WASHINGTON — Federal regulators are conducting an extensive investigation into an alleged mortgage insurance kickback scheme that pushed up costs for homebuyers dating from the mid-1990s.
The Consumer Financial Protection Bureau, in disclosing its first action Thursday, said the investigation revolves around a scheme in which banks and other lenders required private mortgage insurers to seek backup insurance from lender-owned reinsurance companies.
The backup insurance essentially was worthless and amounted to an improper payment to the lender by the mortgage insurer to acquire new customers, consumer bureau officials said.
Such a scheme was made possible, they said, by the general lenders' requirement that buyers with less than a 20 percent down payment take out private mortgage insurance to cover the additional risk of the loan.
The consumer bureau said Thursday that it had settled accusations against four major private insurers, including giant MGIC Investment Corp., that they improperly kicked back money to lenders that steered homebuyer business to them. The four insurers agreed to pay a total of $15.4 million in fines for actions that accelerated during the housing boom.
The bureau added that its ongoing investigation into other mortgage lenders could produce more substantial results.
The agency has been investigating the practice for more than a year, after an earlier federal inquiry resulted in no action. In 2011, American Banker magazine reported that many of the nation's largest banks had received more than $6 billion in kickbacks through the scheme over the course of a decade.
“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,” Richard Cordray, the consumer bureau's director, said Thursday.
“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,” he said. “In essence, the lenders were extracting financial kickbacks from the mortgage insurers in exchange for referring business to them.”
The fines hit some of the largest companies providing private mortgage insurance to homeowners.
Genworth U.S. Mortgage Insurance and United Guaranty Corp. each agreed to pay $4.5 million in penalties. Radian Guaranty Inc. agreed to pay $3.75 million and MGIC agreed to pay $2.65 million.
The companies, which did not admit any guilt, said they believed that the reinsurance arrangements were proper and did not raise costs for homebuyers. But all the firms said they settled to put the matter behind them.
Typically when a buyer puts less than 20 percent down, the lender selects the mortgage insurance company. Starting in the mid-1990s, a system was developed to allow for illegal kickbacks to lenders for lucrative business referrals, consumer bureau officials said.
Lenders set up so-called captive reinsurance arrangements — subsidiaries that provided secondary coverage — and steered mortgage insurers to their units for reinsurance, which spreads the risk of possible loan losses.
But insurers paid much more for reinsurance than the coverage was worth, the bureau said, essentially turning overpayments into lender kickbacks.
Kent Markus, the bureau's assistant director for enforcement, would not estimate how much extra money homeowners paid. He also would not name the lenders that are under investigation.