Today (4/4/13), the CFPB announced enforcement actions against, and settlements with, four mortgage insurers involving what “the Bureau believes to be improper kickbacks paid by mortgage insurers to mortgage lenders in exchange for business.” The CFPB alleges that, in exchange for business referrals, the four insurers—Genworth U.S. Mortgage Insurance Corporation, United Guaranty Corporation, Radian Guaranty Inc., and Mortgage Guaranty Insurance Corporation—violated RESPA by providing kickbacks to lenders in connection with the purchase of captive reinsurance, which the CFPB claims were designed to help lenders obtain greater profits. The CFPB contends these captive reinsurance deals violated RESPA because the projected value of the reinsurance was less than the reinsurance premiums paid by mortgage insurers to the reinsurer. Under the terms of the proposed consent orders filed with the United States District Court for the Southern District of Florida, the mortgage insurers will: (i) pay a collective $15 million in penalties to the CFPB; (ii) cease the paying “illegal kickbacks”; (iii)  not enter into new captive mortgage reinsurance arrangements with affiliates of mortgage lenders; and (iv) submit to compliance monitoring and reporting.  Read item (iii) carefully:  All four companies agreed that they would NEVER AGAIN enter into captive mortgage reinsurance arrangements with mortgage lenders.   

Leaving aside the demonstrable fact that there is nothing per se illegal or improper about captive mortgage reinsurance, the actions and resulting agreement is astonishing in its breadth. Director Cordray stated that “Illegal kickbacks distort markets and can inflate the financial burden of homeownership for consumers.” Casting classic reinsurance arrangements in criminal terms, Cordray added that the CFPB believes “these mortgage insurance companies funneled millions of dollars to mortgage lenders for well over a decade. The orders announced today put an end to these types of arrangements and require these insurers to pay more than $15 million in penalties for violating the law.” And what law did they violate precisely? Rohit Gupta, president and CEO of Genworth U.S. Mortgage Insurance, issued a statement highlighting the fact that the CFPB “did not make any findings or determinations that Genworth or any other company violated any law.” Gupta explained that “Genworth agreed to settle this review so we can focus our resources on working with customers to help borrowers responsibly achieve and maintain homeownership, and to resolve the uncertainties inherent in such a review and any possible resulting litigation." A spokesperson for United Guaranty also remarked that United Guaranty "agreed to resolve a potential challenge by the Consumer Financial Protection Bureau to industry-wide practices involving captive reinsurance which were largely discontinued in 2008-2009." United Guaranty’s spokesperson added that the firm ”believes these practices complied with the law and were fair to consumers, but settled the matter to avoid the distraction and expense of protracted litigation."

The CFPB has not yet named the lenders involved in the alleged kickbacks and CFPB’s Director of Enforcement, Kent Marcus, specifically declined to identify which lenders received the kickbacks, or how much they were paid, because the CFPB’s investigation is continuing. Markus explained, “[i]n every kickback situation, there is somebody paying and somebody receiving. It takes two to tango. Today we’re dealing with those paying the kickbacks. But we have more work to do on this matter.” There can be little doubt that the CFPB’s ongoing investigation is also targeting those lenders who received the kickbacks.