In response to what the CFPB views as an increasing trend among mortgage brokers shifting to a mini-correspondent lender model, the CFPB recently issued “Policy Guidance on Supervisory and Enforcement Considerations Relevant to Mortgage Brokers Transitioning to Mini-Correspondent Lenders” (“Policy Guidance”) regarding the application of Regulations X (RESPA) and Z (TILA) to transactions involving mini-correspondent lenders. In addition to providing background on the differences between brokers and mini-correspondents and certain requirements of Regulations X and Z, the Policy Guidance identifies questions the CFPB may consider when reviewing mini-correspondent transactions and the relationship between the mini-correspondent lender and the investor as part of CFPB examinations or enforcement actions. The CFPB, however, stops short of drawing any lines in the sand between what it considers to be brokered transactions and bona fide secondary market transactions under the mini-correspondent model.
The Policy Guidance appears to be spurred by the CFPB’s concern that mortgage brokers may be transitioning to the mini-correspondent lender model in light of GFE and HUD-1 disclosure requirements and the mortgage loan originator compensation and points and fees rules, which govern when mortgage broker compensation must be disclosed and when such compensation must be included in the points and fees calculation. The CFPB states that it will closely monitor these practices to ensure that companies are not evading the requirements that afford consumers certain protections. Accordingly, the Policy Guidance summarizes the scope of Regulations X and Z, and specifically notes that both regulations draw a distinction between table-funded and secondary market transactions—the former are subject to Regulations X and Z; the latter are not. The CFPB highlights that the applicability of these regulations to mini-correspondents and their transactions is not determined by the title of the parties involved but, rather, the nature of the transaction.
To facilitate the CFPB’s exercise of its supervisory and enforcement authorities and its determination of whether a transaction involves a mini-correspondent lender or a mortgage broker, the CFPB compiled a non-exhaustive list of questions, each of which, by itself, is not determinative under Regulations X and Z. The primary questions include:
- 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?
- How many “investors” does the mini-correspondent have available to it to purchase loans?
- Is the mini-correspondent using a bona fide warehouse line of credit as the source to fund the loans that it originates?
- 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?
- Which entity (mini-correspondent, warehouse lender, investor) is performing the majority of the principal mortgage origination activities?
The Policy Guidance drills down further on the question of whether the mini-correspondent is using a bona fide warehouse line by listing questions related to the source of the warehouse line, the number of warehouse lines, the process of obtaining the warehouse line, and any restrictions placed on the mini-correspondent’s use of the warehouse line. The CFPB also lists questions that will take a closer look at the division of origination activities, including the entity that underwrites the loan and makes the final credit decision. Again, while the CFPB notes that these questions are not an exhaustive list, and the questions do not reflect an affirmative statement by the CFPB as to what it considers to be a mini-correspondent (or secondary market) transaction, the questions provide a framework of the issues important to the CFPB.
Entities operating as mini-correspondents and the investors that purchase their loans may want to apply these questions to their business models to identify whether areas exist that could subject their transactions to further scrutiny by the CFPB. We are available to assist companies in analyzing whether their mini-correspondent relationships present any risks under Regulations X and Z in light of the Policy Guidance.