Credit; Joe Adler APR 4, 2013, American Banker
WASHINGTON – The Consumer Financial Protection Bureau’s enforcement actions against four large mortgage insurers are likely just the start of efforts against an alleged widespread mortgage insurance kickback scheme that involves several lenders.
The agency ordered the firms to stop reinsurance deals with mortgage lenders that were purportedly made in return for getting a larger slice of the mortgage insurance pie. It also said the insurance companies must pay a total of $15.4 million in civil money penalties and undergo additional CFPB monitoring.
Yet the paltry size of the fines – combined with additional investigations and ongoing litigation involving borrowers, insurers and big banks alleged to have participated – suggests more enforcement activity is still on the way, including against lenders that were said to have received the reinsurance business. The scheme is estimated by some to have involved as much as $6 billion in kickbacks.
“In the context of the massive amount of mortgage fraud that occurred in this industry, a $15 million penalty seems pretty small,” said David Reiss, a professor at Brooklyn Law School. “But given that further enforcement against the large financial institutions that demanded the kickbacks is possibly still on the horizon, the jury is out on whether this will be an effective set of enforcement actions.”
The largest fines, of $4.5 million each, were levied against United Guaranty Corp. and Genworth Mortgage Insurance Corp. Radian Guaranty Inc. and Mortgage Guaranty Insurance Corp. were ordered to pay, respectively, $3.75 million and $2.65 million. Each of the companies was party to CFPB consent orders that must still be approved by the U.S. District Court for the Southern District of Florida.
The agency said the companies, which rely on lenders for referrals to sell mortgage insurance policies, agreed to take out reinsurance policies themselves from lender affiliates in return for those referrals. But the deals, regulators say, appeared to be more about providing lenders with extra profits than insurers needing a backstop.
“The mortgage insurance business can be lucrative, and our investigation indicates that lenders sought to leverage their control over the business to capture some of those revenues for themselves,” CFPB Director Richard Cordray said on a conference call with reporters.
Officials with the agency did not provide any details about further actions to come related to the scheme, but signaled that the institutions on the other side of the business arrangements continue to be a focus of their probe.
“In every kickback situation, there is somebody paying and there is somebody receiving. It takes two to tango,” said Kent Markus, the CFPB’s assistant director for enforcement. “As I’ve indicated, today we’re dealing with those who paid the kickbacks, and in particular trying to make sure that the practices stopped and that consumers do not continue to be victimized in this way. But we have more work to do on this matter.”
At issue are so-called captive reinsurance arrangements. Borrowers typically must pay for mortgage insurance when they cannot afford to make a 20% down payment. The CFPB said the mortgage insurance firms were unnecessarily taking out reinsurance contracts with a lender’s own subsidiary – a captive reinsurance arrangement that effectively allowed the insurance firms to provide additional money to the lender.
Under the proposed settlement, which cites alleged violations of the Real Estate Settlement Procedures Act, the companies are prohibited from entering into any mortgage reinsurance arrangements for at least 10 years. The CFPB said the fines were based on the insurers’ finances, “relative culpability” and the companies’ cooperation with the agency. (The federal investigation into the kickback schemes was initially launched by the inspector general of the Department of Housing and Urban Development.)
“While mortgage insurance can help borrowers get a loan, the financial burden it imposes is clearly magnified if the cost is inflated by illegal kickbacks,” Cordray said. “That harms not only consumers but entire communities, the housing market and the economy as a whole.”
In statements issued by the insurance companies involved, they expressed their hope to move past the ordeal, while also attempting to make the case that the captive deals did not affect borrower costs and were intended to help the firms mitigate losses.
“MGIC’s captive reinsurance transactions caused no harm to any borrower because MGIC’s premium rates were not based on, or affected by, captive reinsurance,” the company said.
A statement by Teresa Bryce Bazemore, president of Radian Guaranty, said, “We are pleased to put this behind us.”
“While we believe our captive arrangements complied with RESPA and caused no harm to consumers, this settlement was an opportunity to eliminate distractions at an acceptable cost so that we can continue our primary focus of writing new, profitable mortgage insurance and helping low down-payment borrowers realize the dream of homeownership,” Bazemore said.
But in its press release, the CFPB said the captive reinsurance “was essentially worthless” and “designed to make a profit for the lenders.”
