Press Call on Enforcement Action Against Mortgage Insurers to End Kickbacks to Lenders

Prepared Remarks of Richard Cordray
Director of the Consumer Financial Protection Bureau

Press Call on Enforcement Action Against Mortgage Insurers to End Kickbacks to Lenders

Washington, DC
April 4, 2013

Thank you for joining us today. The Consumer Bureau was born out of the worst financial crisis since the Great Depression. The financial reform law that created us also directed us to root out unfair, deceptive, or abusive acts or practices in connection with consumer financial products or services. More generally, we are charged with the duty of ensuring fair, transparent, and competitive markets. We recognize that can only be done by strong and vigilant enforcement.

Today, we are taking enforcement actions against four mortgage insurance companies to end a long cycle of kickbacks between them and mortgage lenders. As background, when a home buyer cannot make a 20 percent down payment, the lender may require mortgage insurance. The borrower pays the insurance premium every month in addition to the mortgage payment.

Generally the lender, not the borrower, selects the mortgage insurer because the insurance protects the lender against the risk of default on the loan. 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.

Based on our investigation, we believe that the exertion of this pressure led these mortgage insurance companies to funnel many millions of dollars to lenders for well over a decade. The payments were dressed up as supposedly relating to a “reinsurance” product provided by new subsidiaries created by the lenders. “Reinsurance” is simply further insurance provided to insurance companies themselves as a means of hedging the risks they have taken on. 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. In essence, then, the lenders were extracting financial kickbacks from the mortgage insurers in exchange for referring business to them.

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. That harms not only consumers, but entire communities, the housing market, and the economy as a whole. These are precisely the kinds of concerns that led Congress to pass the Real Estate Settlement Procedures Act (known as “RESPA”) almost forty years ago. It generally prohibits kickbacks in connection with real estate transactions. The proposed orders put an end to these types of arrangements and require these insurers to pay more than $15 million in penalties for violating the law.

Today’s actions are an important step in our quest to improve markets for consumers by getting rid of harmful practices that impede their pathway to opportunity. Homeownership is difficult and expensive enough for most people without extra costs imposed by financial kickbacks that are kept hidden from them. In the meantime, we are continuing to look into the lender side of these captive reinsurance arrangements.

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The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov .