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Time to Reevaluate the 'Mini-Correspondent' Model, ASAP

JUL 14, 2014 12:34pm ET
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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 CFPBs 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.

Comments (5)
Clearly, mini-correspondents are brokers when they must obtain prior underwriting approval from their investor, and in so doing therefore, are passing representations and warrants as to borrower credit, capacity, and collateral to that investor, regardless of whether or not they close with their own warehouse line prior to sale to the investor.
Posted by John D | Monday, July 14 2014 at 1:02PM ET
If closing with an independent warehouse line or with your own funds does not make you a lender, but is determined by whether you underwrote the loan, we sink into an even deeper abyss. Nearly every "lender" requires DU or LP approval. Who's underwrite counts? This is as much a concern to the industry in general as it is to mini-correspondents.
Posted by John C | Monday, July 14 2014 at 3:12PM ET
Bankers have always had the ability to utilize underwriting capacity and/or expertise from their investors. The only difference today is that someone started the term"mini- correspondent". If the Originator/banker funds the loan off of a traditional non captive warehouse line than it mirrors what has occurred for many years before the term was in invented.
Posted by JACK O | Monday, July 14 2014 at 3:15PM ET
This article is so poorly written it's hard to understand what the real consequences of the ruling. The ruling doesn't give the CFPB the right to retroactively designate lenders as brokers. It sets forth their requirements for them to determine whether a transaction is a "bona-fide" secondary market transaction, and the pre-requisites for this.

Essentially, this is the end of table-funders defined.
Posted by Thomas M | Tuesday, July 15 2014 at 9:40AM ET
John C, do not mistake DU or LP as "underwriting" the loan... There's FAR FAR more involved than simply getting an Approve/Eligible. DU or LP is merely one tool we underwriters use in the process of underwriting a loan, just as pulling credit, or tax transcripts.
Posted by jtetreault | Thursday, July 17 2014 at 10:11AM ET
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