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From Banking and Finance Law Daily, July 11, 2014

“Mini-correspondent” label might not minimize mortgage broker compensation rule compliance

By Richard A. Roth, J.D.

A mortgage broker cannot escape the effects of the Consumer Financial Protection Bureau broker compensation rules simply by calling itself a mini-correspondent lender, according to new CFPB policy guidance. Whether a business is a mortgage broker or a correspondent lender depends on what functions the business performs, not what it calls itself, the guidance emphasizes. No single factor will determine the appropriate characterization of the business, the CFPB says.

According to the bureau, a mortgage broker connects borrowers with lenders. On the other hand, correspondent lenders undertake many or all of the traditional lender functions—processing applications, providing required disclosures, underwriting loans, making credit approval decisions, funding loans, and selling loans to investors. The bureau says that while some brokers are working to expand their businesses to become correspondent lenders, it is concerned that others might be creating arrangements with investors under which the broker simply calls itself a mini-correspondent lender, in the belief that this will insulate the broker from the CFPB’s mortgage broker compensation rules.

A mini-correspondent lender simply is a correspondent lender of small size or with relatively few warehouse funding sources and investors. A broker changing into a correspondent lender would, at least initially, probably be considered to be a mini-correspondent as it grows its business.

Broker compensation rules. Under the Dodd-Frank Act, the CFPB adopted a series of rules governing broker compensation arrangements that are intended to eliminate incentives for bad behaviour.

  • Mortgage broker compensation must be disclosed on the Good-Faith Estimate and the HUD-1 Settlement Statement. Payments from an investor to the lender do not need to be disclosed.

  • Compensation a consumer pays to a broker must be considered part of a loan’s points and fees when testing to determine if the loan is a qualified mortgage or a high-cost mortgage. Interest paid to a creditor or compensation paid to a creditor by a third party is not included.

  • Mortgage brokers who are compensated by the consumer may not receive compensation from any other source and may not receive compensation based on certain loan terms. The ban does not apply to compensation paid by a third party to a creditor.

  • Brokers and loan originators cannot steer consumers to transactions that are not in their best interests. The restriction does not apply to creditors that are not loan originators.

As a result, significant restrictions apply to broker compensation that do not apply to lenders, including correspondent lenders. The CFPB agrees that a broker which actually changes its operations to become a correspondent lender is no longer bound by those restrictions.

A broker that changes its operations in name but not in substance remains a broker, the bureau says. For example, a correspondent lender typically obtains funding for a loan from a warehouse bank, closes the loan in its own name, and then sells the loan to an investor. However, if the investor continues to perform the same loan origination functions it performed as a wholesale lender, the broker likely will not be seen to be a correspondent lender.

Funding. While the CFPB says it will not rely on any single factor when looking at a business’s operations, the policy guidance does give significant attention to funding considerations.

The broker compensation restrictions do not apply to a bona fide secondary-market transaction, the bureau notes, but they do apply to a table-funded transaction—a transaction in which a third party advances the funds for the loan and receives a contemporaneous assignment of the loan. The third party is considered to be the lender, and the intermediary between the lender and the consumer is a broker, regardless of who is designated as the lender or mortgagee in the closing documents.

All of the broker compensation restrictions apply to table-funded transactions, the CFPB says.

Specific factors for consideration. The policy guidance offers a number of specific questions the bureau will seek to answer when deciding if a business is a broker or a correspondent lender. These questions examine the relationship between the business and its warehouse lenders and investors; the number of investors with which the business works; and whether the warehouse line of credit is bona fide. The CFPB also will look at what changes the business has made to is staff training procedures and infrastructure and how it is managing the additional compliance risk of being a lender.

Which entity—the business, the warehouse lender, or the investor—is performing the majority of the loan origination activities also will be significant.

MainStory: TopStory ConsumerCredit CFPB DoddFrankAct Loans Mortgages RESPA TruthInLending

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