CFPB Issues Policy Guidance on Mini-Correspondent Structure for Mortgage Lenders

The CFPB recently issued supervisory and enforcement guidance titled “Policy Guidance on Supervisory and Enforcement Considerations Relevant to Mortgage Brokers Transitioning to Mini-Correspondent Lenders.” The guidance addresses regulatory requirements applicable to mortgage brokers under the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA).

The CFPB notes that it is aware of increased interest among some mortgage brokers to restructure their business to become mini-correspondent lenders “in the possible belief that doing so will alter the applicability of important consumer protections that apply to transactions involving mortgage brokers.” The CFPB specifically identifies the following requirements:

  • The RESPA requirements to disclose mortgage broker compensation on the Good Faith Estimate and HUD-1 Settlement Statement
  • The TILA requirements to include compensation paid to a mortgage broker in points and fees under the high-cost loan rule and to satisfy the qualified mortgage conditions under the ability-to-repay rule
  • The TILA requirements regarding compensation paid to a mortgage broker under the loan originator compensation rule, and the prohibition against steering by a mortgage broker under such rule

The CFPB describes a “correspondent lender” as a party that performs the activities necessary to originate a mortgage loan, and specifically identifies the following functions:

  • Taking and processing applications
  • Providing required disclosures
  • Often, although not always, underwriting the loan and making the final credit approval decision
  • Closing the loan it its name
  • Funding the loan, often through a warehouse line of credit
  • Selling loans to investors

The CFPB states it understands that some mortgage brokers may be setting up arrangements with wholesale lenders in which the brokers purport to act as mini-correspondents. The CFPB describes a “wholesale lender” as an entity that typically provides the funding for loans in transactions involving mortgage brokers.

The CFPB explains that in a mini-correspondent arrangement, a 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 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. The CFPB notes that mortgage brokers making such a transformation may start out as small correspondents dealing with only a few investors (hence the “mini-correspondent” moniker). However, the CFPB asserts that in substance the mortgage brokers “may not have transitioned to a mini-correspondent 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 . . . .”

To provide guidance, the CFPB sets forth a number of questions that it may ask to assess whether a company using a mini-correspondent structure is actually acting as a creditor, or is acting as a mortgage broker. The CFPB notes that the questions in the guidance are not exhaustive and that no single question is necessarily determinative of how the CFPB may exercise its supervision and enforcement authority. The questions reflect areas that likely are of concern to the CFPB, including whether the warehouse line arrangement that the mini-correspondent uses to fund loans is bona fide and whether the mini-correspondent is actually performing the functions of a creditor. Among the various questions are:

  • Is the warehouse line of credit provided by a third-party warehouse bank?
  • 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?
  • How thorough was the process for the mini-correspondent to get approved for the warehouse line of credit?
  • Does the mini-correspondent have more than one warehouse line of credit?
  • 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?
  • What entity (mini-correspondent, warehouse lender, investor) is performing the majority of the principal mortgage origination activities?

The Policy Guidance is nonbinding guidance regarding the CFPB’s exercise of its supervisory and enforcement authority under RESPA and TILA. Nevertheless, it appears the CFPB intends to send a strong message regarding attempts by mortgage brokers to restructure their operations as mortgage lenders. In announcing the guidance, Director Richard Cordray stated: “Before the financial crisis, consumers seeking mortgages were steered toward high-cost and risky loans that were not in the consumer’s interest. 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.”

- Richard J. Andreano, Jr.

CFPB Provides Guidance on Ability-To-Repay Rule Application to Assumptions of Residential Mortgage Loans

The CFPB recently provided guidance on the application of the Regulation Z ability-to-repay rule (Section 1026.43) to assumptions of residential mortgage loans for purposes of clarifying the application of the rule in cases in which a relative acquires title to a security property upon the death of the borrower and wants to assume the loan, and also in similar situations. Creditors may rely on the CFPB interpretation under TILA Section 130(f), which provides a safe harbor from TILA liability for actions taken or omitted in good faith in conformity with a CFPB rule, regulation or interpretation.

Prior CFPB guidance indicated that the ability-to-repay rule applied to refinancings and assumptions under Regulation Z sections 1026.20(a) and 1026.20(b), respectively. The CFPB notes that both industry and consumer advocates have expressed uncertainty regarding the application of the rule in cases in which a successor seeks to be added as an obligor or substituted for the current obligor on an existing mortgage. The CFPB describes a successor as a person who receives legal interest in a property, typically by a transfer from a family member, by operation of law upon another’s death, or under a divorce decree or separation agreement. Although the successor acquires title to the property, by virtue of the acquisition the successor does not become legally obligated on any existing mortgage loan. Last October, the CFPB addressed the obligations of servicers with regard to successors in Bulletin 2013-02, and while the CFPB provided guidance regarding assumptions, it did not address the ability-to-repay rule. We previously reported on the Bulletin.

