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CFPB Clarifies “Mini-Correspondents” Position

Posted by Tom Erickson on Jul 23, 2014 2:02:00 PM

CFPB Clarifies | Mini-Correspondents PositionReason for the clarification

 

On July 11, 2014, the CFPB posted policy guidance for mini-correspondents and for Mortgage Brokers who have/or will convert to a mini-correspondent business model.  The CFPB is concerned that some mortgage brokers may be shifting to the mini-correspondent model in the belief that, by identifying themselves as mini-correspondent lenders, they are automatically exempt from

 

the consumer protections that apply to transactions involving mortgage brokers.  There are two primary concerns that the CFPB addresses when looking at such cases. The first is the disclosure of mortgage broker compensation (RESPA-Reg X).Mortgage Brokers must disclose their compensation on the GFE and the HUD-1 settlement statements, whereas mortgage bankers (correspondents) do not.The second is broker compensation must be included in the “points and fees” tests (TILA-Reg Z) for QM and HOEPA, whereas LO compensation for mortgage bankers is not included.

 

CFPB Guidance 

 

The CFPB will try to determine if the parties are engaging in “good faith” market transactions between a lender and a third party investor or if it’s really a transaction between a mortgage broker and a wholesale lender, and will ask numerous questions to try to understand the true nature of the transaction.  Here are some examples of the questions that were provided by the CFPB:

  • Is the mini-correspondent using a bona fide warehouse line of credit as the source to fund the loans that it originates?
  • Does the mini-correspondent have more than one warehouse line of credit?
  • How thorough was the process for the mini-correspondent to get approved for the warehouse line of credit?
  • 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?
  • Is the warehouse line of credit provided by a third-party warehouse bank?
  • If the warehouse line of credit is provided by an investor to whom the mini-correspondent will “sell” loans to, is the warehouse line a “captive” line (i.e., the mini-correspondent is required to sell the loans to the investor providing the warehouse line, or affiliates of the investor)?
  • What percentage of the mini-correspondent’s total monthly-originated volume is sold by the mini-correspondent to the entity providing the warehouse line of credit to the mini-correspondent or to an investor related to the entity providing the 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)?
  • Beyond the mortgage transaction at issue, does the mini-correspondent still act as a mortgage broker in some transactions, either brokering to the same wholesale lender that supplies the warehouse line of credit or otherwise?
  • If so, what distinguishes the mini-correspondent’s “mortgage broker” transactions from its “lender” transactions?
  • How many “investors” does the mini-correspondent have available to it to purchase loans?
  • 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?
  • Which entity (mini-correspondent, warehouse lender, investor) is performing the majority of the principal mortgage origination activities?
  • 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?
  • Which entity underwrites the mortgage loan before consummation and otherwise makes the final credit decision on the loan?
  • If the majority of the principal mortgage origination activities are being performed by the investor, is there a plan in place to transition these activities to the mini-correspondent?

The bottom line is if it looks like a broker, smells like a broker, and acts like a broker, it is a broker, no matter what it call itself.  The CFPB has vowed to closely monitor mini-correspondents to ensure that consumer protections are not being evaded.

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