[Federal Register Volume 79, Number 137 (Thursday, July 17, 2014)]
[Notices]
[Pages 41671-41675]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-16779]


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BUREAU OF CONSUMER FINANCIAL PROTECTION


Policy Guidance on Supervisory and Enforcement Considerations 
Relevant to Mortgage Brokers Transitioning to Mini-Correspondent 
Lenders

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Policy Guidance.

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SUMMARY: The Bureau of Consumer Financial Protection (CFPB or Bureau) 
is issuing supervisory and enforcement guidance entitled ``Policy 
Guidance on Supervisory and Enforcement Considerations Relevant to 
Mortgage Brokers Transitioning to Mini-Correspondent Lenders,'' (Policy 
Guidance) which relates 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.''

FOR FURTHER INFORMATION CONTACT: Paul S. Ceja, Senior Counsel and 
Special Advisor; Office of Regulations at (202) 435-7700.

SUPPLEMENTARY INFORMATION: 

[[Page 41672]]

I. Introduction

    The Bureau has become aware of increased interest among some 
mortgage brokers to restructure their business to become mini-
correspondent lenders (mini-correspondents) in the possible belief that 
doing so will alter the applicability of important consumer protections 
that apply to transactions involving mortgage brokers. These 
protections include provisions in the Real Estate Settlement Procedures 
Act (RESPA) and Regulation X and the Truth in Lending Act (TILA) and 
Regulation Z, as amended by title XIV of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). The Bureau 
has implemented the title XIV amendments to RESPA and TILA through 
final rules amending Regulations X and Z, issued beginning in January 
2013. These rules generally took effect in January 2014.
    The Bureau is issuing this Policy Guidance to identify for mortgage 
industry stakeholders, consumers, and the public generally questions 
the Bureau may consider in exercising its supervisory and enforcement 
authority under RESPA and TILA with respect to transactions involving 
mini-correspondent lenders.

II. Description of Policy Guidance

    The Policy Guidance begins by providing background on the Bureau's 
concern regarding the shift of some mortgage brokers to the mini-
correspondent lender role, the RESPA and TILA consumer protections 
potentially affected by the transition of a mortgage broker to a mini-
correspondent lender, and an overview of correspondent lending. The 
Policy Guidance follows this with a discussion of the regulatory 
framework under Regulation X and Regulation Z that determines the role 
and obligations of the parties in a mortgage transaction. The Policy 
Guidance then provides a non-exhaustive list of questions the Bureau 
may consider in the exercise of its supervisory and enforcement 
authority with respect to transactions involving mini-correspondent 
lenders. The Policy Guidance makes clear that no single question listed 
in the Policy Guidance is necessarily determinative of how the Bureau 
may exercise its supervisory and enforcement authorities. The Policy 
Guidance also makes clear that the facts and circumstances of the 
particular mortgage transaction being reviewed would be relevant to how 
the Bureau exercises these authorities.
    The Policy Guidance states that the Bureau will closely monitor the 
practices of mini-correspondents, including former mortgage brokers 
that have converted to this form, to ensure that the protections 
afforded to consumers under federal consumer financial law, including 
the Bureau's implementing regulations, are not being evaded. Finally, 
the Policy Guidance also states that the Bureau will use all 
appropriate tools to assess whether supervisory, enforcement, or other 
actions are necessary.

III. Policy Guidance

    The text of the Policy Guidance follows:

Policy Guidance on Supervisory and Enforcement Considerations Relevant 
to Mortgage Brokers Transitioning to Mini-Correspondent Lenders

    The Bureau of Consumer Financial Protection (CFPB or Bureau) is 
issuing this ``Policy Guidance on Supervisory and Enforcement 
Considerations Relevant to Mortgage Brokers Transitioning to Mini-
Correspondent Lenders'' (Policy Guidance) to identify the questions the 
Bureau may consider in exercising its supervisory and enforcement 
authority under the Real Estate Settlement Procedures Act (RESPA) and 
Regulation X and the Truth in Lending Act (TILA) and Regulation Z with 
respect to mortgage transactions involving mini-correspondent lenders 
(mini-correspondents), including transactions involving mortgage 
brokers that transition to mini-correspondent lender roles.

