Mortgage brokerages looking to become mini-correspondents need to be on the lookout for regulatory red flags that will run them afoul of recent Consumer Financial Protection Bureau guidance. And it's not just one or two red flags. It's more than a dozen.
The list of red flags ranges from lack of underwriting and quality control, to shared interests between mini-correspondents, wholesalers and investors, and even just basic guilt by association, Ari Karen, an attorney for Offit Kurman in Fulton, Md., told attendees at a recent National Mortgage News webinar.
The good news is that no one factor by itself should doom a mini-correspondent's status, he said. Rather, a "totality of circumstances" is what will be used for a determination.
A mini-correspondent designation is a move that brokerages make to take a step up the ladder toward becoming a true mortgage banker. Usually it includes the development of additional net worth, obtaining a line of credit from one or more wholesale lenders, closing loans in its own name, and selling production to investors. It is considered an intermediate step in the process of becoming a full correspondent lender.
But some investors maintain it's nothing more than a way to disguise old-style brokering in order to get around points-and-fee requirements on brokers. The key question here: is mini-c a real secondary market strategy or a bogus way to disguise the legacy business-as-usual practices of table funding?
The CFPB issued its guidance this July, acting after it "received an increased number of questions about mini-correspondents from firms not operating in that space," Brian Webster, the CFPB's originations program manager, said during the webinar.
The concern from buyers, he said, is that they would find out loans represented to them as qualified mortgages actually "were non-QM, due to a points or fees transgression."
The bureau decided on going the guidance route because rule-making "takes a lot of time" and also because "we didn't want to regulate through enforcement," Webster said.
Karen's laundry list of red flags included an insufficient compliance infrastructure; outdated or "broker only" policies and procedures; a lack of training in the new channel; as well as insider status, where a warehouse lender is also an investor and owns a percentage of the mini-correspondent.
Other concerns include too few risk controls for lending and funding; guilt by association with firms not in compliance; and a flat trajectory of progress toward full correspondent status. The CFPB guidance is designed to curb these "captive" mini-correspondents as opposed to true ones.
On warehouse lines, compliance factors include how many lines of credit a mini-correspondent has, as well as how much of its lines it uses; what attempts are made to obtain LOCs, and rationales for having just one LOC, he said.
Compliance training on mini-correspondent regulations should be offered and tracked so a firm can show the CFPB "an earnest effort at self-monitoring," Ginger Bell, director of business development and training at Maple Lawn, Md.-based Strategic Compliance Partners, told webinar attendees. "It's crucial to have a solid business plan," as part of a compliance management system to ensure a firm is following regulations, she added.
But it is not the case that a mini-correspondent lender can't also broker loans at the same time, she said. Brokering Federal Housing Administration loans, for instance, while becoming a mini-correspondent is still allowed, but a bright line should separate the mini-correspondent and broker channels at a firm doing both.
"If you want to be treated like a creditor, act like a creditor," she advised webinar attendees.
According to Ruth Lee, executive vice president of Denver-based Titan Lenders Corp., the CFPB guidance really talks about two things: "the relationship between the mini-correspondent, the warehouse line provider and the investor; and the operational requirements of a true mini-correspondent entity," she recently wrote in a commentary piece for NMN.
Those factors are what differentiate a "true" mini-c from a "captive" mini-c. And she concludes, in a hopeful note, that the CFPB's mini-correspondent guidance should serve as a how-to primer, rather than a deterrent, to what represents a nice step up the mortgage lending chain for many former brokerages.
Webster concurred with that assessment, and told the webinar that the bureau didn't issue the guidance to deter true mini-correspondent lending.
It's probably still a smart move to watch out for all those red flags, though.
Mark Fogarty, Editor at Large at National Mortgage News, brings more than 30 years of experience to his analyses of the mortgage market.