Were Mini-Correspondents the Target of Those HMDA Warning Letters?

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The Consumer Financial Protection Bureau's warning letters about Home Mortgage Disclosure Act obligations has prompted speculation that the regulator once again has mini-correspondent lenders in its sights.

The bureau did not name the 44 mortgage lenders and brokers that it said received letters. But brokers are not required to report HMDA data, nor will they be required to under the revised set HMDA rules that take effect in 2018. So a logical interpretation is that the bureau targeted so-called mini-correspondents, a popular stepping-stone structure for mortgage brokers that want to fund loans in their own names. The mini-correspondent setup has faced regulatory scrutiny amid concerns the business model is used to evade consumer protection laws.

"The company doing the underwriting usually is making the credit decision and reports for HMDA," said Ari Karen, a principal at Offit Kurman and head of the law firm's mortgage compliance department. "If you were a broker and you were not making a credit decision, why would you be getting a letter saying you may have a HMDA obligation?"

"It could be one of two things. It could be mini-correspondents. Or it could be a company, in theory, that just has not been reporting," he said.

HMDA data for the industry's 2015 originations was released in late September. And the CFPB has had an information-sharing agreement with the Conference of State Bank Supervisors since 2011, which would give it access to the quarterly mortgage call reports that nonbank lenders and brokers with state licenses submit to the Nationwide Mortgage Licensing System.

"I think what the CFPB did was look at the nondepository mortgage call reports and from there, they saw people who were submitting mortgage call reports and the type of loans they were submitting would qualify as HMDA-reportable loans," said Leonard Ryan, president of compliance technology developer QuestSoft. "Then they compared that to the HMDA list and saw that those 44 lenders had not submitted HMDA, probably because they felt like they were brokers and didn't have a HMDA requirement."

The CFPB did not respond to NMN's numerous inquiries about whether it sent the letter to mini-correspondents. In an email, a spokesperson declined to detail how it selected the letters' recipients, "as that would disclose investigative tactics and methodologies, which are confidential information."

But it wouldn't be the first time the CFPB has put mini-correspondents on notice. The agency published guidance in July 2014, outlining questions it considers with transactions involving mini-correspondent lenders to determine "their true nature."

Mortgage brokers are often attracted to the mini-correspondent model to avoid the qualified mortgage rule's 3% cap on broker points and fees, while also receiving premiums for selling loans they've closed in their own names. Mini-correspondents typically have warehouse line agreements with the entities purchasing their loans, which enables them to operate with limited net worth. Because of this, critics claim mini-correspondents are brokers in all but name and lack the staff and capital to prevent fraud and repurchase bad loans.

In a sample of the letter the CFPB sent to mortgage companies, the agency says it has "information that appears to show that your company may not be in compliance with certain provisions of the Home Mortgage Disclosure Act," and outlines the HMDA reporting obligations for non-depositories.

"We encourage you to advise us of the steps you have taken or will take to ensure compliance with the laws identified above or, if you believe these legal requirements do not apply to you, to provide an explanation," reads the letter from Patrice Alexander Ficklin, the bureau's fair lending director.

The companies that received HMDA letters may have been attempting to straddle the line between operating as a broker and a mortgage banker.

"When it comes to HMDA, they say, 'No, I don't have a HMDA requirement because I'm a broker,' and then on the other side they go and advertise out on the street that they're a direct lender," Ryan said.

In any event, the letter marks the beginning of an intense focus on fair lending compliance by the CFPB.

"If you think TRID was bad, ha-ha. That's all I have to say. TRID was a cakewalk compared to what HMDA's going to be for lenders," said Karen, referring to the TILA-RESPA integrated disclosure rules that took effect in 2015.

"I think most people who are fairly aware of what's going on believe the CFPB already has some type of analysis … that's going to take all that initial data and spit out, 'here are the people who are violating fair lending and in what way,'" he added.

The new HMDA rules add 25 data points and modify 14 others. There are also changes to the thresholds that determine whether a lender has to submit its data. About 940 of the nearly 7,000 financial institutions that currently report HMDA data will no longer be required to when the new rules go into effect, according to an analysis of 2015 HMDA data by QuestSoft. However, roughly 1,240 companies that currently do not report HMDA data will be required to, resulting in a net increase of about 300 lenders.

Most of the increase will come from lenders with more than 100 home equity lines of credit (which are currently optional for HMDA reporting, but will become mandatory under the new rules), as well as nonbank mortgage companies that originate fewer than 100 loans (the current reporting threshold for nonbanks), but more than 25 loans (the new threshold).

"The impacts from a business standpoint of HMDA are going to be so much more significant than simply the changes that come into reporting," said Karen.

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