I. INTRODUCTION
The Consumer Financial Protection Bureau (CFPB) has issued guidance regarding mortgage brokers transitioning to a “mini-correspondent” lender model. The CFPB is concerned that some mortgage brokers may be shifting to the mini-correspondent model under the mistaken belief that identifying themselves as such would automatically exempt them from important consumer protection rules affecting broker compensation. The guidance sets out how the CFPB evaluates mortgage transactions involving mini-correspondent lenders. It confirms who must comply with the broker compensation rules, regardless of how they may describe their business structure.
CFPB mortgage rules that took effect in January 2014 protect homebuyers from risky lending practices. Building upon regulations issued by the Federal Reserve Board in 2010, the rules provide important consumer protections by prohibiting financial incentives for brokers to push borrowers toward risky loans. They also require lenders to include mortgage broker compensation in calculations determining whether a loan meets certain consumer protection standards. (See, NBA Compliance Handbook, Volume III, Real Estate section, “Mortgage Loan Originator Compensation Requirements – Regulation Z” article).
The CFPB is concerned that some mortgage brokers may be setting up arrangements with investors in which the broker claims to be a “mini-correspondent lender,” when in fact the broker is still essentially just facilitating a transaction between a borrower and a lender. While some brokers may be setting up such arrangements because they intend to grow into full correspondent lenders, the CFPB is concerned that other brokers may simply be attempting to evade consumer protection rules. The guidance confirms that mortgage brokers who merely choose to describe themselves as mini-correspondent lenders are not automatically exempt from applicable consumer protection requirements.
The guidance sets out some of the questions the CFPB may consider in evaluating mortgage transactions involving mini-correspondent lenders in order to understand their true nature.
Among the questions the CFPB asks are the following:
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 CFPB exercises these authorities.
II. CONCLUSION
Regulation Z and RESPA make it improper for a bank to pay an improper amount to a mortgage broker. If an entity, which a bank thinks is a correspondent, proves to be a mortgage broker, all of the mortgage broker rules imply which could entail penalties to the bank doing business with it. This is particularly important if a bank has granted a warehouse line of credit to an entity that was previously a mortgage broker.