Markus said mortgage-related kickbacks can have a real effect on consumers.
“The impact on consumers of illegal kickbacks is that it raises prices. That’s the entire reason the Congress made it illegal to have kickbacks in the context of real estate settlement activity,” he said. “Those kickback costs somehow end up working their way into the costs of the product and therefore increased costs for consumers.”
Four Companies to Pay $15.4 Million in Penalties
WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) today announced four enforcement actions to end what the Bureau believes to be improper kickbacks paid by mortgage insurers to mortgage lenders in exchange for business. The CFPB filed complaints and proposed consent orders against four national mortgage insurance companies in order to stop these practices, which have been prevalent for more than 10 years. The proposed orders require the four mortgage insurers to pay more than $15 million in penalties to 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.”
The CFPB alleges that four mortgage insurance companies violated federal consumer financial law by engaging in widespread kickback arrangements with lenders across the country. The CFPB believes the mortgage insurers named in today’s enforcement actions provided kickbacks to mortgage lenders by purchasing captive reinsurance that was essentially worthless but was designed to make a profit for the lenders.
The four companies named in today’s actions are Genworth Mortgage Insurance Corporation, United Guaranty Corporation, Radian Guaranty Inc., and Mortgage Guaranty Insurance Corporation. In exchange for kickbacks, these mortgage insurers received lucrative business referrals from lenders. These types of kickbacks were a common practice in the years leading up to the financial crisis. These four companies were key players during that time.
In accordance with the proposed settlement, the four mortgage insurance companies have agreed to change their practices and pay fines to the CFPB. Specifically, they have agreed to the following:
- End the practice: If entered by the court, the proposed orders will prevent these four mortgage insurers from engaging in this practice going forward. The mortgage insurers 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 ten years. As pre-existing reinsurance arrangements come to a close, the mortgage insurers will forfeit any right to the funds not directly related to collecting on reinsurance claims. The mortgage insurers will also be prohibited from paying illegal kickbacks or otherwise violating the Real Estate Settlement Procedures Act. Any violation of these prohibitions could result in additional fines.
- Payment of more than $15 million in penalties: The four mortgage insurers will pay the CFPB a total of $15.4 million in penalties. The amount of the penalties reflects a number of factors, including each mortgage insurers’ finances, the pervasiveness of its conduct, its relative culpability, and its cooperation with the Bureau.
- Compliance monitoring and reporting: These companies will be subject to monitoring by the CFPB and required to make reports to the CFPB in order to ensure their compliance with the provisions of the orders.
Mortgage insurance is typically required on loans when homeowners borrow more than 80 percent of the value of their home. It protects the lender against the risk of default. Generally, the lender, not the borrower, selects the mortgage insurer. The borrower pays the insurance premium every month in addition to the mortgage payment.
While mortgage insurance can help borrowers get a loan when they cannot make a 20 percent down payment, it also adds to the cost of monthly payments for borrowers who have little equity in their homes. As such, mortgage insurance can be especially harmful when its cost is inflated by illegal kickbacks. Increasing the burden on borrowers who already have little equity increases the risk that they will default on their mortgages. Widespread defaults, in turn, can be damaging for communities and the housing market.
The kickbacks at issue in today’s actions were paid to the lenders through “captive reinsurance arrangements.” “Reinsurance” is simply insurance for insurance companies. Many insurance companies purchase reinsurance in order to cover their own risk of unexpectedly high losses. When a mortgage lender sets up a subsidiary company to provide reinsurance to the mortgage insurers, it becomes a “captive” arrangement. It is “captive” because the lender both originates the loan and, through its own subsidiary, provides the reinsurance.
The Office of Inspector General at the Department of Housing and Urban Development (HUD) initiated this investigation of reinsurance practices, and in July 2011, HUD’s authority over the investigation transferred to the CFPB. Since then, HUD has given the CFPB valuable assistance in this matter.
The proposed Consent Orders have been signed by the CFPB and the named companies. The full text of each of the proposed Consent Orders is available at:
The proposed Consent Orders have been filed with the United States District Court for the Southern District of Florida court and will have the full force of law only when signed by the presiding judge. The Bureau files a complaint when it has reason to believe that the law has been or is being violated, and it appears to the Bureau that an enforcement action is in the public interest. The complaint is not a finding or ruling that the defendants have actually violated the law.
