On July 11, 2014, the Consumer Financial Protection Bureau (the “CFPB”) issued its “Policy Guidance on Supervisory and Enforcement Considerations Relevant to Mortgage Brokers Transitioning to Mini-Correspondent Lenders” (the “Guidance”). The CFPB stated that the Guidance was issued to identify the questions the CFPB may consider in exercising its supervisory and enforcement authority under the Real Estate Settlement Procedures Act, Regulation X, and the Truth in Lending Act, Regulation Z, with respect to mortgage transactions involving mini-correspondent lenders, including transactions involving mortgage brokers that transition to mini-correspondent lender roles. Specifically, the Guidance identifies a concern that mortgage brokers may be altering their business models to remove themselves from the supervision of the CFPB and Regulations X and Z.
Regulations X and Z impose certain requirements and restrictions on mortgage brokers, including:
- Disclosure of mortgage broker compensation;
- Inclusion of mortgage broker compensation in points and fees;
- Restrictions on mortgage broker compensation; and
- A prohibition on steering to increase mortgage broker compensation.
These requirements do not apply to exempt bona fide secondary-market transactions, but do apply to table-funded transactions; the difference between which depends on the “real source of funding” and the “real interest of the funding lender.”
A correspondent lender typically processes applications, provides legally required disclosures, underwrites the loans, makes final credit approval decisions, funds the loans, and sells the loans to investors. A mini-correspondent lender is typically a smaller mortgage banker or mortgage broker with a limited net worth that closes loans in its own name, funds the loan from what is designated as a warehouse line of credit (sometimes extended by the investor), and receives compensation through what may nominally take the form of a premium for the sale of the loan to an investor.
The Guidance clarifies that the requirements and restrictions that Regulations X and Z impose on compensation paid to mortgage brokers do not depend on how mortgage brokers choose to describe themselves or the labels used in transactions. The compensation related disclosures required under Regulation X depend on whether the compensation received is part of a secondary market transaction or a table-funded transaction. Similarly, the compensation related disclosures required under Regulation Z depend on whether the creditor finances the transaction out of its own resources or it is relying on table-funding by the investor.
The guidance provides sample questions that the CFPB may ask mortgage lenders in their effort toward understanding the true nature of the mortgage transaction:
- 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?
- Is the mini-correspondent using a bona fide warehouse line of credit as the source to fund the loans that it originates?
- Is the warehouse line of credit provided by a third-party warehouse bank?
- How thorough was the process for the mini-correspondent to get approved for the warehouse line of credit?
- Does the mini-correspondent have more than one 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?
- If the warehouse line of credit is provided by an investor to whom the mini-correspondent will “sell” loans, 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 warehouse 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)?
- 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?
- Which entity underwrites the mortgage loan before consummation and otherwise makes the final credit decision on the loan?
- What percentage of the principal mortgage origination activities, such as the taking of loan applications, loan processing, and pre-consummation underwriting, is being performed by the mini-correspondent, or an independent agent of the mini-correspondent?
- 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?
- What conditions must be met to make this transition (e.g., number of loans, time)?
Although the Guidance states that it is non-binding, mortgage lenders should carefully review the CFPB’s considerations and use the Guidance to evaluate their existing businesses. The Guidance may also be a useful tool for updating and modifying mortgage lenders’ compliance programs.