There has been an increased interest among 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. These protections include provisions in the Real Estate Settlement Procedures Act (RESPA) and Regulation X and the Truth in Lending Act (TILA) and Regulation Z, as amended by title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). The Bureau has implemented the title XIV 2 amendments to RESPA and TILA through final rules amending Regulations X and Z, issued beginning in January 2013. These rules generally took effect in January 2014.
On July 9th, The Consumer Financial Protection Bureau (CFPB) issued Policy Guidance to identify for mortgage industry stakeholders, consumers, and the public general questions the Bureau may consider in exercising its supervisory and enforcement authority under RESPA and TILA with respect to transactions involving mini-correspondent lenders. The CFPB said it would closely monitor the practices of mini-correspondents, including former mortgage brokers that have converted to this form. The Policy Guidance states that among the questions the CFPB will consider are:
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- Does the mini-correspondent still act as a mortgage broker in some transactions? If so, what distinguishes those transactions from its “lender” transactions?
- How many “investors” purchase the mini-correspondent’s loans?
- Does the mini-correspondent fund loans using a “bona fide warehouse line of credit”?Is the line of credit provided by a third-party warehouse bank?
- How thorough was the process to obtain approval for the warehouse line of credit
- Does the mini-correspondent have more than one warehouse line of credit?
- Is the warehouse lender one of the investors that purchases loans from the mini-correspondent (or an affiliate of the investor)?
- Is the correspondent required to sell the loans to the warehouse lender (or its affiliate)?
- What percentage of the mini-correspondent’s total monthly originated volume does it sell to the warehouse lender (or its affiliate)?
- Does the mini-correspondent’s warehouse line 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 residential mortgage lending?
- Which entity is performing the majority of the principal mortgage origination activities?
- Who underwrites the mortgage loan and otherwise makes the final loan decision?
- What percentage of the principal loan origination activities (e.g., application, processing, underwriting) is performed by the mini-correspondent (or its “independent agent”)?
- If the majority of the principal loan origination activities are being performed by the investor, is there a plan in place to transition these activities to the mini-correspondent? What conditions must be met to make this transition (e.g., number of loans, time)?
“The CFPB’s rules on mortgage broker compensation are intended to protect consumers from this type of abuse,” stated CFPB Director Richard Cordray. “Today we are putting companies on notice that they cannot avoid those rules by calling themselves by a different name.”
“The guidance makes clear that no single question necessarily determines how the CFPB may exercise its supervisory and enforcement authorities, and that the facts and circumstances of the particular mortgage transaction being reviewed would be relevant to how the Bureau exercises these authorities,” the CFPB stated.