On Friday the Consumer Financial Protection Bureau released guidance pertaining to the increasing use of the mini-correspondent relationship. Specifically, the CFPB indicated that it would treat mini-correspondents as brokers for purposes of all laws and regulations where in substance the purchaser of the loan functions as the lender.
In other words, for purposes of compensation and its impact on qualified mortgage status, the CFPB is in effect notifying mini-correspondents and their investors that the agency reserves the right to retroactively designate mini-correspondents as brokers. This could also affect the treatment of such entities under the Real Estate Settlement Procedures Act.
In furtherance of this policy, the CFPB issued guidance relating to the considerations relevant to determining whether the mini-correspondent should be considered a broker for regulatory purposes. Specifically, the agency focused on the use of warehouse lines, the distinctions from being a broker, the relationships with investors, and the extent of the origination activities being performed.
Overall, the guidance seems to focus on whether the mini-correspondent is truly an independent stand-alone company capable of remaining in business without the relationship to the purchaser of the loan.
Specifically, the guidance looks at the distinctions between the mini-correspondent and a broker in terms of policies, procedures, staff, compliance and overall infrastructure as well as whether the correspondent remains active as a broker, and if so the differences in terms of its activities as a broker versus a mini-correspondent. It also looks at the origination activities performed by the mini-correspondent as opposed to the purchaser.
Further, it examines the number and extent of the warehouse lines, the nature and extent of the relationships between the warehouse line and investors, and the independence of those warehouse lines from the investors. The guidance also indicates the CFPB will examine whether the acceptance of the mini-correspondent by the investor or warehouse bank was consistent with standard business practices. Notably, the CFPB did not provide any specific rules or bright lines – leaving itself the flexibility to call it how it sees it.
The CFPB’s latest guidance reflects the agency's ongoing desire to continue regulating through enforcement, while providing the industry information and principles that will guide its decisions.
Given the significance of the ramifications that can result from a re-classification as a broker, mini-correspondents and investors should immediately evaluate with legal counsel whether their relationships will pass CFPB scrutiny.
Ari Karen is an attorney at Offit Kurman.