The Consumer Financial Protection Bureau issued guidance Friday aimed at stopping mortgage brokers from evading compensation rules by hiding under the cloak of a "mini-correspondent" lender.
A growing number of brokers have rebranded themselves as mini-correspondent lenders so they can fund loans off warehouse lines and close in their own names. But many critics say the mini-correspondent model is often used simply to avoid CFPB restrictions on broker compensation.
Under one regulation, lenders must disclose how much they pay brokers. Meanwhile, the bureaus recent qualified mortgage rule includes broker compensation in the points and fees that are capped at 3% of the loan amount.
The CFPB guidance laid out questions the agency will consider with transactions involving mini-correspondent lenders to determine "their true nature." This will include examining how mini-correspondent lenders are structured, whether they still broker loans, how they are funded, how they interact with investors and their involvement in mortgage origination.
The message sent was that brokers must comply with the broker compensation rules, regardless of how they describe their business.
"Before the financial crisis, consumers seeking mortgages were steered toward high-cost and risky loans that were not in the consumer's interest," said CFPB Director Richard Cordray in a press release.
"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."
The effect of the guidance could be quite significant, considering how popular the mini-correspondent channel has become.
"The numbers I'm hearing from wholesalers is that their overall percentage of mini-correspondent business is between 5% up to as high as 30%," Lloyd San, a mortgage market manager at the insurer MGIC, wrote on a company blog May 14.
But the CFPB's action did not take the industry by surprise. "We have been warning our members this was coming," says Marc Savitt, president of the National Association of Independent Housing Professionals. "They are trying to keep brokers in a box."
The move to the mini-correspondent model stems from frustration with the CFPB's rules on compensation, with brokers charging that the bureau has subjected them to rules not imposed on mortgage and commercial bankers.
However, converting to a mini-correspondent has always been full of risks. "We always cautioned our members against becoming mini-correspondents," Savitt says. "They get a temporary little warehouse line of credit. But it is a lot of liability for a little bit of benefit."