Consumer Bureau Says 4 Insurers Made Kickbacks to Mortgage Lenders

A federal regulator set up after the financial crisis to protect consumers announced on Thursday enforcement actions against four insurance companies, asserting that the firms paid kickbacks to mortgage lenders for over 10 years.

The Consumer Financial Protection Bureau’s allegations focus on mortgage insurance, a product that many borrowers were required to purchase if they didn’t make a sizable down payment when buying a house. The bureau claims that, because of the kickbacks, home buyers may have had to pay more for the mortgage insurance. The arrangements examined by the agency are the latest example of how murky insurance transactions may be used to cover up payments of questionable intent.

“Illegal kickbacks distort markets and can inflate the financial burden of home ownership for consumers,” Richard Cordray, the bureau’s director, said in a statement. “We believe these mortgage insurance companies funneled millions of dollars to mortgage lenders for well over a decade.”

Settlements with the four firms require that that they pay a combined $15 million in penalties. The companies are Genworth Mortgage Insurance Corporation, Mortgage Guaranty Insurance Corporation, Radian Guaranty and United Guaranty Corporation, a subsidiary of American International Group.

The bureau’s investigation covered deals struck in the years before the housing bust, when using mortgage insurance from private companies was a lot more common. Mortgage banks often steered borrowers toward mortgage insurance provided by certain companies. The consumer agency claims that the insurers made disguised payments to mortgage lenders in order to gain business.

The bureau didn’t name the banks that it said received the kickbacks. When asked why, Kent Markus, assistant director for enforcement, said, “Because we are not done with this matter, there are still a lot of things we can’t talk about.”

According to the bureau, the insurers made the kickbacks in the form of separate insurance payments back to the mortgage lenders, called reinsurance. These payments didn’t appear to provide real economic value to the mortgage insurers, according to Mr. Markus.

In agreeing to the bureau’s orders, which were filed with the United States District Court, Southern District of Florida, none of the four insurers admitted or denied the allegations.

In its statement, Mortgage Guaranty Insurance said it had, “obtained actuarial opinions from independent actuaries reflecting that the reinsurance premiums paid by MGIC were reasonably related to the risk assumed by the captive reinsurers.”

Genworth said that when it set up its reinsurance arrangement, also known as captive reinsurance, it had used guidance from the Department of Housing and Urban Department. “Genworth followed the guidance, and had the arrangements tested by independent third parties to verify that the HUD requirements were met,” the company’s statement said. In its statement, Radian made a similar point about using HUD’s guidance.

Genworth and Mortgage Guaranty Insurance also disputed whether borrowers were financially harmed by the insurance arrangements.

In the settlement, the four companies are prohibited from entering any new captive insurance arrangements with mortgage lenders for 10 years.

In a statement, Jon Diat, a spokesman for American International Group, the owner of United Guaranty, said the unit, “believes these practices complied with the law and were fair to consumers, but settled the matter to avoid the distraction and expense of protracted litigation.”

Because reinsurance deals can be malleable and opaque, companies have been under scrutiny for using them to mask the real motivation for payments. One prominent case was a deal at the start of the last decade between American International Group and a unit of Berkshire Hathaway that made the former’s balance sheet look healthier than it was. In 2010, Berkshire agreed to a $92 million settlement with federal agencies over the arrangement.

Since the financial crisis, there has been less demand for private mortgage insurance. Banks require larger down payments now, removing the need for private mortgage insurance. Meanwhile, the federal government, through the Federal Housing Administration, guarantees many mortgages with small down payments.