#DidYouKnow MORTGAGE FRAUD – BANK FINES NO JAIL; Cash and non-cash such as consumer relief, Citigroup , $7 billion; @CreditSuisse $5.28 billion; @GoldmanSachs $5.06 billion; @RBS $4.9 billion; @MorganStanley $2.6 billion; @WellsFargo $2.09 billion; and @Barclays $2 billion.
— LawsInTexas (@lawsintexasusa) August 12, 2019
#DidYouKnow MORTGAGE FRAUD – BANK FINES NO JAIL; Including both cash and non-cash consideration such as consumer relief, Bank of America paid $16.65 billion ; J.P. Morgan, $13 billion; Deutsche Bank, $7.2 billion; CORRECTION $0, THE GERMANS SAID HELL NO; THE DON OWES US! #Trump
— LawsInTexas (@lawsintexasusa) August 12, 2019
CFPB Director: PHH Corp. took kickbacks for mortgage insurance referrals which requires firm to pay $109M to the CFPB
Consumer Financial Protection Bureau Director Richard Cordray issued a decision in the first appeal of a Bureau administrative enforcement proceeding.
The director’s decision concludes that PHH Corp., a mortgage lender, illegally referred consumers to mortgage insurers in exchange for kickbacks.
He also issued a final order that prohibits PHH from violating the law and requires it to pay $109 million to the bureau.
Cordray issued a decision upholding in part, and reversing in part, Administrative Law Judge Cameron Elliot’s November 2014 Recommended Decision, which held that PHH violated the Real Estate Settlement Procedures Act when it accepted kickbacks for loans that closed on or after July 21, 2008. Those kickbacks took the form of mortgage reinsurance premiums that the mortgage insurers paid to a subsidiary of PHH.
A spokesperson for PHH Mortgage issued the following statement today.
“We strongly disagree with the decision of the Director. We believe this decision is inconsistent with the facts and is not in accord with well-settled legal principles and interpretations. We continue to believe we complied with RESPA and other laws applicable to our mortgage reinsurance activities,” the statement from PHH reads. “The Company did not provide reinsurance on loans originated after 2009. We intend to file an appeal to the United States Court of Appeals. While there can be no assurances as to the final outcome of any such appeal, we believe our appeal will be successful and, as a result, are not adjusting our previously issued earnings guidance for this matter.”
Cordray’s decision held that PHH violated RESPA every time it accepted a kickback payment on or after July 21, 2008 – going beyond Judge Elliot’s ruling, which had limited PHH’s violations to kickbacks that were connected with loans that closed on or after July 21, 2008.
Cordray issued a final order that requires PHH to disgorge $109 million – all the reinsurance premiums it received on or after July 21, 2008.
The order also bars PHH from violating the provision of RESPA that forbids kickbacks. In addition, it prohibits PHH from referring any consumer to a provider of a real estate settlement service if that provider has agreed to purchase any service from, or make any payment to, PHH, and if that purchase or payment is triggered by the referral.
In issuing his decision and final order, Cordray denied the appeal filed by respondents PHH Corp., PHH Mortgage Corp., PHH Home Loans LLC, Atrium Insurance Corp., and Atrium Reinsurance Corp. He also granted in part, and denied in part, an appeal filed by the Bureau’s enforcement counsel.
$39M Settlement Reached for Mortgage Insurance Kickbacks in Florida, New Jersey
A federal magistrate has preliminarily approved three settlements totaling nearly $15 million in a national class action accusing mortgage servicers of taking kickbacks from residential insurers.
According to the complaint, the mortgage companies forced borrowers to buy inflated policies from insurers that funneled some of the money back in the guise of commissions, reimbursements and the provision of below-cost services.
Under the terms of the settlements preliminarily approval by U.S. Magistrate Jonathan Goodman of the Southern District of Florida on Aug. 10, tens of thousands of borrowers will receive between 6 percent and 10.5 percent of the premiums they were overcharged and forced to buy since 2008.
