On July 11, 2014, the CFPB issued supervisory and enforcement guidance entitled “Policy Guidance on Supervisory and Enforcement Considerations Relevant to Mortgage Brokers Transitioning to Mini-Correspondent Lenders.” The guidance addresses regulatory requirements applicable to mortgage brokers under the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA).
The CFPB notes that it is aware of increased interest among some mortgage brokers to restructure their business to become mini-correspondent lenders “in the possible belief that doing so will alter the applicability of important consumer protections that apply to transactions involving mortgage brokers.” The CFPB specifically identifies the following requirements:
- The RESPA requirements to disclose mortgage broker compensation on the Good Faith Estimate and HUD-1 Settlement Statement.
- The TILA requirements to include compensation paid to a mortgage broker in points and fees under the high-cost loan rule and to satisfy the qualified mortgage conditions under the ability to repay rule.
- The TILA requirements regarding compensation paid to a mortgage broker under the loan originator compensation rule, and the prohibition against steering by a mortgage broker under such rule.
The CFPB describes a “correspondent lender” as a party that performs the activities necessary to originate a mortgage loan, and specifically identifies the following functions: (1) taking and processing applications, (2) providing required disclosures, (3) often, although not always, underwriting the loan and making the final credit approval decision, (4) closing the loan it its name, (5) funding the loan, often through a warehouse line of credit, and (6) selling loans to investors. The CFPB states it understands that some mortgage brokers may be setting up arrangements with wholesale lenders in which the brokers purport to act as mini-correspondents. The CFPB describes a “wholesale lender” as an entity that typically provides the funding for loans in transactions involving mortgage brokers.
The CFPB explains that in a mini-correspondent arrangement, a mortgage broker may in form appear to be the lender or creditor in each transaction by engaging in activities such as closing the loan in its name, funding the loan from what is designated as a warehouse line of credit and receiving compensation through what may nominally take the form of a premium for the sale of the loan to an investor. The CFPB notes that mortgage brokers making such a transformation may start out as small correspondents dealing with only a few investors (hence the “mini-correspondent” moniker). However, the CFPB asserts that in substance the mortgage brokers “may not have transitioned to a mini-correspondent role and may be continuing to serve effectively as mortgage brokers. That is, these mortgage brokers may continue to facilitate brokered loan transactions between borrowers and wholesale lenders . . . .”
To provide guidance, the CFPB sets forth a number of questions that it may ask to assess whether a company using a mini-correspondent structure is actually acting as a creditor, or is acting as a mortgage broker. The CFPB notes that the questions in the guidance are not exhaustive and that no single question is necessarily determinative of how the CFPB may exercise is supervision and enforcement authority. The questions reflect areas that likely are of concern to the CFPB, including whether the warehouse line arrangement that the mini-correspondent uses to fund loans is bona fide and whether the mini-correspondent is actually performing the functions of a creditor. Among the various questions are the following:
- Is the warehouse line of credit provided by a third-party warehouse bank?
- Is the warehouse bank providing the line of credit one of, or affiliated with any of, the
mini-correspondent’s investors that purchase loans from the mini-correspondent?
- How thorough was the process for the mini-correspondent to get approved for the warehouse line of credit?
- Does the mini-correspondent have more than one warehouse line of credit?
- Does the mini-correspondent’s total warehouse line of credit capacity bear a reasonable relationship, consistent with correspondent lenders generally, to its size (i.e., its assets or net worth)?
- What changes has the mini-correspondent made to staff, procedures, and infrastructure to support the transition from mortgage broker to mini-correspondent?
- What training or guidance has the mini-correspondent received to understand the additional compliance risk associated with being the lender or creditor on a residential mortgage transaction?
- What entity (mini-correspondent, warehouse lender, investor) is performing the majority of the principal mortgage origination activities?
The Policy Guidance is non-binding guidance regarding the CFPB’s exercise of its supervisory and enforcement authority under RESPA and TILA. Nevertheless, it appears the CFPB intends to send a strong message regarding attempts by mortgage brokers to restructure their operations as mortgage lenders. In announcing the guidance, Director Richard Cordray stated “Before the financial crisis, consumers seeking mortgages were steered toward high-cost and risky loans that were not in the consumer’s interest. The CFPB’s rules on mortgage broker compensation are intended to protect consumers from this type of abuse. Today we are putting companies on notice that they cannot avoid those rules by calling themselves by a different name.”