The Consumer Financial Protection Bureau's guidance on the growing mortgage mini-correspondent business has scared some originators to the point that they are considering converting to branches of larger retail lenders.
"I've gotten a couple of calls from mini-correspondents asking to become branches. There is a lot of concern among the newly converted mini-correspondents given this new guidance," says Daniel Jacobs, who is president of the national retail lending division of American Financial Network, based in Chino Hills, Calif.
Mini-correspondents are smaller mortgage bankers or (where they are allowed to have warehouse lines) mortgage brokers that close loans in their own names. They typically have limited net worth and the warehouse lines they do have are provided by the entity purchasing the loan.
The guidance, issued last week, is CFPB's attempt to definitively define who is a mortgage banker and who is a mortgage broker.
Some in the mortgage origination community say it's about time that CFPB has taken this action, because they feel many of these outfits are really mortgage brokers in all but name, lacking the staffing needed to prevent fraud and the capital to repurchase loans that go bad. Others feel the channel gives smaller originators an opportunity to grow and reap the benefits of being able to close loans in their own names, such as higher prices in the secondary market. (Investors typically pay more to purchase a closed loan than to fund a brokered loan).
Either way, the ambiguities in the CFPB guidance, combined with the risks to lenders found to be in noncompliance, could spell the end of the mini-correspondent trend.
"I don't think we are going to see a lot of mini-correspondents anymore," Jacobs says. "I think we are going to have to see them invest and grow or move into a branch system. That seems to be what the CFPB is telling them to do."
Lenders that service loans have long seen this channel as a legitimate way to acquire servicing rights. They are aware that it carries more risk for them than the regular correspondent channel, but less than a brokered loan.
But with the qualified mortgage rules in place, many brokers (with the encouragement of some aggregators) have decided being a mini-correspondent is a way to avoid restrictions on fees. Critics claim that these originators are not true mortgage bankers because they lack the infrastructure and net worth.
"The CFPB is saying there is no such thing as a chickenduck. You are either a chicken or you're a duck; you can't be both," says Rick Soukoulis, the CEO of San Jose, Calif. lender Western Bancorp.
In the guidance, CFPB states it is "concerned that some mortgage brokers may be shifting to the mini-correspondent model in the belief that, by identifying themselves as mini-correspondent lenders, they automatically alter the application of important consumer protections that apply to transactions involving mortgage brokers."
There is a list of questions the agency is going to use in determining whether a transaction is a whole loan sale or a brokered loan. CFPB could determine that the originator is really acting as a broker in what it claims is a whole loan sale.
In that case, there are undisclosed fees in the transaction and as a result "you have a bunch of defective loans," Soukoulis says. Aggregators are going to have to worry if the originators they are buying whole loans from are also acting as brokers in other deals; the CFPB is likely to see these originators are brokers rather than mortgage bankers, he says.
There are risks for the originator and the purchaser of the loan on the enforcement side and the penalties can be significant, Jacobs adds.
If originators are not underwriting loans and need permission from investors to close loans—a "clear to close"—the regulator could decide they are really brokers and not mortgage bankers. Mortgage bankers typically take on the underwriting function themselves and can close a loan without waiting for their investor to say yes or no.
Furthermore, regulators could see the captive lines of credit being issued to these originators as "sham warehouse lines," Jacobs says.
Some of these captive lines of credit have been given to brokers who for any number of reasons might not have qualified for a traditional warehouse line or one aimed at those firms making the transition to mortgage banker.
The solution for these originators is to "make a choice," Soukoulis declares. "Do everything on your warehouse line and be a banker" and take on all of the related risk or just be a broker.
But the guidance is not specific in what will be considered to be a whole loan sale versus a brokered mortgage. It states that while there is a list of questions to be considered, there is not one defining factor that would make a determination.
Don Frommeyer, the president, and Rick Bettencourt, the government affairs chairman of NAMB, a trade association for mortgage brokers, met with the CFPB on July 15.
The trade group was not surprised that CPFB issued the guidance; it had brought the subject up with the agency in a meeting seven or eight months ago, Bettencourt says.
During the meeting, the CFPB asked NAMB to work with it to help clarify and provide industry insight into the guidance.
"We support the idea that there should be guidance. NAMB is not saying that the mini-correspondent conduit is not beneficial. But we have to ensure our brokers remain compliant and we have to make sure the brokers understand the added responsibility of acting the capacity of a mini-correspondent," Bettencourt says. He notes, as others have, that the guidance as currently written is ambiguous and broad.
NAMB sees this as an opportunity to work closer with the agency to help clarify the statement, as well as to address other concerns of the mortgage broker community.
The Mortgage Bankers Association, while lauding CFPB for issuing the guidance, suggests the agency needs to "provide examples of mini-correspondent arrangements that have passed (or failed) examinations in future issues of its supervisory highlights," according to a statement from Pete Mills, the trade group's senior vice president of residential policy and member services.
Until CFPB makes an enforcement action under the guidelines, the industry doesn't know "how draconian they are going to be in the punishment for violating" the guidelines, Jacobs says.
The result is likely to be many of these mini-correspondents quitting the business and the investors would be left holding the bag, he continues.
"I believe the mini-correspondent structure in some cases is probably not working the way it is supposed to be," says Jason Madiedo, the president and CEO of Venta Financial Group, a retail and wholesale mortgage banking company based in Las Vegas.
Venta is an agency seller/servicer and also acts as a correspondent seller. Its wholesale operation works the way the channel has traditionally done. Venta underwrites and funds the loans. It does not buy closed loans.
Clients have asked Venta if it will purchase closed loans and it has refused and that has probably cost it some business, says Madiedo, who is also the president of the National Association of Hispanic Real Estate Professionals.
There are those in the third party origination space that are actively marketing to brokers to become mini-correspondents and that is affecting Venta's ability to compete, he says.
"It's an allure that is marketed very heavily in the wholesale space to become a mini-correspondent," Madiedo says. But this marketing is being done not as a way for a mortgage broker to enhance her business, but as a loophole around the new rules and that is what is driving the segment's growth, he says.
"I think the CFPB was pretty spot on. It's a fine thing for a small independent mortgage brokerage firm to have the desire to become a mortgage banker. But while you are doing that, you don't also get to operate as a mortgage broker and play both sides of the fence."
Soukoulis says his takeaway from the guidance is that "you have to take the risks associated with being a mortgage banker" to be one.
It might be better for these mini-correspondents to remain mortgage brokers, he says. "The broker gets paid a fee to act in the best interests of the consumer, which is why the broker value proposition, in the coming years, is going to come back, stronger than ever."
There should remain a path for mortgage brokers to make the move to become a true mortgage banker and regulators should not restrict such growth, Madiedo adds.
That being said, he doesn't want a mini-correspondent seller with no plan in place to become a traditional correspondent seller.
"It's not today, it is tomorrow, it is a year from now or two years from now, when some type of compliance issue comes up," Madiedo says. As the purchaser of a loan (and then a potential seller to Fannie Mae or Freddie Mac), he worries about whether his company would "be properly covered."
With this guidance, everyone in the mortgage industry whether they participate in the mini-correspondent channel or not, "needs to ask each other 'are we doing the right thing?" Madiedo declares "Are we keeping to the spirit and rules of the law?'
"And if we are not, we should reevaluate how we are doing it and we should put the measures in place to make sure we are doing it right."