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.

The 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.

The 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.