PhotoAn alleged a mortgage insurance kickback scheme is at the heart of an administrative proceeding brought against PHH Corporation and its affiliates by the Consumer Financial Protection Bureau (CFPB).

CFPB claims consumers were harmed by the scheme that started as early as 1995, and is seeking a civil fine, a permanent injunction to prevent future violations, and victim restitution.

The filing is against New Jersey-based PHH Corporation and its residential mortgage origination subsidiaries, PHH Mortgage Corporation and PHH Home Loans LLC, and PHH’s wholly-owned subsidiaries, Atrium Insurance Corporation and Atrium Reinsurance Corporation.

Mortgage insurance

Mortgage insurance is typically required on loans when homeowners borrow more than 80% of the value of their home. It protects the lender against the risk of default. Generally, the lender -- not the borrower -- selects the mortgage insurer. The borrower pays the insurance premium every month in addition to the mortgage payment.

While mortgage insurance can help borrowers get a loan when they cannot make a 20% down payment, it also adds to the cost of monthly payments for borrowers who have little equity in their homes.

Ken of Puyallup, Wash., had an experience with PHH that left him shaking his head. "Got a runaround for a year and a half, lied to, ripped off, forcing me to use their insurance," he writes in a ConsumerAffairs post. "After all this time hassling back and forth, they gave me a 2% discount on my loan. (Big deal.) Crooks and scammers. My principal has not gone down since I started this loan and I'm current on my payment. Where did this money go that was supposed to go toward my loan? Payments-- where did my payment go?"

Doing damage

Mortgage insurance can be harmful when illegal kickbacks inflate its cost. Increasing the burden on borrowers who already have little equity increases the risk that they will default on their mortgages. The Real Estate Settlements Procedures Act (RESPA) protects consumers by banning kickbacks that tend to unnecessarily increase the cost of mortgage settlement services. It also helps promote a level playing field by ensuring companies compete for business on fair and transparent terms.

CFPB says its investigation showed that when PHH originated mortgages, it referred consumers to mortgage insurers with which it partnered. In exchange for this referral, these insurers purchased “reinsurance” from PHH’s subsidiaries. Reinsurance is supposed to transfer risk to help mortgage insurers cover their own risk of unexpectedly high losses.

According to the Notice of Charges, PHH took the reinsurance fees as kickbacks, in violation of RESPA. The CFPB alleges that because of PHH’s scheme, consumers ended up paying more in mortgage insurance premiums.

Enforcement action

The Notice contends that PHH used mortgage reinsurance arrangements to solicit and collect illegal kickback payments and unearned fees -- through its affiliates Atrium Insurance Corporation and Atrium Reinsurance Corporation -- in exchange for the referral of private mortgage insurance business. The bureau believes that from the start of the arrangements, and continuing into at least 2009, PHH manipulated its allocation of mortgage insurance business to maximize kickback reinsurance payments for itself.

PHH Corporation and its affiliates are specifically accused of:

  • Kickbacks: Over approximately 15 years, the CFPB alleges that PHH set up a system whereby it received as much as 40% of the premiums that consumers paid to mortgage insurers, collecting hundreds of millions of dollars in kickbacks;
  • Overcharging Loans: In some cases, PHH charged more money for loans to consumers wPhotoho did not buy mortgage insurance from one of its kickback partners. In general, they charged these consumers additional percentage points on their loans; and
  • Creating Higher-Priced Insurance: PHH pressured mortgage insurers to “purchase” its reinsurance with the understanding or agreement that the insurers would then receive borrower referrals from PHH. PHH continued to steer business to its mortgage insurance partners even when it knew the prices its partners charged were higher than competitors’ prices.

This case will be tried by an Administrative Law Judge from the CFPBs Office of Administrative Adjudication, an independent adjudicatory office within the bureau. The Administrative Law Judge will hold hearings and make a recommended decision regarding the charges, which may be appealed to the director of the CFPB for a final decision.

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