The nation's four major mortgage insurance companies have been hit with $15 million in fines over what is described as an illegal kickback scheme with mortgage lenders.

Enforcement actions against the four were announced today by the Consumer Financial Protection Bureau (CFPB), which filed complaints and consent orders against the insurers. The four companies are the largest surviving private mortgage insurance (PMI) issuers in the nation, following a shakeout of the industry in the wake of the collapse of the housing bubble.

Bought reinsurance from lender subsidiaries

The CFPB claims the four companies violated federal consumer law by funneling illegal payments to lenders in return business referrals steered their way. The complaints allege that the insurers purchased reinsurance arrangements that were essentially worthless from subsidiaries of numerous mortgage lenders as a way of funneling money to the parent companies.

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

In addition to the fines, which are to be paid to the CFPB, today's actions asks the courts to prohibit the four companies from engaging in such practices in the future and subjects the four to CFPB monitoring to ensure their compliance.

CFPB officials said the investigation remains open and suggested they are looking into the role played by mortgage lenders in the alleged schemes.

Insurers say they followed HUD guidlines

The four companies named in today's actions are Genworth Mortgage Insurance Corporation, United Guaranty Corporation, Radian Guaranty Inc., and Mortgage Guaranty Insurance Corporation.

Representatives of the private mortgage insurers said their agreement to participate in the settlement did not constitute an admission of wrongdoing. Several said they had been expressly following guidance provided by the Department of Housing and Urban Development (HUD) on how reinsurance arrangements ought to be structured.

The investigation was originally begun by HUD, but was handed over to CFPB after the bureau was established in 2011.

Mortgage insurance is required on home purchase mortgages with less than a 20 percent down payment or refinanced mortgages with less than 20 percent equity. Private mortgage insurance is one of the most common types; others include lender-paid mortgage insurance and type-specific insurance for FHA and VA mortgages.

Published on December 2, 2010