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."
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.