LOS ANGELES — The recent settlement between the U.S. Consumer Financial Protection Bureau and four mortgage insurers relating to improper payment allegations is a credit positive, according to Moody's Investors Service.
The settlement, which is subject to court approval, ends a five-year investigation into allegations that the insurers made kickbacks to mortgage lenders in exchange for business.
"It also shelters the mortgage insurers from pressure to enter into captive reinsurance arrangements that do not have, in our view, clear economic value and thus lower insurers' profitability," Moody's analyst Brandan Holmes wrote in a report released Monday.
Holmes said the settlement is a credit positive because it ends the lengthy investigation for an immaterial amount and allows the insurers to put another significant issue behind them.
The CFPB filed complaints and proposed consent orders against the mortgage insurers, requiring them to pay more than $15 million in penalties.
The settlement amounts include $3.75 million for Radian Guaranty Inc., $2.65 million for Mortgage Guaranty Insurance Corp., and $4.50 million for both United Guaranty Residential Insurance Co. and Genworth Mortgage Insurance Corporation.
According to Moody's, by the late 1990s it had become a common practice to cede a portion of mortgage insurance business to captive reinsurers that were subsidiaries or affiliates of certain mortgage lenders. In 2008 the U.S. Department of Housing and Urban Development began investigating with captive reinsurance arrangements were unlawful under the federal Real Estate Settlement Procedures Act, and the investigation was transferred to the CFPB in 2011.
According to the CFPB complaint, the reinsurance payments were effectively kickbacks for referring mortgage insurance business, since the projected reinsurance recoveries were lower than the premiums that mortgage insurers paid to lender-owned captive reinsurers.
Along with the settlement announcement, CFPB director Richard Cordray said the bureau believes that the mortgage insurers companies "funneled millions of dollars to mortgage lenders for well over a decade."
The CFPB also barred the four insurers from engaging in any other captive reinsurance arrangements with mortgage lenders for 10 years as part of the settlement.
The proposed consent orders were filed with the United States District Court for the Southern District of Florida court on Thursday.