United States: CFPB To Shine Spotlight On Mini-Correspondent Mortgage Lending?

On July 9, 2014, the Consumer Financial Protection Bureau ("CFPB" or "Bureau") issued Policy Guidance on the issue of Mortgage Brokers Transitioning to Mini-Correspondent Lenders ("Policy Guidance"), which highlights risks and considerations that should be taken into account by brokers who may be considering or venturing into the mini-correspondent channel.

A mortgage broker that is considering transitioning to a mini-correspondent must perform its due diligence. In today's regulatory environment, this means not only investigating issues such as state law requirements in the states in which it does business and the demands of the relevant warehouse lenders and investors, but also assessing the issues raised in the CFPB's Policy Guidance. The principles reflected in the Policy Guidance, while non-binding, will guide the Bureau in exercising its supervisory and enforcement authority, and potentially could be used in adjudicating RESPA's secondary market exemption as well.

It remains to be seen just how the Bureau will apply this new guidance and there are numerous open issues, but the questions posed do afford some generalizations. The Bureau clearly would be critical of an entity whose operations and infrastructure for "lender" transactions did not meaningfully differ from its former or current "brokered" transactions. It will be interested in the warehouse lines of credit and whether they appear to be the result of arms-length transactions and to have fair market terms and adequate capacity for the business. The CFPB will be more critical of operations that involve a "captive" warehouse line. Conversely, having more than one line of credit and selling closed loans to more than one investor, including selling a meaningful volume of loan to third party investors that are distinct from the warehouse lender, appear to be preferable. The CFPB will expect robust lender compliance. Perhaps most significantly, the CFPB appears to view the mini-correspondent model as appropriate only to the extent it is part of a demonstrable transition to become a full correspondent lender.

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