The CFPB notes that there can be significant consequences for a successor who is not able to become an obligor on an existing mortgage loan, and provides an example of a successor not being able to obtain a modification because he or she is not a party to the existing loan and cannot enter into a modification agreement. As the CFPB observes, if the ability-to-repay rule applies to a successor’s assumption of an existing mortgage loan, such an assumption is less likely to occur.

The CFPB interprets the ability-to-repay rule as incorporating the existing Regulation Z standard for transactions involving a change in obligors as set forth in section 1026.20(b) and, therefore, unless a change in obligors satisfies the definition of “assumption” under that section the change does not trigger the ability-to-repay rule requirements. The CFPB then notes that an “assumption” for purposes of section 1026.20(b) occurs when a creditor agrees in writing to accept a new consumer as a primary obligor on an existing mortgage loan, and the loan would constitute a residential mortgage transaction for that new consumer. Under Regulation Z, a residential mortgage transaction is a transaction in which a consumer finances the acquisition or initial construction of the consumer’s principal dwelling.

The CFPB interprets the ability-to-repay rule as not applying when a creditor agrees in writing to allow a successor to become the obligor on an existing mortgage loan because there is no assumption for Regulation Z Section 1026.20(b) purposes. Because the successor had previously acquired title to the property, the transaction is not a residential mortgage transaction for the successor and, therefore, is not an assumption subject to the ability-to-repay rule.

The CFPB notes that the transaction still is a consumer credit transaction and is subject to other Regulation Z requirements, including the requirement to provide monthly statements under Section 1026.41 and the requirements to provide notices of interest rate adjustments under Sections 1026.20(c) and (d).

- Richard J. Andreano, Jr.

New York DFS Unveils Shared Appreciation Mortgage Rule

The New York Department of Financial Services (DFS), in accordance with Section 6-F of the New York Banking Law, recently adopted regulations authorizing shared mortgage appreciation modifications in limited circumstances.

More specifically, first mortgages on residential property are eligible for a shared appreciation modification if the unpaid principal balance exceeds the property’s appraised value based on an appraisal report prepared no more than 150 days before the execution of the modification agreement. Junior mortgages on residential property are also eligible for shared appreciation modifications under the same criteria. Further, if the lender holds both the senior and junior mortgages, the total mortgage debt is also eligible for a shared mortgage appreciation under these criteria.

Next, the mortgage loan must be at least 60 days delinquent or the subject of an active foreclosure. Lastly, the holder of the loan must have disclosed potential modification alternatives to the borrower, including the Home Affordable Modification Program (HAMP), prior to the borrower electing to proceed with the shared appreciation modification. The regulations also require the holder to provide a conspicuous notice before entering into the shared appreciation mortgage warning the borrower that, among other things, “he agree[s] to give away a part of any future increase in the value of your home.”

If the above criteria are met, then the modification may authorize the lender to share in the property’s appreciation “in the event of a sale or transfer of the Residential Property or any interest therein.” The regulations establish a specific formula to calculate the lender’s share of the appreciation in value.

While we commend the DFS for its creativity in crafting this program, the amount of disclosure required by the regulations fails to strike the right balance. We believe that as distressed properties recover prior value, the regulations will be exploited by the consumers’ bar to attempt to invalidate these agreements.

- Justin Angelo

FCC Clarifies TCPA Consent Standard for Collection Calls to Cell Phones

The Federal Communications Commission (FCC) recently clarified its view on when someone has provided “prior express consent” to receive prerecorded or autodialed collection calls to his or her cell phone as required by the Telephone Consumer Protection Act (TCPA). The clarification was made in an amicus letter brief the FCC filed in a TCPA case pending before the U.S. Court of Appeals for the Second Circuit. Creditors, debt buyers, and debt collectors who make such calls should have their procedures and documentation reviewed by counsel in light of the FCC’s clarification to make sure that, in the event of a TCPA challenge, they will be able to demonstrate that the requisite consent was obtained.

The FCC’s brief was filed at the Second Circuit’s request in Albert A. Nigro v. Mercantile Adjustment Bureau, LLC. The district court had ruled in the case that the plaintiff gave his “prior express consent” to receive autodialed collection calls to his cell phone number when he provided it to a power company during a call he made to request the discontinuance of electric service to his deceased mother-in-law’s apartment.

