There are big changes for those in the mortgage industry. For starters, the CFPB mortgage kickbacks cases are coming full circle – and they’re coming with hefty fines.
The Consumer Financial Protection Bureau is definitely flexing its regulatory muscle – and using new federal laws to do so.
CFPB Mortgage Kickbacks
While CFPB has had the power since being defined three years ago, it’s just now using its flex in these types of cases. It’s doing so by making sure there aren’t any backdoor kickbacks being traded between builders and lenders in the mortgage industry – or against the Real Estate Settlement Procedures Act (RESPA). If you’ve ever purchased a home, you’re likely familiar with RESPA, which requires consumers be provided disclosures at various – though very specific – times in the transaction. Any kind of kickbacks that increase the cost of settlement services are strictly outlawed. Most of these types of arrangements are detrimental to consumers because they’re the ones who unknowingly fund those kickbacks. The CFPB says it “unfairly increases the cost of a mortgage”.
In its efforts, it’s targeting a Texas homebuilder. Paul Taylor has been ordered to give back more than $100,000 he received as kickbacks when he referred business to two Texas lenders, Benchmark Bank and Willow Bend Mortgage Company. Taylor is also now prohibited from playing a role in any future real estate settlement services, including mortgage originations or “closings” as they’re sometimes referred to.
Richard Cordray, CFPB Director, said during the announcement,
Kickbacks harm consumers by hampering fair market competition and by unnecessarily increasing the costs of getting a mortgage. The CFPB will continue to take action against schemes designed to let service providers profit through unscrupulous and illegal business practices.
Chain of Events
Here’s how CFPB has it figured:
Taylor received referral fees, illegal ones, through his partnerships with the two lenders. Those lenders and Taylor then created and jointly owned Stratford Mortgage Services, LLC when they say how easy it was to engage in this type of illegal behavior. The company claimed it was an originator. From there, the two parties then created and again, jointly owned, PTH Mortgage Company. Both entities were deemed as fraudulent shams designed to facilitate the kickbacks to Taylor.
Meanwhile, his construction company, Paul Taylor Homes, referred consumers to the companies to handle the financing. The companies then funneled the work to the actual lenders, Willow Bend and Benchmark Bank.
Four More Insurers
You may recall last month, four mortgage insurers were ordered to pay more than $15 million in penalties and were ordered to cease their kickbacks as well. They were accused by CFPB of using kickbacks to line their own pockets.
The government watchdog group said it filed against the companies, ordered the restitution and demanded they cease doing business in an illegal manner – some of which had been operating illegally for more than a decade. The agency said the “lucrative business referrals” came from lenders as part of “schemes” that were quite common and likely played a role in the mortgage meltdown in 2008 which led, at least partly, to the recession. It also called them “key players” in the meltdown.
The companies were Genworth Mortgage Insurance Corp., Mortgage Guaranty Insurance Corp., Radian Guaranty, and United Guaranty Corp. and each violated federal consumer protection laws. They did so all those years by purchasing captive reinsurance that was essentially worthless, but was designed to turn impressive profits for those lenders. During the announcement in April, Cordray said,
Illegal kickbacks distort markets and can inflate the financial burden of homeownership for consumers…We believe these mortgage insurance companies funneled millions of dollars to mortgage lenders for well over a decade. The orders announced today put an end to these types of arrangements
LTV and MI
Even when homeowners were qualifying for 100% LTV loans with credit ratings of 600 or even lower, mortgage insurance was still usually required. This was especially true with the 100% LTV (meaning the buyers didn’t have to put anything down) loans. The purpose of the insurance is to better protect the lender in the case of default. It’s the lender and not the borrower who decides who insures it, but the borrower makes a payment, part of his mortgage payment, each month. It can also help further qualify borrowers who might not be able to provide a downpayment (and certainly that was the case in 2008 and earlier). It was then and is now still sometimes used in refinances, as well, for those homeowners whose credit isn’t ideal.
When kickbacks are calculated into the mix, those premiums can sometimes be unreasonably inflated, which can and likely did lead to widespread defaults. There’s no doubt the housing market as a whole suffered as a result of these inflated premiums.
End the Practice
As part of the order, CFPB states that the four lenders must first, end the practice and if the court approved the settlement, the four lenders would be prohibited from entering into any “new captive mortgage reinsurance arrangements with affiliates of mortgage lenders, and from obtaining captive reinsurance on any new mortgages, for a period of ten years.” Also, as those insurance arrangements that were already in place come full circle and are closed, the mortgage insurers had to agree to forfeit any right to any funds that weren’t a part of the reinsurance claims. They are now also prohibited from paying other non-specific fees (kickbacks) and they must in no way, in the future, sway from RESPA. Additional fines await them if they do not adhere to the settlement.
The fines, as mentioned, totaled more $15 million; all of which was paid to CFPB. Finally, the companies and any others involved with them are now subject to closer CFPB monitoring and any changes or requests made by CFPB must be provided, in writing, to ensure compliance of the rules and provisions of the agreements.
So is this the end of the kickbacks in the mortgage industry? It’s not likely – but one thing’s for sure – if there are any companies still engaging in this kind of illegal activity, and if they’re caught, you can be sure CFPB will come down hard, “It’s our job,” said Cordray.