It looks like yet another illegal kickback scheme involving mortgage insurance has been uncovered in the residential mortgage industry. Recently the Consumer Financial Protection Bureau (“CFPB”) filed a lawsuit in the U.S. District Court for the Southern District of Florida against Republic Mortgage Insurance Company (“RMIC”), alleging that it had developed an illegal scheme in which it paid kickbacks to residential mortgage lenders in exchange for business. Interestingly, these allegations come in the wake of recent reports that private mortgage insurers have returned to profitability after the housing crisis.
In relevant court pleadings, the CFPB alleged that RMIC entered into agreements through which it paid illegal kickbacks, or otherwise unearned fees, under the pretext of reinsurance premiums. RMIC allegedly made those illicit payments to captive reinsurance affiliates of lenders providing residential mortgage loans. In return, RMIC obtained private mortgage insurance referrals from those residential lenders, in violation of the Real Estate Settlement Procedures Act (RESPA). According to the CFPB, the North Carolina Department of Insurance was already supervising RMIC’s resolution of outstanding insurance claim obligations through an independent court-approved corrective plan.
Under a proposed consent order, RMIC has agreed to pay a fine and end its practice of doling out kickbacks to residential mortgage lenders in exchange for business. “Kickbacks for mortgage insurance referrals are illegal, and can drive up costs for consumers seeking to buy a home,” said CFPB Director Richard Cordray in a statement. “The order announced today will put an end to this practice and require RMIC to pay a $100,000 penalty for violating the law.”
Related Actions Brought by the CFPB against other Mortgage Insurers
The action against RMIC is the latest attempt by the CFPB to eradicate kickbacks of this type, which it claims have been widespread in the industry and throughout the country for more than a decade. The same agency in April 2013 initiated actions against United Guaranty Corp., Radian Guaranty Inc., Mortgage Guaranty Insurance Corp. and Genworth Mortgage Insurance Corp., concerning illegal kickbacks. Those actions resulted in the targeted mortgage insurers paying more than $15 million in penalties.
Considerations for Correspondent Lenders Facing Repurchase Demands
Kickback schemes are of concern to loan originators. Such schemes drive the costs of loan products up for the consumer, ultimately increasing default rates and prompting additional repurchase and indemnification claims against correspondent lenders. Far too many repurchase or “make-whole” claims are based on the rescission of mortgage insurance as to a particular residential mortgage loan. To the extent that illegal kickback practices have been used by these mortgage insurance companies, the affirmative defense of unclean hands may prove to be successful. Additionally, if mortgage insurance providers are engaging in undisclosed agreements for referral payments with the big banks lodging the repurchase claims, there is certainly an appearance of impropriety, and likely an outright conflict of interest. We will monitor with interest the CFPB’s efforts to eliminate this harmful and anti-competitive practice.