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The Consumer Financial Protection Bureau (CPFB) issued guidance Friday to curb mortgage brokers transitioning into the “Mini-Correspondent” lender model in the hopes of avoiding the mortgage consumer protections affecting broker compensation that took effect in January of 2014.
The guidance sets forth how the Bureau evaluates transactions under the model and reaffirms exactly what the criteria is for deciding who must adhere to broker compensation rules, regardless of how the business structure is described.
“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. “The CFPB’s rules on mortgage broker compensation are intended to protect consumers from this type of abuse. Today we are putting companies on notice that they cannot avoid those rules by calling themselves by a different name.”
Mini-Correspondents are mortgage bankers that have limited net worth. They can close loan in their own names, but typically utilize warehouse lines of credit that are either provided by the organization purchasing the loans or require approval. Some critics of the model opine that the only reason for the existence of the model is to allow mortgage brokers to avoid the qualified mortgage rule's 3% cap on points and fees.
In January, new rules took effect to prohibit financial incentives for brokers pushing borrowers toward risky loans, putting the borrower on more stable financial ground and reducing the chance of default.
CFPB issued the guidance out of concerns that mortgage brokers were disguising the nature of their involvement in the transaction, describing themselves as “Mini-Corespondent lenders” when in reality they were actually just was simply facilitating the contract between the borrower and the lender.
The guidance sets forth some criteria that the bureau will consider when evaluating the business model of the so-called Mini-correspondent, examining how it is structured and operating.
