Beware of Mortgage Brokers Who become 'Mini-Correspondent' Lenders

By John Voket


I was recently notified that the Consumer Financial Protection Bureau (CFPB) is issuing guidance to aspiring homeowners regarding mortgage brokers transitioning to what is known as a “mini-correspondent” lender model.

The CFPB is concerned that some mortgage brokers may be shifting to the mini-correspondent model under the mistaken belief that identifying themselves as such would automatically exempt them from important consumer protection rules affecting broker compensation.

Mortgage brokers connect borrowers with lenders who underwrite and fund loans. In contrast, a correspondent lender, as generally understood in the mortgage industry, processes applications, provides legally required disclosures, frequently underwrites the loans, makes the final credit approval decision, funds the loans, and sells them to investors.

But those mortgage brokers who merely choose to describe themselves as mini-correspondent lenders are not automatically exempt from applicable consumer protection requirements.

The guidance sets out some of the questions the CFPB may consider in evaluating mortgage transactions involving mini-correspondent lenders in order to understand their true nature.

This evaluation involves examining how the mini-correspondent lender is structured and operating, for example: whether it is continuing to broker loans; its sources of funding; whether it funds its loans through a bona fide warehouse line of credit; its relationship with its investors; and its involvement in mortgage origination activities such as loan processing, underwriting, and making the final credit approval decision.

These provisions include:

• Disclosure of mortgage broker compensation. Regulation X requires that the lender’s compensation to the mortgage broker be disclosed on the Good-Faith Estimate and HUD-1 Settlement Statement

• Inclusion of mortgage broker compensation in “points and fees.” Interest paid to a creditor is not included in points and fees; nor is any compensation a creditor receives from a third party that purchases the loan included in points and fees.

• Restrictions on mortgage broker compensation. Generally mortgage brokers may not receive compensation from both the consumer and the creditor or any other person; and mortgage brokers may not receive compensation based on loan terms.

• Prohibition on steering to increase mortgage broker compensation. Loan originators, including mortgage brokers, are prohibited from ‘‘steering’’ consumers to transactions not in their interest, to increase the mortgage broker’s compensation.

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