Mortgage insurers respond to CFPB enforcement action

The Consumer Financial Protection Bureau reached a deal with four major mortgage insurers, requiring the firms to pay a total of $15 million in penalties for allegedly paying kickbacks to lenders in exchange for business.

The CFPB cited the following firms: Genworth Mortgage Insurance Corp. (GNW), United Guaranty Corp., Radian Guaranty Inc. (RDN) and Mortgage Guaranty Insurance Corp (MTG).

A spokesperson for United Guaranty responded to the announcement, saying the company “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.”

The firm added, “United Guaranty 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 consumer agency claims the four insurers received lucrative business referrals from lenders by purchasing captive reinsurance from the lenders’ subsidiaries in a move that was allegedly “designed to make a profit for the lenders.”

As part of the deal, the insurers ended the practice, paying $15 million in penalties total and agreeing to undergo constant monitoring by the CFPB.

“Illegal kickbacks distort markets and can inflate the financial burden of homeownership for consumers,” said CFPB Director Richard Cordray. “We believe 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.”

Going forward, the CFPB says the firms are prohibited from entering into any new captive mortgage reinsurance arrangements with affiliates of mortgage lenders and from obtaining captive reinsurance on any new mortgages for a period of up to 10 years.

In addition, when pre-existing reinsurance arrangements close, the insurers will have to forfeit any right to funds not directly related to collecting on reinsurance claims.

CFPB director Richard Cordray says investigators who looked into the matter concluded that mortgage insurers distributed millions of dollars to lenders over the past decade by dressing up payments as ‘reinsurance product’ provided by the subsidiaries of lenders. Reinsurance is essentially additional insurance that insurers buy to create more buffer if there’s an eventual payout on claims.

“Here, however, we believe that the payments made as supposed ‘reinsurance’ premiums did not correspond to a proportionate transfer of insurance risk between the parties,” said Cordray. “In essence, then, the lenders were extracting financial kickbacks from the mortgage insurers in exchange for referring business to them.”

MGIC said the investigation, which alleges the transactions violated the Real Estate Settlement Procedures Act, was originally launched by HUD and then transferred to the bureau.

The CFPB claims the captive reinsurance deals violated RESPA because “the projected value of the reinsurance was less than the reinsurance premiums paid by MGIC to the reinsurer,” MGIC said in a statement.

However, the firm asserts the practice was in line with industry standards and did not harm borrowers.

“Likewise the consent order (entered into with the CFPB) makes it clear that ‘MGIC is not making any evidentiary admissions of liability’ for the practices alleged,” the insurer said.

Furthermore, MGIC says HUD in 1997 created guidance on how to properly structure captive reinsurance transactions, and MGIC believes its contracts were “structured in accordance with that longstanding guidance.”

“Among other things, MGIC obtained actuarial opinions from independent actuaries reflecting that the reinsurance premiums paid by MGIC were reasonably related to the risk assumed by the captive reinsurers,” the firm said.  “In addition, borrowers received notice from their lender that the borrower’s loan might be reinsured by an affiliate of the lender. As part of the notice, each borrower was given an ‘opt-out’ right to exclude his or her loan from the captive reinsurance transaction.”


“Genworth followed the guidance, and had the arrangements tested by independent third parties to verify that the HUD requirements were met,” Genworth noted in a statement. “Further, consumers paid the same amount for the underlying insurance whether or not their loan was part of a captive reinsurance arrangement.”

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