What’s Old is New: CFPB Claims Captive Reinsurance Arrangements Violate RESPA

By: Phillip L. Schulman, Andrew L. Caplan

Last week, the CFPB announced the filing of a complaint and proposed consent order with a North Carolina-based private mortgage insurer, Republic Mortgage Insurance Corporation (“RMIC”), which echoes previous enforcement positions taken years ago by HUD and state regulators. In this most recent enforcement action, the CFPB alleges that RMIC violated Section 8 of RESPA (the “anti-kickback” provision) through participation in captive reinsurance programs with mortgage lenders. These business arrangements are once again under scrutiny in 2013, as last week’s complaint and proposed consent order with RMIC marks the fifth such enforcement action this year.

The complaint and proposed consent order against RMIC allege that RMIC violated Section 8 of RESPA by engaging in “widespread kickback arrangements with lenders across the country.” Specifically, the CFPB alleges that RMIC ceded portions of mortgage insurance premiums to captive reinsurance affiliates of mortgage lenders that referred business back to RMIC. The CFPB further alleges that the reinsurance provided by the lenders’ captive reinsurance was of “little if any value because the projected value of the reinsurance…was far less than the premiums [RMIC] expected to cede.” The proposed consent order calls for $100,000 in civil penalties, a permanent injunction (a violation of which could lead to additional fines), and continued compliance monitoring by the CFPB (including a ten-year compliance certification requirement).

The complaint and proposed consent order read like a carbon copy of the CFPB’s April 4, 2013 announcement regarding four proposed consent orders calling for over $15 million in monetary damages (and other injunctive remedies) from four private mortgage insurers that allegedly participated in improper captive reinsurance arrangements. Those four enforcement actions picked up where HUD left off decades earlier, as the original investigations were initiated by HUD prior to the CFPB’s assumption of RESPA enforcement authority in 2011. Moreover, all five of these CFPB enforcement actions echo legal theories asserted by HUD nearly a decade ago. Specifically, in 2005 and 2006, HUD and state regulators entered into seven-figure settlements with title insurance companies that participated in captive reinsurance arrangements. In these past enforcement actions, regulators posited that the ceded title insurance premiums reflected a fee-sharing that did not correlate to the value of services performed. This was notwithstanding the fact that HUD had issued guidance in 1997 and 2004 stating that captive reinsurance arrangements would not per se violate Section 8 of RESPA, provided: (a) payments to the reinsurer are for reinsurance services actually furnished or for services performed; and (b) these payments are bona fide compensation that do not exceed the value of such services.

Still, these recent CFPB enforcement actions should not move the needle on industry practice, as most mortgage lenders and insurance companies have ceased engaging in new captive reinsurance arrangements over the past several years. A three-year statute of limitations on RESPA enforcement actions (and a one-year limitation for consumer actions) should render these specific actions unlikely to arise in the future. Nevertheless, these events signal the CFPB’s aggressive stance in enforcing Section 8 of RESPA. They also demonstrate that past practice may serve as a useful guide in fashioning “next year’s” compliance priorities.