PHH Targeted by CFPB in Reinsurance Kickback Probe

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The Consumer Financial Protection Bureau has launched an investigation of alleged kickbacks paid to private mortgage lender and servicer PHH Corp.

The probe, disclosed on Tuesday by PHH in a Securities and Exchange Commission filing, is the CFPB's first known formal investigation. The agency has a mandate to enforce the Real Estate Settlement and Procedures Act, a 1974 law meant to bar abusive practices in the sale of homes.

The CFPB's investigation follows an American Banker report last September that the Department of Justice had failed to act on a multi-year government investigation that concluded mortgage insurers were disguising reinsurance deals to pay kickbacks to banks.

The newly-empowered consumer agency has inherited the authority to enforce RESPA from the Department of Housing and Urban Development, which previously investigated the alleged kickback schemes. While the matter was referred to the Department of Justice, prosecutors have not brought a case.

The disclosure of the PHH investigation came on the same day that PHH disclosed concerns about its capital adequacy and stated that liquidity risks might imperil its ability to operate as a going concern. Its stock had fallen 8% through mid-afternoon. The company abruptly replaced its CEO last week.

The CFPB's review appears to focus on allegations that over a decade insurers paid kickbacks to banks and lenders in exchange for steering insurance business to them. In response to lenders' demands for a piece of the highly profitable business of insuring mortgages, the insurers allegedly bought reinsurance policies that did not transfer significant risk.

The collapse of the mortgage market brought the deals to a halt, although many of the pacts remain profitable for banks.

The existence of the multi-year reinsurance investigation by the Department of Housing and Urban Development's Inspector General and Minnesota state banking officials was first revealed by American Banker in its September, 2011 article. HUD identified $6 billion of alleged kickbacks paid to banks and numerous instances in which banks sold excessive amounts of mortgage insurance to consumers, according to documents obtained at the time and people familiar with the investigation.

Documents gathered during the review suggest that Countrywide Financial Inc., Wells Fargo & Co. and other banks pressured insurers to enter into the reinsurance deals, in some cases threatening to pull business if the companies did not meet their demands. One insurer, a predecessor of Genworth, complained to Citi Mortgage in 1999 that the industry couldn't "defend/sustain" some of the reinsurance deals. By capitulating to lenders' demands, insurers were simply "feeding the beast."

Lenders and insurers have argued that the payments were legitimate reinsurance.

"The Company has provided reinsurance services in exchange for the premiums ceded, and believes that it has complied with the Real Estate Settlement Procedures Act and other laws," PHH wrote in its Tuesday SEC filing. "[T]here can be no assurance whether or not this investigation will result in the imposition of any penalties and fines against the Company or its subsidiaries," it added.

PHH declined to discuss the CFPB's review beyond its SEC disclosure.

HUD's staff believed that their case, which targeted industry-wide practices, merited a settlement worth hundreds of millions of dollars, according to HUD's former inspector general and others close to the investigation. But after formally referring the case to the Department of Justice in 2010, the HUD team became frustrated that prosecutors weren't advancing the case.

"[T]his thing has been going on for too damn long," former inspector general Michael Stephens told American Banker last year.

As HUD waited for the Department of Justice to bring a case, its authority to enforce the Real Estate Settlement and Procedures Act expired. The CFPB acquired that authority last July, and has hired a significant contingent from HUD's former RESPA enforcement staff. The CFPB did not immediately respond to a request for comment.

At least ten HUD staffers have been transferred to the new agency, according to a December client note from law firm K&L Gates.

Additional reporting contributed by Kate Davidson.

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