January 31, 2014

The Consumer Financial Protection Bureau (CFPB) has initiated an administrative proceeding against PHH Corporation and its affiliates (PHH), alleging that PHH harmed consumers through a mortgage insurance kickback scheme that started as early as 1995. The CFPB 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 is typically required on loans when homeowners borrow more than 80 percent 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 percent down payment, it also adds to the cost of monthly payments for borrowers who have little equity in their homes.

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. RESPA also helps promote a level playing field by ensuring companies compete for business on fair and transparent terms.

A CFPB 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.