Guidelines between what is considered to be a brokered transaction and a secondary market transaction under the model is vague. Here’s what mini-correspondents can do to avoid subjecting their transactions to further scrutiny.
As loan aggregators continue to face heaps of regulations, more and more are considering pursuing the mini-correspondent channel. For some, it's a way to expand their businesses. For others, it's a way to bypass compensation rules. For those looking to simply catch a break, beware, you won't find it here.
While the industry is currently seeing an increase in mini-correspondent lending, the trend for the channel began a few years ago around 2010 with the passing of Dodd Frank. Since then, the mini-correspondent platform has continued to grow as more regulations are announced and implemented.
"I believe initially, many made the change or considered making the change out of survival," said Adam Millstein, senior vice president at 5-star lender CMG National Wholesale Lending. "Mortgage brokers are entrepreneurial by nature and if you recall, they took a lot of the blame for the mortgage crisis, which I believe was misguided."
What are mini-correspondents?
Mini-correspondents are mortgage bankers that have limited net worth. The platform allows brokers to close loans in their own name, but typically the warehouse lines are either provided by an entity buying the loans or require lender approval of the takeout investor.
Under the platform, companies can pick up additional revenue by having more control over their pricing and margin strategies, which they then can deploy in other areas of their businesses.
“The channel also helps in both retaining and recruiting top-tier talent," said Millstein of San Ramon, California-headquartered CMG. "As we continue to transition into a purchase market, being the lender on the transaction provides more control to the originator, which improves the home buying experience for the borrower, realtor and referral sources."
When making the switch to mini-correspondent, brokers exchange one set of pressures for another. "There is more risk involved and it is important that those companies making the transition have the infrastructure and controls in place to mitigate those risks," said Millstein. "Mini-correspondent lending is certainly not for everyone."
The mini-correspondent is responsible for all of the origination functions and ensuring the loan is compliant and meets all federal and state requirements. It is also non-delegated, so the investor underwrites and approves the loan for purchase prior to the lender closing the transaction. This reduces the risk of the investor not purchasing due to the loan not meeting the investors’ credit guidelines, he added.
CFPB's guidelines
This summer, the Consumer Financial Protection Bureau (CFPB) published guidance regarding mortgage brokers transitioning to the mini-correspondent lender model. The regulator suggested concerns that some brokers may be shifting to the model for the wrong reasons and has put the group on notice that their activities are being watched closely.
The regulatory guidance that the CFPB issued in July on mini-correspondent lending was very vague, said Millstein. The guidelines stop short of drawing any lines in the sand between what it considers to be brokered transactions and secondary market transactions under the mini-correspondent model.
One way that new-to-the-business, mini-correspondent lenders can avoid subjecting their transactions to further scrutiny by the CFPB is making sure they stand on their own.
"The mini-correspondent cannot be dependent on the investor for many of the functions that they provide on a brokered transaction," he said. "As you take on this new business you need to take on all those other functions. If you don’t, then you are walking a fine line.”
Three ways mini-correspondents can stand on their own:
- Have more than one funding source. Mini-correspondents should have multiple funding sources or warehouse lines that are not affiliated with the investors they are selling loans to.
- Do not rely on investors for origination functions. Mini-correspondents should not be relying on their investors for such functions as issuing disclosures, quality control policies, compliance, funding review and appraisal ordering.
- Be approved to sell loans to several companies. Simply selling loans to one company can be a red flag and can make the mini-correspondent look dependent. "You need to look and feel like an independent mortgage lender," said Millstein.
With the right training and mindset, the mini-correspondent channel can open doors for mortgage brokers looking to expand. Programs like CMG’s Select Partner/Mini-Correspondent program can help brokers make the smooth transition.
"Mini-Correspondents– especially those new to this platform– generally require more of a personalized, hands-on, high-touch experience," said Millstein. "Working with an investor like CMG that provides that type of service is critical to their success."
The Select Partner/Mini-Correspondent program began in June 2012 when Millstein joined the company. CMG piloted the platform in early 2013 with a handful of clients and in July 2013, the company officially rolled out the program nationwide.
The program is designed for a few types of companies: mortgage companies, community banks and small financial institutions that are looking to transition from brokering 100% of their business to becoming the lender on some transactions.
"It’s for brokers thinking that perhaps they don’t have the net worth or the experience and that’s where our Select Partner program comes in," said Millenstein. “Our folks can help walk them through the transition process. We are at their side the whole time."
The biggest challenge is first determining if transitioning to a mini-correspondent platform is the right next step for the organization, he said. "While being a mini-correspondent has several advantages, there is additional risk associated with being the lender."
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