WHITE PAPER
Jonathan Foxx
President & Managing Director
There is nothing more deceptive than an obvious fact.
The Bascombe Valley Mystery
Sir Arthur Conan Doyle
The predictable sometimes is
predicted and sometimes it is not. Our biases tend to lead the way in
determining a course of action based on perceived predictability. We find ways
to convince ourselves that the obvious is not obvious and the necessary is
really not essential. It is said that facts are stubborn things, but they are
more like heat-seeking missiles if they bear ill-tidings. So, in finding the
means toward a “workaround” or any method of circumventing or overcoming a
problem, real or imagined, our hearty species indulges in an endless variety of
obfuscations, bafflements, blinding bewilderments, miasmic confusion,
discombobulating fogs of frenzy, perplexities of interests and foolish entanglements.
All for the sake of avoiding ineluctable facts!
A characteristic feature of a
predictable event is that it often becomes inevitable. When that happens, no
manner of pleadings or remonstrations will undo the already done! It is not as
if we did not know that the predictable could become the inevitable. Our biases
simply refused to admit that our present plans will oneday meet their future
denouement. And so it is that the strange case of the shrinking
mini-correspondent took its course, gradually and inexorably, through the
annals of mortgage banking to its current resting place on July 11, 2014, with
the bloviatingly long title “Policy Guidance on Supervisory and Enforcement
Considerations Relevant to Mortgage Brokers Transitioning to Mini-Correspondent
Lenders.” Published by the Consumer Financial Protection Bureau (“CFPB” or
“Bureau”), the issuance is on its way to all supervised institutions as a Policy
Guidance (“Guidance”) relating to the Bureau’s exercise of its authority to
supervise and enforce compliance with RESPA and Regulation X and TILA and
Regulation Z in certain transactions involving “mini-correspondent lenders”.[i]
The billowing wave of the mini-correspondent
began as a trickle, intensified as lenders established “mini-correspondent
channels,” and gushed into a modest torrent, its demand rising in prominence on
January 10, 2014. For it was on this date that the proximate cause for the new mini-correspondent
channel was given its impetus, due to the Final Rule pertaining to the
Ability-to-Repay guidelines and the requirements of the Qualified Mortgage rule
(“Rule”). Many brokers usually seek to charge fees between 2% and 3% per loan
transaction; however, under the foregoing requirements, any excess above 3% in
total points and fees virtually guarantees that such loans, originated by
brokers, will not be eligible for treatment as a Qualified Mortgage (QM). A consequence
of the Final Rule and specifically the 3% cap was to create an incentive for
many brokers to morph into a new kind of loan originator, termed the
“Mini-Correspondent.”
In September 2013, in anticipation
of the Rule’s compliance effective date coming just months away, my colleague,
Michael Barone,[ii]
and I published a White Paper and article in which we discussed the challenges
facing the mini-correspondent channel. The White Paper was entitled “The
Mini-Correspondent Channel: Pros and Cons.”[iii]
In the article’s penultimate section, titled "Mini-Correspondents and the
CFPB," the following observation was made:
“Before concluding please consider these final points.
Has anyone given consideration as to what the CFPB
might take as a position when a tremendous amount of mortgage brokers transform
themselves into mini-correspondents with the primary purpose of avoiding QM’s
3% points and fees cap? We surely have, and so have many others. The CFPB has
not commented on this issue, but you bet they will at some point down the
road.
It is possible that the CFPB will take no issue with
mortgage brokers becoming mini-correspondents! After all, this has been done
for years, and when done correctly, it has been a valuable intermediary step
for a brokerage firm that wishes to transition from broker to lender.
But would it shock anyone if the CFPB took issue with
the mini-correspondent channel and tried to eliminate it to the extent it is
used to avoid the 3% points and fees cap? This would not be difficult. The CFPB
could modify the exception to loan originators of the entity that makes the
credit decision or take any number of other actions to prevent the
mini-correspondent channel from growing solely for the benefit of avoiding the
3% cap. For now, we have to wait and see what their position on
mini-correspondents will be.”[iv]
We were not soothsayers or
prophets. The facts, such as they were, the experience working with applicable
mortgage acts and practices, and the regulatory compliance concerns of our
clients, gave us a unique purview.
Are we now finding that the
mini-correspondent wave is running its course, shrinking in momentum, and
undulating to its demise? Let us explore the requirements and implications of
the Guidance.[v]
Perhaps we will find a way to solve the mystery at the heart of the
mini-correspondent surge and derive some insight about its potential fate.
Eliminate all other factors, and the one which remains must be the
truth.
The Sign of Four
Sir Arthur Conan Doyle
Due to the Bureau becoming aware
of the transitioning of mortgage brokers from their traditional roles to
mini-correspondent lender roles, the CFPB has become concerned that some
mortgage brokers may be shifting to the mini-correspondent model in the belief
that, by identifying themselves as “mini-correspondent lenders,” they
automatically alter the application of important consumer protections that apply
to transactions involving mortgage brokers. The specific protections that the
Bureau cites include provisions in RESPA and its implementing Regulation X,[vi]
and TILA and its implementing Regulation Z.[vii]
RESPA and TILA were amended by Title XIV of the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010 (Dodd-Frank Act).[viii]
On the compliance effective date of January 10, 2014, the Final Rule (issued in
January 2013) required that Regulations X and Z apply certain requirements and
prohibitions to compensation paid to a mortgage broker.
An outline of applicable provisions,
as they concern mortgage brokers and compensation, consist of the following
four factors:
1.
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.[ix]
However, payments received by the lender from an investor as
compensation for a bona fide transfer
of the loan in the secondary market need not be disclosed.[x]
2. Inclusion of mortgage broker compensation
in “points and fees.”
Under Regulation
Z, compensation paid to a mortgage broker by a consumer or creditor is included
in points and fees for purposes of the points-and-fees cap for “qualified mortgages”
and for the points-and-fees test for determining whether a mortgage is a
“high-cost mortgage” under the Home Ownership and Equity Protection Act
(HOEPA).[xi] But, the interest paid to a creditor is excluded
in points and fees. Excluded also are any points and fees compensation a
creditor receives from a third party that purchases the loan.[xii]
3. Restrictions on mortgage broker
compensation.
TILA and
Regulation Z[xiii]
prohibit certain compensation arrangements between creditors and loan
originators, including mortgage brokers.[xiv]
