The government's consumer finance watchdog is investigating deals that transferred billions in premiums charged to mortgage borrowers from mortgage-insurance companies to the banks that made the loans.
The deals amounted to kickbacks, because the banks pressured insurers into them in exchange for a share of the banks' mortgage-insurance business, according to civil lawsuits filed by borrowers and legal experts.
The Consumer Financial Protection Bureau has served subpoenas to American International Group, MGIC Investment, Genworth Financial and Radian Group, the companies said in public filings this week. The CFPB asked for documents and answers to written questions about captive mortgage reinsurance deals, they said.
The companies did not respond to requests for comment Friday.
Mortgage borrowers whose down payments are less than 20% typically must buy private mortgage insurance that protects the bank in case they default. Because mortgage insurers charge roughly the same rates, borrowers generally choose an insurer recommended by their lender.
Lenders routinely steered borrowers to their preferred mortgage insurers, said Mike Calhoun, who was the lead attorney on a class-action suit about the practices in the early 2000s. In return, the insurers shared their premiums with the lender by buying reinsurance from a company owned by the lender at vastly inflated rates.
“It's just a grossly overpriced reinsurance that is many times more expensive than what arms-length reinsurance costs in the general market,” said Calhoun, who now is president of the Center for Responsible Lending, a consumer advocacy group. Banks were typically insulated from any real possibility of loss on the reinsurance, he said.
Mortgage insurers called their payments to banks reinsurance because it is illegal to pay fees or kickbacks in exchange for referrals of business related to mortgages, under a law called the Real Estate Settlement Procedures Act, or RESPA.
Creating costly reinsurance and splitting the borrowers' fees and premiums was “primarily a way to get around the RESPA referral fee situation,” Calhoun said.
Reinsurance usually is used by insurance companies to transfer some of their potential risk to another company. In these cases, they claimed that the risk was transferred in exchange for a reasonable fee. But several civil lawsuits filed by borrowers argued that the risk was not truly transferred and the fees were merely a way to attract business from banks.
The mortgage insurers didn't necessarily want to transfer that risk, because that meant sharing the premiums and fees collected from borrowers.
“The mortgage insurers were bullied into this,” said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. ”The lenders would say,
'Hey, if you don't take this, we won't even give you any business.'”
The reinsurance deals unfairly add to people's monthly payments while offering them no direct benefit, said Adam Levitin, an authority on consumer finance and a visiting professor at Harvard Law School.
“There really isn't any insurance here, it's just cash going around in a loop,” he said. “It's really as if you're paying a higher mortgage rate.”
The CFPB's subpoenas, called Civil Investigative Demands, mean that its enforcement division has launched a preliminary probe of the matter. The investigation could result civil charges against the companies, or might be resolved without any formal action.
A spokeswoman for the CFPB said the agency does not comment on, confirm or deny activities by its enforcement team.
The companies already had responded to similar inquiries about mortgage reinsurance from the Department of Housing and Urban Development's inspector general, they said in their filings. The HUD probe was transferred to the CFPB after it took over enforcement of the law that allegedly was violated.
AIG said in its filing that the CFPB had allowed it to delay its deadlines for submitting the information because AIG is close to settling a formal enforcement action with the Minnesota Commissioner of Commerce. The company said that “could resolve the investigation.” AIG shares closed up 50 cents, at $31.34.
MGIC shares fell 4 cents, or 4.6%, to close 84 cents on Friday. The company had said Thursday that its second-quarter loss widened as homeowner defaults forced it to pay out more insurance claims. MGIC has posted annual losses since 2007, and expects the losses to continue.
Genworth rose 20 cents, or 4.9%, to $4.32. Radian rose 1