Background

    The Bureau has become aware of increased mortgage industry interest 
in the transition of mortgage brokers from their traditional roles to 
mini-correspondent lender roles. The Bureau is 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. 
These protections include provisions in RESPA and Regulation X \1\ and 
TILA and Regulation Z,\2\ as amended by title XIV of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank 
Act).\3\ The Bureau has implemented the title XIV amendments to RESPA 
and TILA through final rules amending Regulations X and Z, issued 
beginning in January 2013. These rules generally took effect in January 
2014.
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    \1\ 12 U.S.C. 2601 et seq., 12 CFR part 1024.
    \2\ 15 U.S.C. 1601 et seq., 12 CFR part 1026.
    \3\ Public Law 111-203, 124 Stat. 1376 (2010).
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    Regulations X and Z apply certain requirements and prohibitions to 
compensation paid to a mortgage broker. 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.\4\ 
By contrast, 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; \5\
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    \4\ See 12 CFR part 1024, appendix A and appendix C. The 
Bureau's TILA-RESPA Integrated Disclosure Rule (78 FR 79730 (Dec. 
31, 2013)) effective August 1, 2015, requires that the creditor 
compensation's to the mortgage broker be on the Closing Disclosure 
(although not on the Loan Estimate). See 12 CFR 1026.38(f)(1).
    \5\ 12 CFR 1024.5(b)(7). Coverage under section 8 of RESPA, 
implemented at 12 CFR 1024.14, prohibiting the payment of kickbacks 
for the referral of settlement services, and splits of charges other 
than for services performed, is also implicated by whether 
compensation is being paid in a secondary market transaction. For 
example, compensation for the sale of a mortgage loan is a secondary 
market transaction rather than a referral fee and is ``beyond the 
scope of section 8.'' See 12 CFR part 1024, appendix B, illustration 
5.
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     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).\6\ Interest paid to a creditor is not included in points and 
fees; nor is any compensation a creditor (not otherwise defined as a 
``loan originator'' for purposes of the loan originator compensation 
restrictions discussed further below) receives from a third party that 
purchases the loan included in points and fees; \7\
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    \6\ 12 CFR 1026.32(b)(1)(ii). This section cross references the 
definition of ``loan originator'' in 12 CFR 1026.36(a)(1). 12 CFR 
1026.36(a)(2) defines ``mortgage broker'' for purposes of Sec.  
1026.36, as ``any loan originator that is not an employee of the 
creditor.'' See also 12 CFR 1026.32(a)(1)(ii) (threshold for points 
and fees for high-cost mortgages); 12 CFR 1026.43(e)(3) (limit on 
points and fees for qualified mortgages). See also 15 U.S.C. 
1602(bb)(1)(A) (definition of high-cost mortgage); 15 U.S.C. 
1602(bb)(4) (points and fees included for high-cost mortgages); 15 
U.S.C. 1639c(b)(2)(A)(vii) (limit on points and fees for qualified 
mortgages); and 15 U.S.C. 1639c(b)(2)(C) (definition of points and 
fees for purposes of qualified mortgages).
    \7\ 12 CFR 1026.32(b)(1)(i)(A) (excluding interest from points 
and fees); 12 CFR 1026.32(b)(1)(ii) (generally including 
compensation paid directly or indirectly by a consumer or creditor 
to a loan originator).

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[[Page 41673]]