The TCPA prohibits autodialed or prerecorded non-emergency calls to cell phone numbers unless the call is made with “the prior express consent of the called party.” In finding that the collection calls the plaintiff received from a debt collector hired by the power company did not violate the TCPA, the district court relied on the FCC’s statement in a 1991 TCPA rulemaking order that “persons who knowingly release their phone numbers have in effect given their invitation or permission to be called at the number which they have given, absent instructions to the contrary.”

In its brief, the FCC asserted that the plaintiff’s provision of his cell phone number to the power company did not qualify as consent under the TCPA. The FCC indicated that such action did not satisfy the standard established in a 2005 declaratory ruling issued by the agency in response to a petition from a debt collection industry trade association. The FCC ruled that an individual gives express consent to receive autodialed or prerecorded collection calls from creditors or third-party collectors by providing his or her cell phone number in connection with an existing debt if the number was provided by the consumer to the creditor during the transaction that resulted in the debt owed.

According to the FCC, the defendant debt collector could not satisfy this standard because the plaintiff had not given the power company his cell phone number in the transaction that resulted in the debt owed, i.e., his mother-in-law’s purchase of electric service. Instead of giving his number in the transaction in which she arranged for or made that purchase, the plaintiff provided his number after she had incurred the debt at issue.

The FCC notes in its brief that an individual can convey prior consent to receive prerecorded or autodialed debt collection calls to his or her cell phone number by a method other than providing a phone number, such as by a written or oral communication. Noting an absence of evidence indicating that the plaintiff was acting as the representative of his mother-in-law’s estate or otherwise had responsibility for her debts, the FCC states in its brief that it “takes no position on whether there would have been consent had [the power company] been furnished with the telephone number of the administrator or other formal representative of a decedent’s estate regarding a previously incurred, but currently pending, bill against the estate.”

We continue to see a high volume of class actions alleging TCPA violations. In part, this is because the penalties are draconian. Violations can yield damages of $500 per violation or actual damages—whichever is greater—with a tripling of damages for willful violations and unlimited class action liability.

- Barbara S. Mishkin



Federal Bank Regulators Increase Focus on Cybersecurity

As banking regulators increase their focus on cybersecurity, they are taking steps to raise financial institutions’ awareness about the need for preparedness. On June 24, 2014, the Federal Financial Institutions Examination Council (FFIEC) launched a web page that combines available resources from the federal regulators on cybersecurity.

In addition to heightening institutions’ awareness of cybersecurity risks, the web page is intended to create a repository of prior FFIEC cybersecurity documents and guidance. The web page was established in conjunction with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau. The debut of the web page comes more than a month after we reported at some length on cybersecurity measures taken by the New York Department of Financial Services.

At a FFIEC webinar on May 7, 2014, titled “Executive Leadership of Cybersecurity,” Comptroller of the Currency Thomas J. Curry indicated that FFIEC member agencies would begin conducting cybersecurity assessments by the end of 2014 as part of the examination process. The Comptroller also focused on cybersecurity issues the following week at a speech delivered to the New England Council.

- Keith R. Fisher 

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Hawaii Amends Mortgage Loan Origination Laws

Hawaii has amended and enacted provisions governing mortgage loan origination and licensed mortgage loan originator companies. Specifically, SB 2817, which was signed into law on July 3, 2014, makes numerous changes to the Hawaii Secure and Fair Enforcement for Mortgage Licensing Act. Among the enacted changes, the bill:

  • Requires the principal place of business and each branch office of the mortgage loan originator company to be open during regular business hours to the public and for the examination or investigation by the commissioner. A company's principal office means the location where the company's core executive and administration functions are primarily carried out, and a branch office is any location in Hawaii that is identified to the public as a location where the licensee holds itself out as a mortgage loan originator company. "Regular business hours" means Monday through Friday, between 8:00 a.m. and 4:30 p.m., excluding state holidays.
  • Clarifies that a branch manager may not oversee more than one branch office or principal place of business.
  • Eliminates licensing exemptions for individuals facilitating mortgage loans for their family members or for their own residence.
  • Requires licensees and exempt sponsoring mortgage loan originator companies to submit quarterly mortgage call reports to the National Mortgage Licensing System (NMLS). An "exempt sponsoring mortgage loan originator company" is any person exempt or not required to be licensed who registers with NMLS for the purposes of sponsoring a mortgage loan originator.

 These changes took effect immediately.

- Marc D. Patterson 

Copyright © 2014 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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