Guidance has been issued to help mortgage brokers that are transitioning to mini-correspondent lenders better understand whether they are still subject to broker rules.
Consumer Financial Protection Bureau rules that took effect this year prohibit financial incentives for mortgage brokers to place borrowers in risky loans.
In addition, the CFPB rules require lenders to include compensation to brokers in their calculations that determine whether a loan meets certain consumer protection standards.
These requirements fall under the Real Estate Settlement Procedures Act along with its implementing Regulation X and the Truth in Lending Act and its implementing Regulation Z.
But some mortgage brokers are transitioning to the mini-correspondent business model because, they believe, they will be exempt from these rules.
The CFPB says that could be a mistake.
While mortgage brokers only connect borrowers with actual lenders, correspondent lenders underwrite loans, make the final credit decision and fund the loans — which are subsequently sold in the secondary market to investors.
The bureau is concerned that some brokers are setting up arrangements with investors where they claim to be mini-correspondent lenders even though they are still just facilitating a transaction between a borrower and a lender.
Such arrangements — which are not funded by a bona fide warehouse line carried by the mini-correspondent lender — are referred to as “table funding,” are not secondary market transactions and do not exempt brokers from the requirements.
So the regulator has issued guidance to help clarify whether a firm should be considered a broker or a lender.
“While some brokers may be setting up such arrangements because they intend to grow into full correspondent lenders, the bureau is concerned that other brokers may simply be attempting to evade consumer protection rules,” the CFPB announcement said. “Today’s guidance confirms that mortgage brokers who merely choose to describe themselves as mini-correspondent lenders are not automatically exempt from applicable consumer protection requirements.”
One question the CFPB seeks to answer is whether the mini-correspondent still acts as a mortgage broker in some transactions with the same wholesaler that also provides the warehouse line of credit. If the answer is yes, then the bureau will need to determine what distinguishes broker transactions and lender transactions with the wholesale lender.
The CFPB also wants to know how many investors the mini-correspondent lender has available to purchase loans.
Another question is whether the warehouse line bona fide. Factors considered here include whether the line is provided by a third-party warehouse bank, if the warehouse lender is also an investor and whether the warehouse line is captive.
The CFPB will also consider how thorough the approval process was for the warehouse line, how many warehouse lines the mini-correspondent has and what share of total monthly volume is sold to the entity providing the line.
One other factor the CFPB will analyze about the warehouse line is whether the size of the line is relative to the mini-correspondent’s assets or net worth.
On the operational side, the regulator will look at what changes the mini-correspondent lender has made to staffing, procedures and infrastructure in order to support the transition to mini-correspondent.
Another operational consideration is the training or guidance the mini-correspondent has received in order to understand the additional compliance risk associated with being a lender or creditor.
Additional operational questions the CFPB will seek to answer is which entity underwrites the loan and makes the final credit decision and what share of the production process is being performed by the mini-correspondent or its independent agent. In the case where the investor does most of these activities, the regulator will need to know if there is a plan in place to transfer these functions and what the time frame and conditions of the transition are.
No single question will be solely used to determine how the CFPB will exercise its supervisory and enforcement authorities. The regulator might consider additional factors.
In addition, the facts and circumstances of a particular mortgage transaction under review will be relevant to how the bureau exercises these authorities.
“The bureau will closely monitor the practices of mini-correspondents, including former mortgage brokers that have converted to this form, to ensure that the protections afforded to consumers under federal consumer financial law, including the bureau’s implementing regulations, are not being evaded,” the guidance stated. “In doing so, the bureau will use all appropriate tools to assess whether supervisory, enforcement or other actions are necessary.”