The settlements include attorney fees capped at nearly $2.3 million for the plaintiffs lawyers: Adam Moskowitz, Thomas Ronzetti, Rachel Sullivan and Robert Neary of Kozyak Tropin & Throckmorton in Coral Gables; Lance Harke, Sarah Engel and Howard Bushman of Miami’s Harke Clasby & Bushman; and Aaron Podhurst, Peter Prieto, John Gravante III and Matthew Weinshall of Podhurst Orseck in Miami.
A final approval hearing is scheduled before Goodman in January.
Defense attorneys include Brian Toth of Holland & Knight in Miami; Mark Johnson, Rodger Eckelberry and Robert Tucker of Baker & Hostetler in Columbus, Ohio; Elizabeth Campbell of Locke Lord in West Palm Beach; and Keith Olin of Bressler, Amery & Ross in Fort Lauderdale.
None of the defense counsel responded to a request for comment.
The agreement comes on the heels of another force-placed insurance class action settlement worth nearly $24 million in New Jersey District Court. Judge Noel Hillman approved that settlement July 27. Nearly 75,000 people are members of that class.
The plaintiffs were represented by Moskowitz, Harke and Bushman; Peter Muhic, Donna Moffa and Samantha Holbrook of Pennsylvania’s Kessler Topaz Meltzer & Check; and a team of lawyers at Radnor.
The defendants in that case were PHH Mortgage Corp. and Assurant Insurance.
Defense attorneys Robert DiUbaldo and Frank Burt of Carlton Fields did not immediately respond to requests for comment.
Moscowitz and his team have taken a leading role in challenging force-placed insurance abuses since 2010, settling 27 class actions nationally on behalf of some 5.8 million homeowners.
“We’ve worked with 57 law firms all around the country working out these settlements,” Moscowitz said. “It’s been a wonderful experience, and we’ve really been able to transform the force-placed insurance industry.”
“Most of the conduct we complained about beginning six years ago has been prohibited, but the homeowners are still out the money they paid.”
Creditor-placed or force-placed insurance is common in the mortgage industry, where lenders require borrowers to maintain insurance on property securing a loan and can demand the purchase of new coverage in case a policy lapses.
As alleged in multiple suits and investigations around the country, including the just-settled actions, in some instances mortgage service companies have allowed insurers an exclusive right to monitor their loan portfolios and force place policies on borrowers in return for kickbacks disguised as commissions for assisting in issuing policies, expense reimbursements and payments for purported services that had nothing to do with the issuance of insurance.
Moscowitz said that about 15 class actions involving allegations of wrongdoing involving force-placed insurance were filed in the Southern District of Florida, the state where most such policies are sold. He and his team have been involved in many of them, including a $217 million settlement with Ocwen Loan Servicing and Nationstar Mortgage in 2015.
“I do give a lot of credit to some of the early providers that decided to settle with us,” Moscowitz said. “A settlement take two parties A lot of these [insurers] want to the right thing and protect their consumers.”
RESPA Kickbacks, Mortgage Companies, and the CFPB
For the past six years, the mortgage industry has watched the dramatic rise of enforcement activity under the Consumer Financial Protection Bureau (CFPB). The agency has assertively approached its regulatory power – implementing many new requirements and re-energizing old ones. So, the resuscitation of enforcement actions under Section 8 of the Real Estate Settlement Procedures Act (RESPA) for unearned kickbacks and fees should not be of any surprise. MCM Weekly NewsLINEs last visited RESPA Section 8 violations in our March 9, 2015, issue.
What may be of some surprise, though, is the CFPB Director Cordray’s remarks before the Senate Banking Committee in April of this year. In his testimony, he defended the CFPB’s “regulation by enforcement” approach that relies on enforcement in place of rulemaking. Compared to the approach banks, thrifts, and credit unions have experienced with federal regulators in the past, those organizations and mortgage companies, which are now under the supervision of the CFPB, may be in for a shock when confronted with examinations and enforcement actions designed by the CFPB to bring about systemic changes. Forewarned is forearmed.
What are kickbacks and unearned fees under Section 8 of RESPA? Specifically, the section states: “No person shall give and no person shall accept any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” That includes any portion, split, or percentage of any charge covered by the definition.
What, then, is a thing of value? Section 3 of RESPA describes this broad term. It includes, without limitation, monies, things, discounts, salaries, commissions, fees, duplicate payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or free rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person’s expenses, or reduction in credit against an existing obligation. Pretty much covers the bases, doesn’t it?
