The Consumer Financial Protection Bureau is trying to rein in a type of mortgage lender that has proliferated at least in part because of its own rules: the mini-correspondent.
The agency is worried that these originators are circumventing the qualified mortgage rules that are designed to protect consumers from predatory pricing. But the large number of mortgage brokers that have converted to the mini-correspondent business model might be a sign of how hard it is to operate as a broker under those rules.
"A lot of brokers were forced to go this model in order to maintain their operations and to keep closing loans and serve their market," says Richard Bettencourt, who chairs the National Association of Mortgage Bankers' government affairs committee.
As a mini-correspondent, a former broker can be compensated like a mortgage banker and receive a premium for selling a loan. But the QM rule prohibits the payment of premiums to brokers. Their compensation is limited to 3% of the loan amount. And, to protect themselves from litigation, most wholesalers won't pay a broker more than 2.75%.
A 2.75% fee is fine if the mortgage brokerage firm operates in a high-cost area. They can pocket a nice fee on a $500,000 loan. But in low-cost markets and rural areas, the 3% fee barely covers the cost of doing business.
"There is a broker in Louisiana that cannot do loans under $115,000," Bettencourt says. In high-cost areas like Boston, brokers will accept a 1.75% fee so they don't price themselves out of the market.
CFPB allows some flexibility. On loan balances of $60,000 to less than $100,000, a broker can charge up to $3,000 in points and fees. But the Mortgage Bankers Association also wants CFPB to revisit the cap on small loans.
"We continue to advocate for an adjusted scale on the 3% cap to help smaller-balance loans," said MBA senior vice president Pete Mills. But he's not optimistic the CFPB will act anytime soon.
In terms of any changes to the caps, a CFPB spokesman said the bureau "will continue to monitor the housing market now that the new rules have taken effect."
The mini-correspondent model has been around for a while as a way to graduate from broker to mortgage banker. Mini-correspondents are generally mortgage bankers that can close the loan in their own name with funds from a warehouse line of credit. A mini-correspondent sells their loans to a correspondent lender or other investors. They also have to meet certain net worth requirements because they might face loan repurchases and other financial liabilities.
Mortgage brokers don't have to meet these requirements. A bank or mortgage banker is responsible for funding brokered loans at the closing table.
Migrating to the mini-correspondent model allows brokers to escape some of the QM restrictions. "The mini-correspondent model has proven to be viable strategy for brokers to continue to originate loans," says Donald Lampe, a partner at the law firm of Morrison & Foerster in Washington D.C.
But this mitigation also raised concerns about doing business with these newly minted mini-correspondents. Industry groups approached the CFPB for guidance, which was issued on July 11.
"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 announcing the guidance. "The CFPB's rules on mortgage broker compensation are intended to protect consumers from this type of abuse. We are putting companies on notice that they cannot avoid those rules by calling themselves by a different name."
The CFPB acknowledged that a new mini-correspondent may have just one investor at first and one warehouse line of credit. But it is important that they close the loan in their own name and actually sell the loan in a secondary market transaction to receive a premium.
"The bureau understands that some mortgage brokers have successfully transitioned to correspondent lenders," according to the guidance. But the bureau also "recognizes that is possible to structure transactions that take the form of the sale of a loan to an investor but where, in substance the purchaser functions as the lender and the entity whose name is on the note is a mortgage broker." In other words, CFPB will be on the lookout for sham mini-correspondent operations.
The MBA welcomed the guidance. "It provides a path for a broker to banker conversion," Mills said in an interview.
The MBA is looking for the CFPB to issue supervisory guidance in a few months that might provide specific examples of mini-correspondent arrangements that the bureau finds acceptable or unacceptable. "That would obviously shed more light how they view these arrangements," Mills said.
Lampe says guidance was issued with the encouragement of the lending industry to help people better understand how to comply and how to structure mini-correspondents. His clients include correspondent lenders that purchase loans from mini-correspondents.
"Brokers may not be happy because it brings to light some compliance points that brokers want to de-emphasize," the Washington attorney adds.
NAMB and other trade groups have been warning brokers about the risks of becoming a mini-correspondent.
"The problem is a lot of these brokers aren't aware of the responsibilities. If the broker gets a loan buyback request for a $250,000 — it could put them out of business," Bettencourt says. The NAMB official is also a sales manager at Mortgage Network in Danvers, Mass.
NAMB officials are hoping the mini-correspondent issue will prompt the CFPB to ease up on some of the broker restrictions and even out the playing field with banks and mortgage bankers.
"This disparity doesn't need to be there," Bettencourt says. "Brokers offer the exact same loans as banks do. The loans have the same guidelines, the same processing and the same underwriting."