The Consumer Financial Protection Bureau (CFPB) announced that it had settled enforcement actions against four insurance companies in connection with alleged improper payments between the insurance companies and mortgage lenders. While the companies - Genworth Mortgage Insurance Corp., United Guaranty Corp., Mortgage Guaranty Insurance Corp. and Radian Guaranty Inc. - have not admitted wrongdoing or liability, they have agreed to pay an aggregate of $15.4 million in civil penalties. The CFPB filed the proposed Consent Orders with the United States District Court for the Southern District of Florida on April 4, 2013.
The CFPB claimed that the companies violated Section 8 of the Real Estate Settlement Procedure Act (RESPA), which generally prohibits the payment of fees or kickbacks for referring consumers to a real estate settlement service provider or the giving or accepting of unearned fees. According to the CFPB, the four insurers agreed to pay a certain percentage of a referred borrower's premiums back to the referring lender by purchasing reinsurance from captive providers - companies set up by mortgage lenders to provide what the CFPB alleges was essentially worthless reinsurance designed to make a profit for the lenders. These arrangements allegedly existed for more than a decade.
Mortgage lenders often require borrowers who purchase property with less than a 20 percent down payment to purchase loan insurance to cover the risk of default. The mortgage lender typically decides which insurance company will issue the loan insurance policy. According to CFPB Director Richard Cordray's statement, lenders recognized their role in the lucrative mortgage insurance business and sought to leverage their control to capture some of those revenues by creating subsidiaries that provided reinsurance for mortgage insurers. Although reinsurance transfers some of the risk of default away from the insurance companies, the CFPB alleged that the payments the insurers made to these companies for reinsurance premiums did not correspond to a proportionate transfer of insurance risk, but rather represented improper payments to the mortgage lenders.
The Department of Housing and Urban Development (HUD) had been pursuing an investigation into the captive reinsurance arrangements of private mortgage insurers to determine whether these arrangements constituted an unlawful payment under the RESPA since 2008. The investigation was transferred to the CFPB by the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2011.
The four consent decrees require the companies to pay varying amounts of civil penalties to the CFPB:
- Genworth Mortgage Insurance Corp. - $4.5 million
- United Guaranty Corp. - $4.5 million
- Radian Guaranty Inc. - $3.75 million
- Mortgage Guaranty Insurance Corp. - $2.65 million
In addition to levying monetary penalties, the consent decrees prohibit the defendant insurers from participating in any captive mortgage reinsurance arrangements for a period of 10 years. The consent orders also impose extensive compliance monitoring and reporting measures on the settling companies. As with all of the CFPB's previous consent orders, including the CFPB's consent orders with three major credit card companies last year, the four consent orders provide that the settling companies "shall pay such civil money penalty [themselves] and [are] prohibited from seeking or accepting indemnification from such payment from any third party."
While the consent decrees target the practices of four specific insurers, the CFPB has made clear that it is still investigating the lender side of these arrangements. All four consent orders require that the insurers respond on an expedited basis to any Civil Investigative Demand (CID) or subpoena issued "in any investigation, enforcement action, or civil action of the Bureau related to or associated with the transactions or the occurrences that are the subject of the Complaint[.]" This provision suggests that the CFPB may intend to gather more information from mortgage insurers in connection with an investigation of mortgage lenders.
The settlements also demonstrate that, despite the current uncertainties about the Bureau's enforcement authority, arising from questions regarding the constitutionality of Director Cordray's appointment, the CFPB continues to pursue enforcement actions by way of investigations and negotiated settlements with target companies. These resolutions likely represent the tip of the iceberg of contemplated enforcement actions on the Bureau's agenda, which may become apparent only when the issues clouding the agency's authority are resolved.