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Should You Become a Mini-Correspondent as a Compliance Strategy?

Posted by Jeff Schneider on Oct 23, 2013 2:45:00 PM

Mini-Correspondent as a Compliance StrategyCompliance is a top concern, of that there is no doubt. Most lenders are adopting strategies that will see them paying more attention to the new rules or bringing in extra help for quality assurance or even outsourcing compliance work to a third party. This issue doesn’t just impact bankers; it’s also a top concern for mortgage brokers.

 

There is a growing trend among some mortgage brokers that has them considering a switch in their business model from traditional broker to mini-correspondent.  

 

A mini-correspondent is a lender that closes and funds their own loans, but these loans are underwritten and conditioned by the by the purchasing wholesale lender. Mortgage brokers close loans in the name of the wholesale lender and fund the loan with the wholesaler’s funds. Brokers’ loans are also underwritten and conditioned by the Wholesale Lender.  

 

Full scale mortgage correspondent lenders typically have delegated underwriting and the ability to sell to several outlets. There are several advantages and disadvantages for mini-correspondents as described below. We’ll focus on the plus side of the equation for this post.

 

The first advantage that comes with a switch to mini-correspondent is that it changes how the originator must disclose income to the borrower. Lender-paid compensation has to be disclosed on line 1 of the Good Faith Estimate if you are a Broker, but is not required for the mini-correspondent. This eases the burden of explaining this fee to the borrowers and the appearance of being non-competitive. This is going to be a very attractive benefit when everyone else in the field has to explain to their heated borrowers why they make so much money. And believe me, many borrowers will feel that any money the originator makes is too much money.

 

The second advantage is that the lender is afforded greater flexibility and control over the closing process, since they are using their own funds (from their own warehouse line) to close the loan. Anyone who has slaved under the timelines of a wholesale lender knows what a benefit this can be.

 

Another big advantage for mini-correspondents is that it will make it easier to originate Qualified Mortgages. To be eligible for a “Qualified Mortgage” (the only loans that are saleable to the GSEs and that include a safe harbor against certain buyback claims for the lender), the points and fees in the loan must not exceed 3% of the loan amount for loans of $100,000 or more. If a mortgage broker originates the loan, compensation paid to the broker counts against that 3% threshold. For mini-correspondents, it doesn’t!

 

By turning into a mini-correspondent, loan originators will have more control of their incomes, have the power to price transactions competitively and pass through their costs. Broker compensation will always be restricted to a maximum of 3% if they wish to originate QM loans. That makes the broker business, at least for conforming loans, pretty unattractive.

 

But it’s not all good. There are some downsides and serious disadvantages that brokers going this route will have to deal with. We’ll deal with those in my next post.

Mini- Correspondent

 With the growing concern over compliance, mke sure you're utilizing every available tool to keep any compliance issues from affecting you or your business. Find out more about Mortech's compliance and fair lending software solutions today.

 

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Topics: Mortgage Compliance, Compliance

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