Mortgage Insurers Funneled Kickbacks to Lenders, Alleges CFPB

 Consumer Financial Protection Bureau
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On Thursday, the Consumer Financial Protection Bureau filed complaints against four mortgage insurers who the CFPB claimed had paid kickbacks to mortgage lenders. Mortgage insurance is often required by mortgage lenders when customers are unable to make a 20 percent down payment on a home mortgage. Insurance protects the lender from a customer defaulting on their mortgage, but it also adds to the borrower's overall monthly payments.

Lenders, rather than borrowers, typically select the mortgage insurer. Through the arrangement, lenders were able to send business to insurers that then funneled millions of dollars back to the lenders over the span of 10 years.

The CFPB found the arrangement was in violation of the Real Estate Settlement Procedures Act of 1974, which makes kickbacks in real estate transactions illegal. The Dodd-Frank Act moved enforcement of the old law to the new CFPB.

Because the practice targets homeowners with little equity, the CFPB says that inflated costs as a result of illegal kickbacks can be devastating, and increase the chances the homeowners will default on their mortgages.

"Illegal kickbacks distort markets and can inflate the financial burden of homeownership for consumers," said CFPB Director Richard Cordray in a press release. "We believe these mortgage insurance companies funneled millions of dollars to mortgage lenders for well over a decade."
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The four companies involved in the settlement are Genworth Mortgage Insurance Corporation, based in Richmond, Virginia; the Greensboro, N.C.-based United Guaranty Corporation; Radian Guaranty of Philadelphia; and Mortgage Guaranty Insurance Corporation headquartered in Milwaukee.

The complaint against the mortgage insurers and lenders in regards to kickbacks calls for a combined penalty of $15.4 million, an end to the practice of kickbacks, and ongoing compliance monitoring.

Lenders, You're Clearly on Notice

This isn't the first time the CFPB has tackled predatory mortgage practices.

In January, the agency issued new rules to ban predatory lending to high-risk individuals, including interest-only and no-documentation loans. The rules included a caveat that loan payments be no more than 43 percent of a borrower's monthly income.

In February, the CFPB issued warnings about ongoing mortgage relief scams, and are targeting companies that promise to offer help for underwater homeowners, especially those pretending to be government or government-endorsed agencies.

See the CFPB's release for more on its complaints and proposed consent orders sent to the four major lenders.

Molly McCluskey is a contributor to The Motley Fool.

Galling Tax Loopholes Costing The US Government Billions
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Mortgage Insurers Funneled Kickbacks to Lenders, Alleges CFPB
Several major U.S. corporations dodge domestic taxes by moving profits internationally to tax havens.
For example, a company can utilize the "double Irish" formula to minimize their U.S. taxes.

If the profits from the sale of a good stayed in the U.S., they would be taxed at the federal 35 percent rate. However, some companies sell the intellectual property rights to an Irish subsidiary to minimize tax obligations.

The profits from that U.S. sale are paid overseas to the Irish subsidiary. As long as the Irish subsidiary is controlled by managers elsewhere - for instance, a Caribbean tax haven - the profits can move around the world without a dime of taxation.

At this point, the profits are moved to a nation with no tax, skirting around the U.S. 35 percent rate.

Source: NYT

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This is the "Double" part of the Double Irish, and also entails a trip through the Netherlands.

When the same company's product is sold overseas, that profit is routed to a second Irish subsidiary, Since Ireland has treaties with the Netherlands to make inter-European transfers tax free, the profits are then routed through the Netherlands, and then back to the first Irish subsidiary, and then to the no-tax Caribbean Island.

As a result, the U.S. company never has to repatriate the money and they never has to pay taxes on the products.

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Carried interest - profits made by private equity investment managers, hedge funds, venture capitalists, and real estate investment trusts - constitutes a major source of income for many financial professionals.

However, carried interest isn't taxed as income. Instead, it's taxed at the capital gains rate, which, at 15 percent, is considerably less than the top bracket tax rate of 39.6 percent that many of the financial professionals would pay.

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Facebook reported $1.1 billion in pre-tax profits in 2012, but paid zero federal and state taxes while receiving a federal tax refund of around $429 million.

The reason is that the company took a multi-billion dollar tax deduction for the cost of executive stock options and share awards following their IPO.

In essence, Facebook was able to write off its entire federal tax obligation and more for paying its executives. This has raised the ire of a number of people in Washington, including Michigan Democratic Senator Carl Levin.

Source: CBS, Bloomberg Businessweek


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A line in the tax code allows a depreciation schedule of five years for private jets instead of seven, the standard for the rest of the airline industry.

Depreciation is an income tax deduction that allows taxpayers to recover the cost of buying the jet. This means that private jet owners can write off their expenses faster (in five years) and make back the money for the jet in less time.
This costs the U.S. government $300 million annually.

Source: CBS

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Originally designed for small farmers trading assets like livestock or property, the Section 1031 tax break allowed two farmers to avoid capital gains taxes on those transactions.

Since then, major corporations have successfully lobbied for an expansion. Because of this, many companies can go about their business of buying and selling assets, but can escape the capital gains tax, as long as they use all the proceeds from a sale to buy a "like-kind" asset.

For example, a real estate investment group can avoid taxation on a major land sale by invoking Section 1031, and using all proceeds from the sale on another land buy.

Wells Fargo, Cendant, and General Electric were recently sued for abusing the practice, but the law remains on the books.

Source: NYT

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In 2011 you could write-off the full cost of an SUV, provided it was used exclusively for business and weighed more than 6,000 pounds. 

Since then the relevant section of the tax code — Section 179 — has been scaled back significantly, but the process still allows people to deduct the full purchase price of qualifying equipment or software if it's used for business. 

Today, acceptable write-offs include taxis and vehicles that can seat more than nine passengers, have no seating behind the drivers seat, have a fully enclosed driver's compartment, or have a cargo area at least six feet in length (like a pickup truck). 

Source:, Forbes


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The tax code permits yacht owners to claim a boat as a second home, provided it has sleeping quarters, a kitchen, a bathroom, and that the owner sleeps on the vessel at least twice a year.

This means that - just as homeowners do - yacht owners may deduct the interest on their yacht's mortgage from their taxes.

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When an executive flies on a private plane for business reasons, the company pays the bill and deducts the expense. However, if the flight is provided to the executive for personal reasons, the executives are required to pay income taxes on the amount the company paid for the flight, as the IRS considers travel as a form of compensation.

But if an outside security consultant says that the executives need a private jet for security reasons, the executive doesn't need to pay the tax.

According to Dealbook, it's "a common corporate tax trick," that allows many virtually anonymous executives - Melvin J. Gordon of Tootsie Roll Industries, Terry Lundgren of Macy's, the heads of Cablevision, Time Warner, Kraft, Waste Management, and Home Depot, for instance - to enjoy the kind of "security" that Apple didn't bother providing Steve Jobs.

Board members are also frequently rewarded with flights for "security" purposes.

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As part of the TARP bailout, NASCAR owners got a huge tax gift written into the tax code. It's still around today, as it was extended for another year as part of the "Fiscal Cliff" deal.

Much like the private jet depreciation advantage, NASCAR track owners are now allowed to write off the cost of building facilities in seven years, rather than the 39 years the government estimates it actually takes for the tracks to depreciate.

This means that NASCAR track owners make their money back even faster, but the government loses $40 million each year.

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