     Restrictions on mortgage broker compensation. TILA and 
Regulation Z \8\ prohibit certain compensation arrangements between 
creditors and loan originators, including mortgage brokers.\9\ Mortgage 
brokers may not receive compensation from both the consumer and the 
creditor or any another person; \10\ and mortgage brokers may not 
receive compensation based on loan terms.\11\ These restrictions do not 
apply to compensation by a third party, such as an investor, to a 
creditor that is not also defined as a loan originator for purposes of 
these compensation restrictions; and
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    \8\ See Loan Originator Compensation Requirements Under the 
Truth in Lending Act (Regulation Z) 78 FR 11279 (Feb. 15, 2013); see 
also Amendments to 2013 Mortgage Rules Under the Equal Credit 
Opportunity Act (Regulation B), Real Estate Settlement Procedures 
Act (Regulation X), and the Truth in Lending Act (Regulation Z), 78 
FR 60382 (Oct.1, 2013).
    \9\ In Regulation Z these prohibitions apply to compensation 
paid to ``loan originators'' (including ``loan originator 
organizations''). See 12 CFR 1026.36(a)(1)(i), (iii). However, for 
clarity this Policy Guidance refers to mortgage brokers which, as 
noted, are included in the definition of ``loan originator.'' See 12 
CFR 1026.36(a)(2) and footnote 6.
    \10\ 12 CFR 1026.36(d)(2).
    \11\ 12 CFR 1026.36(d)(1).
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     Prohibition on steering to increase mortgage broker 
compensation. TILA and Regulation Z prohibit loan originators, 
including mortgage brokers, from ``steering'' consumers to transactions 
not in their interest, to increase the mortgage broker's 
compensation.\12\
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    \12\ 12 CFR 1026.36(e).
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    A correspondent lender, as generally understood in the mortgage 
industry, performs the activities necessary to originate a mortgage 
loan, i.e., it takes on the tasks usually performed by the originating 
lender. The correspondent lender takes and processes applications, 
provides required disclosures, and often, although not always, 
underwrites loans and makes the final credit approval decision. The 
correspondent lender closes loans in its name, funds them (often 
through a warehouse line of credit), and sells them to an investor by 
prior agreement. A full correspondent lender may have such agreements 
with multiple investors.
    The Bureau understands that some entities may transition from being 
a mortgage broker to being a correspondent lender and, in so doing, may 
begin as a small correspondent with agreements with only a few 
investors. Entities attempting to move to the role of a correspondent 
lender may start by obtaining a warehouse line of credit, typically 
from a third-party ``warehouse bank.'' The warehouse line of credit 
will provide the funding for the mortgage loans the entities originate 
and sell to a third-party investor. Over time, the number of third-
party investors with which the correspondent lender has agreements may 
grow.
    Since the Bureau issued the title XIV rules, it understands that 
some mortgage brokers may be setting up arrangements with wholesale 
lenders in which they purport to act as mini-correspondent lenders. 
Under such arrangements, the mortgage broker may in form appear to be 
the lender or creditor in each transaction by engaging in activities 
such as closing the loan in its own name, funding the loan from what is 
designated as a warehouse line of credit, and receiving compensation 
through what may nominally take the form of a premium for the sale of 
the loan to an investor.
    However, in substance, these mortgage brokers may not have 
transitioned to the mini-correspondent lender role and may be 
continuing to serve effectively as mortgage brokers. That is, these 
mortgage brokers may continue to facilitate brokered loan transactions 
between borrowers and wholesale lenders (i.e., entities which typically 
provide the funding for loans in transactions involving mortgage 
brokers). For example, the mortgage broker may enter into an 
arrangement with a lender designated as an ``investor,'' but that 
investor may function as the mortgage broker's wholesale lender, and 
not as a purchaser of loans in the secondary market. Such an 
``investor'' may continue to perform the same origination activities it 
would perform as a traditional wholesale lender for the loans that it 
now ``buys'' from the mortgage broker. As well as performing these 
functions and agreeing to purchase the loans from the mortgage broker 
designated as a ``mini-correspondent, the ``investor'' may also provide 
the warehouse line of credit that the ``mini-correspondent'' uses to 
fund its loans.
    As discussed below, the requirements and restrictions that RESPA 
and TILA and their implementing regulations impose on compensation paid 
to mortgage brokers do not depend on the labels that parties use in 
their transactions. Rather, under Regulation X, whether compensation 
paid by the ``investor'' to the ``lender'' must be disclosed depends on 
determinations such as whether that compensation is part of a secondary 
market transaction, as opposed to a ``table-funded'' transaction. 
Likewise, under Regulation Z, whether compensation paid by the 
``investor'' to the ``creditor'' must be included in the points-and-
fees calculation and whether the ``creditor'' is subject to the 
compensation restrictions as a mortgage broker depends on 
determinations such as whether the ``creditor'' finances the 
transaction out of its own resources as opposed to relying on table-
funding by the ``investor.''
    In exercising its supervisory and enforcement authority, the Bureau 
may consider factors that evidence the true nature of the mortgage 
transaction, i.e., whether the parties are engaging in good faith in a 
secondary market transaction between a lender and a third-party 
investor or, in fact, a typical primary market transaction involving a 
mortgage broker and a wholesale lender.

