The four largest remaining private
mortgage insurance (PMI) companies have agreed to end what the Consumer
Financial Protection Bureau (CFPB) called "illegal kickbacks" in complaints and
consent orders announced by the Bureau today.
These complaints charge that the companies along with unspecified numbers
of mortgage lenders have for years engaged in a sham reinsurance structure
devised to hide kickbacks from the PMI companies to the lenders.
company which is to provide PMI to a borrower with less than a 20 percent
downpayment is determined by the lender
who is also the beneficiary of the PMI policy in the event of a default even
though it is the borrower who pays the premium.
In order to secure PMI business the four companies are accused of
purchasing reinsurance to hedge their own risk from subsidiaries of the lenders
themselves. These so-called captive
reinsurers ("captive" because the lender both
originates the loan and, through its own subsidiary, provides the reinsurance) served as a
conduit to funnel payments disguised as premiums to lenders in return for their
PMI business. These payments from the
PMI companies were, of course, recouped through higher premiums charged to
consumers for the private mortgage insurance they were required to purchase.
four companies, Genworth Mortgage Insurance
Corporation, United Guaranty Corporation, Radian Guaranty Inc., and Mortgage
Guaranty Insurance Corporation (MGIC) have agreed they will not enter into any
new captive reinsurance arrangements with affiliates of mortgages lenders and will
not obtain captive reinsurance on any new mortgages for a period of ten years. As pre-existing arrangements come to a close
they will forfeit any funds not directly related to collecting on reinsurance
claims. The companies also agree to
monitoring by the CFPB and making reports to ensure their compliance with the
provisions of the orders.
The companies will pay an aggregate
of over $15 million in fines and penalties with United Guarantee and Genworth
each paying $4.5 million, Radian $3.75 million, and MGIC $2.65 million. CFPB Assistant Director for Enforcement Kent
Marcus said the penalties were determined according to statutory factors set
forth in the Dodd-Frank Act which include the size of the offending institution,
the gravity of the violations, financial capability of the institution, prior
offenses, and other considerations.
The proposed Consent Orders have
been filed with the United States District Court for the Southern District of
Florida and will have the full force of law only when signed by the presiding
judge. The complaint is not a finding or ruling that the defendants have
actually violated the law but because the agreements are in the form of consent
orders, any future violations of the orders or of violating the Real Estate
Settlement Procedures Act will take the form of civil contempt and could result
in additional fines.
At a press conference where the
announcement of the enforcement actions was made, Markus made it clear that
this investigation is not complete. "In
every kickback someone is paying and someone is receiving; it takes two to
tango and there is more work, a lot more work to do." He refused however to name any lenders who
might be under investigation or even say how many might be involved. Despite repeated questions from reporters he
also refused to say how much money might have been involved in the kickbacks
but did say they probably started in the mid-1990s. In his
statement about the enforcement action CFPB Director Richard Cordray put the
number at "millions"
Markus thanked the Department of Housing
and Urban Development and its Office of Inspector General as well as the
Minnesota Department of Commerce for their role in the investigation. The scheme was unraveled, he said, because
the premiums paid to the captive reinsurers were not proportionate to the
risk. Claims were substantially less
than the premiums being paid would indicate and the structure to pay out claims
didn't look like it does in traditional insurance situations.