Fining four companies a combined $15.4 million in penalties, the Consumer Financial Protection Bureau has announced enforcement actions that target “improper kickbacks” paid by mortgage insurers to mortgage lenders in exchange for business.

CFPB complaints allege that four mortgage insurance companies -- Genworth Mortgage Insurance Corp., United Guaranty Corp., Radian Guaranty Inc., and Mortgage Guaranty Insurance Corporation -- violated federal consumer financial law by engaging in “widespread kickback arrangements with lenders across the country” that led to “lucrative business referrals from lenders.”

The alleged kickbacks were paid to lenders through “captive reinsurance arrangements."

Many insurance companies purchase reinsurance in order to cover their own risk of unexpectedly high losses, according to a statement by the CFPB. When a mortgage lender sets up a subsidiary company to provide reinsurance to the mortgage insurers, it becomes a “captive” arrangement because the lender both originates the loan and, through its own subsidiary, provides the reinsurance. The Office of Inspector General at the Department of Housing and Urban Development (HUD) initiated the investigation of reinsurance practices, and in July 2011, its authority over the investigation transferred to the CFPB.

In accordance with the proposed settlement, the four mortgage insurance companies have agreed to:

Stop the practice

Not enter 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 10 years.

As pre-existing reinsurance arrangements come to a close, the mortgage insurers will forfeit any right to the funds not directly related to collecting on reinsurance claims.

The companies will be subject to monitoring by the CFPB to ensure their compliance with the provisions of the orders.

The Consent Orders have been signed by the CFPB and the named companies, and filed with the U.S. District Court for the Southern District of Florida. They will have the full force of law only when signed by the presiding judge.