus said the agency considered “the gravity of the violations, severity of the loss to consumers, previous violations” and other factors when deciding how much to fine the companies. He also said “the financial condition of the entity” being fined was taken into account.
“The key is this practice has been stopped, and to the extent that anybody would attempt to reignite this activity, that’s what we’d pay attention to,” Markus said.