Private Mortgage Insurance ProvidersMortgage insurance companies
Although not the common thing we are reporting on, the DC Circuit's refusal of the Consumer Financial Protection Bureau (CFPB) ruling on capstive insurance arrangement is important given the many cases we have been digesting on the subject of capstive re-insurance agreements in the mortgage sector. By its ruling, the Tribunal substantially annulled the CRPB' s decision-making body.
Question of capstive reassurance is simple. Mortgage insurance is advised by a creditor to his debtor. This mortgage insurance firm is advised as it buys re-insurance from the lender's own re-insurance firm. Mortgage of the Mortgagor is covered by the Insurance and the Mortgage Insurance is covered by the Re.
According to the Real Estate Settlement Procedures Act (RESPA), the Tribunal considers that this scheme is lawful as long as the mortgage insurance does not pay more than an appropriate commercial value premium for the actual performance provided to the lender's own reinsurance arm. Otherwise, the agreement is in essence an unlawful discount which RESPA does not allow.
Ministry of Housing and Urban Development (HUD) has enacted rules and published regulative guidelines to ensure appropriate capstive re-insurance agreements. CFPB took a weak stance on capstive re-insurance agreements, ignored the statutes and HUD statements and submitted its recently prepared position against capstive re-insurance agreements retrospectively to a creditor and imposed a substantial penalty.
Creditor demanded a judicial finding and District Tribunal concurred with creditor. Clearly, the CFI found that Sections 8(a) and 8(c) of RESPA allow capping agreements as long as the mortgage insurance undertakings do not compensate the re-insurers for more than an appropriate commercial value for actual service rendered.
Specifically, if the re-insurance business is not in line with the prevailing conditions of the markets and the re-insurance premium is not adequate, then capstive re-insurance infringes RESPA as an illicit discount. However, if the lender's own in-house reinsurance company calculates the third parties insurance company commercial interest rates and appropriate re-insurance premium for the provision of re-insurance cover to the mortgage insurance company, the agreement is legally binding under RESPA and earlier prudential interpretation of the HUD.
It is an important case as the CFPB's sovereignty and constitutional character are being challenged and we may have a Supreme Court judgment on this matter in the near term.