Discussion

    RESPA and TILA Regulatory Framework: The mortgage broker 
compensation requirements imposed by RESPA and Regulation X do not 
apply to exempt bona fide secondary-market transactions, but those 
requirements do apply to table-funded transactions. Whether a 
transaction is deemed to be a bona fide secondary market sale of a loan 
turns on the ``real source of funding'' and the ``real interest of the 
funding lender.''
    Regulation X defines a mortgage broker as a person, other than an 
employee of a lender, who renders origination services and serves as an 
intermediary between a borrower and lender in a federally-related 
mortgage loan transaction, including such a person that closes the loan 
in its own name in a ``table-funded transaction.'' \13\ ``Table-
funding'' occurs when the loan is funded by a contemporaneous advance 
of loan funds and an assignment of the loan to the person advancing the 
funds.\14\ In table-funding, the third party who advances the loan 
funds and takes initial assignment of the loan at or after settlement 
is the lender for purposes of Regulation X, and the entity which acts 
as the intermediary in bringing that lender and the borrower together 
is the mortgage broker (even though that entity closes the loan in its 
own name).\15\ However, a ``bona fide transfer of a loan obligation in 
the secondary-market'' is not covered by RESPA under Regulation X (with 
exceptions not relevant here).\16\ Regulation X explains that the 
Bureau

[[Page 41674]]

will consider the ``real source of funding'' for the loan and the 
``real interest of the funding lender'' in determining what constitutes 
a bona fide transfer.\17\ Under Regulation X, a table-funded 
transaction is not a secondary-market transaction.\18\
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    \13\ 12 CFR 1024.2.
    \14\ Id.
    \15\ Id. A lender is otherwise generally defined as the secured 
creditor named on the debt obligation.
    \16\ 12 CFR 1024.5(b)(7).
    \17\ Id. See also 12 CFR part 1024, appendix B, illustration 5.
    \18\ Id.
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    Similarly, the TILA and Regulation Z loan originator compensation 
requirements discussed above cover compensation paid to mortgage 
brokers in ``table-funded'' transactions. Under Regulation Z, a 
creditor is defined in relevant part as a person who regularly extends 
credit and to whom the obligation is initially payable on the face of 
the note.\19\ For purposes of the loan originator compensation 
requirements discussed above, however, a ``loan originator'' is defined 
to include such a creditor if it engages in loan origination activity 
and ``does not finance the transaction at consummation out of the 
creditor's own resources, including by drawing on a bona fide warehouse 
line of credit.'' \20\ In other words, the term loan originator, for 
purposes of the loan originator requirements discussed above, includes 
any creditor that otherwise satisfies the definition of loan originator 
and makes use of ``table funding'' by a third party.\21\ A table-funded 
transaction is consummated with the debt obligation initially payable 
by its terms to one person, but another person provides the funds for 
the transaction at consummation and receives an immediate assignment of 
the note.\22\
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    \19\ 12 CFR 1026.2(a)(17).
    \20\ 12 CFR 1026.36(a)(1)(i).
    \21\ Comment 36(a)-1.i.C.
    \22\ Comment 36(a)-1.ii.
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    By defining mortgage brokers to include entities which close loans 
in their own names in table-funded transactions--and by excluding from 
RESPA only bona fide secondary-market transactions--Regulation X 
recognizes that it is possible to structure transactions that take the 
form of the sale of a loan to an investor but where, in substance, the 
purchaser functions as the lender and the entity whose name is on the 
note is a mortgage broker. Regulation Z recognizes this as well by 
defining the term loan originator to include creditors in table-funded 
transactions and differentiating between such transactions and those in 
which a creditor draws upon a bona fide warehouse line of credit.
    Questions the Bureau May Consider in Exercising Its Supervisory and 
Enforcement Authority Under RESPA and TILA in Transactions Involving 
Mini-Correspondents: As discussed above, the Bureau understands that 
some mortgage brokers have successfully transitioned to correspondent 
lenders (small or large) that do not act as mortgage brokers in covered 
mortgage transactions. Such correspondent lenders often perform a 
majority of the principal origination activities with the funds 
provided by a bona fide warehouse line of credit. The correspondent 
lenders then sell the loans in secondary market transactions to third-
party investors. The Bureau also understands that other mortgage 
brokers may be seeking to adopt the form of a mini-correspondent lender 
out of a belief that doing so avoids application of various provisions 
of Regulations X and Z.
    In exercising its supervisory and enforcement authority under RESPA 
and TILA in transactions involving mini-correspondents, the Bureau asks 
various questions relevant to understanding the true nature of the 
mortgage transaction.
    Among the questions the Bureau asks are the following:
     Beyond the mortgage transaction at issue, does the mini-
correspondent still act as a mortgage broker in some transactions, 
either brokering to the same wholesale lender that supplies the 
warehouse line of credit or otherwise?
    [cir] If so, what distinguishes the mini-correspondent's ``mortgage 
broker'' transactions from its ``lender'' transactions?
     How many ``investors'' does the mini-correspondent have 
available to it to purchase loans?
     Is the mini-correspondent using a bona fide warehouse line 
of credit as the source to fund the loans that it originates?
    [cir] Is the warehouse line of credit provided by a third-party 
warehouse bank?
    [cir] How thorough was the process for the mini-correspondent to 
get approved for the warehouse line of credit?
    [cir] Does the mini-correspondent have more than one warehouse line 
of credit?
    [cir] Is the warehouse bank providing the line of credit one of, or 
affiliated with any of, the mini-correspondent's investors that 
purchase loans from the mini-correspondent?
    [cir] If the warehouse line of credit is provided by an investor to 
whom the mini-correspondent will ``sell'' loans to, is the warehouse 
line a ``captive'' line (i.e., the mini-correspondent is required to 
sell the loans to the investor providing the warehouse line (or 
affiliates of the investor))?
    [cir] What percentage of the mini-correspondent's total monthly 
originated volume is sold by the mini-correspondent to the entity 
providing the warehouse line of credit to the mini-correspondent, or to 
an investor related to the entity providing the warehouse line of 
credit?
    [cir] Does the mini-correspondent's total warehouse line of credit 
capacity bear a reasonable relationship, consistent with correspondent 
lenders generally, to its size (i.e., its assets or net worth)?
     What changes has the mini-correspondent made to staff, 
procedures, and infrastructure to support the transition from mortgage 
broker to mini-correspondent?
     What training or guidance has the mini-correspondent 
received to understand the additional compliance risk associated with 
being the lender or creditor on a residential mortgage transaction?
     Which entity (mini-correspondent, warehouse lender, 
investor) is performing the majority of the principal mortgage 
origination activities?
    [cir] Which entity underwrites the mortgage loan before 
consummation and otherwise makes the final credit decision on the loan?
    [cir] What percentage of the principal mortgage origination 
activities, such as the taking of loan applications, loan processing, 
and pre-consummation underwriting, is being performed by the mini-
correspondent, or an independent agent of the mini-correspondent?
    [cir] If the majority of the principal mortgage origination 
activities are being performed by the investor, is there a plan in 
place to transition these activities to the mini-correspondent?
    [ssquf] What conditions must be met to make this transition (e.g., 
number of loans, time)?
    This document is intended to provide guidance to mortgage industry 
stakeholders, consumers, and the public related to the considerations 
that the Bureau may employ in the exercise of its supervisory and 
enforcement authority with respect to mortgage transactions involving 
mini-correspondents, including mortgage brokers transitioning into 
becoming mini-correspondents. The above list of questions is not an 
exhaustive list of the Bureau's considerations relevant to the exercise 
of its supervisory and enforcement authorities. In addition, no single 
question listed above is necessarily determinative of how the Bureau 
may exercise its supervisory and enforcement authorities. Furthermore 
the facts and circumstances of the particular mortgage transaction 
being

