The Consumer Financial Protection Bureau has entered into consent orders with four mortgage insurance companies involving captive reinsurance of mortgage insurance issued to mortgage lenders. Those consent orders impose fines and restrictions on the mortgage insurance companies, but the mortgage insurance companies admit no wrongdoing.
Typically, when mortgage borrowers make less than a 20 percent down payment, those borrowers pay for mortgage insurance, which protects the mortgage lender against losses if the borrower ultimately defaults on the mortgage loan. For years, mortgage insurance companies have ceded some of that premium, along with part of the risk, to reinsurance companies that are affiliated with the mortgage lender.
The CFPB has alleged that the insurance companies’ payments of reinsurance premium to the captive reinsurance company amounts to a "kickback" that is illegal under the Real Estate Settlement Procedures Act ("RESPA"). Similar civil actions have been filed under RESPA by mortgage borrowers alleging they were harmed by the captive reinsurance arrangements. Reed Smith has been defending these RESPA putative class action lawsuits for several financial institutions. Those lawsuits allege that consumers were harmed by the captive reinsurance, alleging that the captive reinsurance premium inflated the cost of mortgage insurance, and provided no real transfer of risk and no real benefit to the mortgage insurance companies. There are many defenses to those class actions, including the fact that captive reinsurance companies have actually been paying many millions of dollars of losses, providing real value through the reinsurance.
Now that the CFPB has settled with the mortgage insurance companies, it appears to have set its sights on at least some financial institutions that engaged in these captive reinsurance arrangements. Indeed, the prepared remarks of the CFPB’s director announcing the consent orders include this statement: "we are continuing to look into the lender side of these captive reinsurance arrangements." A link to the CFPB’s press release, which itself contains links to the complaints and proposed consent orders, is available here.
Through its Financial Industry Group, Global Regulatory Enforcement Group, and Insurance Recovery Group, Reed Smith is actively (1) defending RESPA class actions; (2) providing advice relating to CFPB investigations; and (3) representing lenders and affiliated captive reinsurance companies in disputes with mortgage insurance companies relating to reinsurance agreements and the insolvency of certain mortgage insurance companies.