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."

This story originally appeared at American Banker.

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