Mortgage Insurance Kickback Investigation Ends in $15.4 Million Settlement

mortgage insuranceFour mortgage insurance companies have agreed to pay a $15.4 million settlement after being investigated for a kickback scheme involving banks and lenders. Federal investigators alleged that the companies made illegal payments to the financial institutions for worthless reinsurance in exchange for those lenders steering home buyers to them to boost their mortgage home insurance business.

Mortgage Insurance Companies Have Big Role in Kickback Scheme

Both mortgage insurance companies and lenders have come under scrutiny in recent months after investigators caught wind of a kickback scheme benefiting both parties that dates back to the mid-1990s.

According to the Consumer Financial Protection Bureau (CFPB), banks and lenders identified in the investigation were requiring mortgage insurers to purchase backup insurance, also known as reinsurance, from lender-owned reinsurance companies that was essentially worthless.

The profits from the reinsurance dollars were paid directly to those lenders in exchange for them sending home buyers to the mortgage insurance companies.

Mortgage insurance is a form of coverage separate from standard home insurance. While home insurance offers financial support in the event of a home being damaged or destroyed, mortgage insurance is paid by borrowers who have financed a home but have paid less than the standard 20 percent down payment.

Having borrowers pay for the additional insurance as a way to protect lenders in the event that they default normally doesn’t have a direct financial impact on the lenders. But according to investigators, by having mortgage insurers pay for the worthless reinsurance, lenders were able to take a piece of the pie.

Customers Potentially Impacted in Mortgage Home Insurance Scheme

The companies involved in the kickback scheme (Genworth U.S. Mortgage Insurance, United Guaranty Corp., Radian Guaranty Inc. and MGIC Investment Corp) did not admit to guilt in the investigation, noting that they believed the reinsurance arrangements were proper, according to the Los Angeles Times.

They also stated that they did not increase costs for home buyers in the process of making reinsurance payments to lenders, but the CFPB believes otherwise.

Kent Markus, the bureau’s assistant director for enforcement stated that the result of the kickback scheme was probably inflated costs for consumers, though he would not estimate how much extra money homeowners paid, the LA Times noted.

“Today we’re dealing with those who paid the kickbacks and, in particular, trying to make sure the practice is stopped and consumers don’t continue to be victimized in this way,” Markus stated.

As part of the consent order, which is awaiting court approval, the mortgage insurance companies would be barred from engaging in the practice and prohibited from entering into new reinsurance arrangements with lender affiliates for a period of 10 years.

The ongoing investigation will also examine more closely the role of banks and other mortgage lenders in the scheme.

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