[[Page 41675]]

reviewed are relevant to the exercise of these authorities.

Conclusion

    The Bureau will closely monitor the practices of mini-
correspondents, including former mortgage brokers that have converted 
to this form, to ensure that the protections afforded to consumers 
under federal consumer financial law, including the Bureau's 
implementing regulations, are not being evaded. In doing so, the Bureau 
will use all appropriate tools to assess whether supervisory, 
enforcement or other actions are necessary.

IV. Regulatory Requirements

    This Policy Guidance is a non-binding policy guidance articulating 
considerations relevant to the Bureau's exercise of its supervisory and 
enforcement authority under Regulation X and RESPA, and Regulation Z 
and TILA. It is therefore exempt from the notice and comment rulemaking 
requirements under the Administrative Procedure Act pursuant to 5 
U.S.C. 553(b).
    Because no notice of proposed rulemaking is required, the 
Regulatory Flexibility Act does not require an initial or final 
regulatory flexibility analysis. 5 U.S.C. 603(a), 604(a).
    The Bureau has determined that this Policy Guidance does not impose 
any new or revise any existing recordkeeping, reporting, or disclosure 
requirements on covered entities or members of the public that would be 
collections of information requiring OMB approval under the Paperwork 
Reduction Act, 44 U.S.C. 3501, et seq.

    Dated: July 9, 2014.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2014-16779 Filed 7-16-14; 8:45 am]
BILLING CODE 4810-AM-P