Garnet Capital Advisors Blog

The Consumer Financial Protection Bureau recently provided guidance for mortgage brokers that want to operate using a mini-correspondent lender model, outlining the questions it uses to evaluate these industry participants to determine whether they meet the definition of mini-correspondent.

These questions seek to determine how these brokers function, including:

• How they are structured
• Whether they broker loans
• What mortgage origination activities they perform
• What relationship they have with investors
• Where they obtain funding

The government agency emphasized that it will consider the unique circumstances surrounding any particular transaction when determining how it will harness its power as a regulator. As a result, the answer to a single question will not necessarily serve as the basis for such actions.

CFPB voices concerns
In addition to providing greater insight into how it assess the true nature of institutions, the government agency voiced concerns that some brokers are moving toward this model to avoid having to meet certain compensation requirements.

The number of these brokers positioning themselves as mini-correspondent lenders is rising, according to American Banker. Doing so allows the financial institutions to use warehouse lines to fund loans and then close in their own names.

As more brokers move in this direction, various critics have voiced the same concerns as the CFPB, namely that the institutions are transitioning to this model to avoid having to meet certain compensation rules, the media outlet reported.

By issuing the guidance, the CFPB wanted to convey to brokers that no matter what they call themselves, they must follow the same rules for pay, according to the news source.

Agency outlines key differences
The government agency highlighted the difference between a mortgage broker and a correspondent lender. The former entity brings borrowers and lenders together. Alternatively, the latter provides would-be borrowers with needed disclosures and processes applications. It then underwrites the loans and decides whether or not to approve this debt. The correspondent lender then closes the loans in its name, funds them and finally sells them to one or many investors.

Consumer protection
The CFPB released new mortgage rules in January, which prohibited the existence of incentives that would motivate mortgage brokers to promote risky loans to would-be borrowers. In addition, the Qualified Mortgage rule required institutions to incorporate broker compensation into the points and fees that were limited to 3 percent of the loan balance. Richard Cordray, director of the CFPB, commented on the situation.

"Before the financial crisis, consumers seeking mortgages were steered toward high-cost and risky loans that were not in the consumer's interest," Cordray said. "The CFPB's rules on mortgage broker compensation are intended to protect consumers from this type of abuse. Today we are putting companies on notice that they cannot avoid those rules by calling themselves by a different name."

Financial institutions interested in knowing how such regulatory developments could impact their loan sales activity might benefit from speaking with Garnet Capital Advisors, which has significant experience in this space.