A “settlement service” is also defined very broadly and means any service provided in connection with a prospective or actual settlement, including, but not limited to, any one or more of the following:
- Origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of such loans);
- Rendering of services by a mortgage broker (including counseling, taking of applications, obtaining verifications and appraisals, and other loan processing and origination services, and communicating with the borrower and lender);
- Provision of any services related to the origination, processing or funding of a federally related mortgage loan;
- Provision of title services, including title searches, title examinations, abstract preparation, insurability determinations, and the issuance of title commitments and title insurance policies;
- Rendering of services by an attorney;
- Preparation of documents, including notarization, delivery, and recordation;
- Rendering of credit reports and appraisals;
- Rendering of inspections, including inspections required by applicable law or any inspections required by the sales contract or mortgage documents prior to transfer of title;
- Conducting a settlement by a settlement agent and any related services;
- Provision of services involving mortgage insurance;
- Provision of services involving hazard, flood, or other casualty insurance or homeowner’s warranties;
- Provision of services involving mortgage life, disability, or similar insurance designed to pay a mortgage loan upon disability or death of a borrower, but only if such insurance is required by the lender as a condition of the loan;
- Provision of services involving real property taxes or any other assessments or charges on the real property;
- Rendering of services by a real estate agent or real estate broker; and
- Provision of any other services for which a settlement service provider requires a borrower or seller to pay.
Where do lenders and servicers get into trouble?
All the terms are defined. They seem pretty straight forward. And, yet, lenders and servicers get into trouble with RESPA kickbacks and unearned fees. Similar to any other regulatory issue, varying circumstances can lead to violations, but, when it comes to Section 8 violations, there are some themes that surface recur across the industry. Our “Ask the Experts” responded to a great RESPA Section 8 question in a past issue of Mortgage Compliance Magazine.
Be suspicious when the buyer has to pay more based on some contingent factor from a builder, lender, or other party. The additional amount paid would generally be considered a kickback to the benefitting party.
- Home builder incentives (buyers have to use the builder’s mortgage company or pay thousands of dollars more for the home).
- Lender incentives (imposing an additional fee on homebuyers who elect not to use an affiliated company).
Be vigilant for situations for mortgage business referrals for which there is no “work” done for the loan (hence the term, unearned fee); that is, none of the settlement services listed above or other similar ones have been provided in exchange for the referral of business. Mortgage brokers sometimes perform many of the initial settlement services before passing an application packet to a lender, and, when examiners are looking at referred business, they expect to find as many settlement services as possible to support the referral and justify the fee.
- Incentives paid by loan officers (paying for Realtors’ advertising or something else, like a gift certificate, free training on TRID, or tickets to sporting events, theater productions, or other prizes) in exchange for referrals.
- Incentives paid among other parties, like Realtors and title companies (accepting free services or benefits, like free virtual home tours; advertising with parties such as real estate brokers, and making payments related to these agreements based on the “volume or value of business referred” rather than a flat fee; ) in exchange for referrals.
Social Media Emerging
Social media is a new hot bed in which REPSA violations may flourish. It is now common to see solicitations for business on social media websites, and, for many industries, social media advertising and digital marketing are common practice. Such advertisements in the mortgage industry could cost the company penalty fees for Section 8 violations. RESPA guidance regarding fee solicitation and kickbacks was supplemented in December 2013 when the Federal Financial Institutions Examination Council issued a Social Media Guidance. (For more information on managing social media compliance, see MCM NewsLINEs, July 14, 2014.)
The CFPB has implemented steps to use social media to track down individuals and companies who have been violating Section 8 via the subject matter of their online social media posts. The process combs social media sites to monitor what individuals are posting. Regulators are searching for violations by title companies, real estate agents, and developers by searching for buzz words, such as “referral” and “referral fee.”
With the distraction of many new requirements and changes in the regulatory environment, don’t forget to watch the “old salts.” RESPA activities may well be highly automated now, as far as documents and records go, but, the same sources of past Section 8 problems are alive and well – marketing incentives without regard to compliance requirements; determining and managing the terms of third-party relationships; lapses in employee training programs; and a lack of oversight for advertising, including social media. The CFPB’s “regulation by enforcement” approach demands our vigilance