This afternoon, the CFPB issued policy guidance on supervision and enforcement considerations relevant to mortgage brokers transitioning to mini-correspondent lenders. The CFPB states that it “has become aware of increased mortgage industry interest in the transition of mortgage brokers from their traditional roles to mini-correspondent lender roles,” and 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 automatically alter the application of important consumer protections that apply to transactions involving mortgage brokers.”
The guidance describes how the CFPB evaluates mortgage transactions involving mini-correspondent lenders and confirms who must comply with the broker compensation rules, regardless of how they may describe their business structure. In announcing the guidance, CFPB Director Richard Cordray stated that the CFPB is “putting companies on notice that they cannot avoid those rules by calling themselves by a different name.”
The CFPB is not offering an opportunity for the public to comment on the guidance. The CFPB determined that because the guidance is a non-binding policy document articulating considerations relevant to the CFPB’s exercise of existing supervisory and enforcement authority, it is exempt from the notice and comment requirements of the Administrative Procedure Act.
The CFPB explains that generally, a correspondent lender performs the activities necessary to originate a mortgage loan—it takes and processes applications, provides required disclosures, sometimes underwrites loans and makes the final credit approval decision, closes loans in its name, funds them (often through a warehouse line of credit), and sells them to an investor. The CFPB’s focus here is on mortgage brokers who are attempting to move to the role of a correspondent lender by obtaining a warehouse line of credit and establishing relationships with a few investors. The CFPB believes that some of these transitioning brokers may appear to be the lender or creditor in each transaction, but in actuality have not transitioned to the mini-correspondent lender role and are continuing to serve effectively as mortgage brokers, i.e. they continue to facilitate brokered loan transactions between borrowers and wholesale lenders.
RESPA (Regulation X) and TILA (Regulation Z) include certain rules related to broker compensation, including RESPA’s requirement that lender’s compensation to the mortgage broker be disclosed on the Good-Faith Estimate and HUD-1 Settlement Statement, and TILA’s requirements that broker compensation be included in “points and fees” calculations, and its restrictions on broker compensation and prohibition on steering to increase compensation. Those 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.”
The CFPB states that the requirements and restrictions that RESPA and TILA and their implementing regulations impose on compensation paid to mortgage brokers do not depend on the labels that parties use in their transactions. Rather, under Regulation X, whether compensation paid by the “investor” to the “lender” must be disclosed depends on determinations such as whether that compensation is part of a secondary market transaction, as opposed to a “table-funded” transaction. And under Regulation Z, whether compensation paid by the “investor” to the “creditor” must be included in the points-and-fees calculation and whether the “creditor” is subject to the compensation restrictions as a mortgage broker depends on determinations such as whether the “creditor” finances the transaction out of its own resources as opposed to relying on table-funding by the “investor.”
CFPB’s Factors For Assessing Mini-Correspondent Lenders
The guidance advises lenders that in exercising its supervisory and enforcement authority under RESPA and TILA in transactions involving mini-correspondents, the CFPB considers the following questions, among others, to assess the true nature of the mortgage transaction:
The CFPB cautions that (i) the inquiries described in the guidance are not exhaustive, and that the CFPB may consider other factors relevant to the exercise of its supervisory and enforcement authorities; (ii) no single question listed in the guidance is necessarily determinative; and (iii) the facts and circumstances of the particular mortgage transaction being reviewed are relevant.
Questions regarding the matters discussed may be directed to any of our lawyers listed in this alert, or to any other Orrick attorney with whom you have consulted in the past.