When the Housing Urban and Development no longer approved brokers according to ML 2011-02, brokers were quick to seek a net-branch model to avoid disclosure of their yield spread premiums to the borrower on the HUD-1 Settlement Statement. By joining a net-branch, brokers had a completive advantage over sponsored brokers who had to disclose the yield spread on the HUD-1.
The net-branch corporate structure was able to fund loans with its own line of credit also know as a warehouse line. Because the net-branches were able to finance loan internally, the net-branch corporate model was technology and legally defined as a creditor, which was exempted from the Loan Originator Compensation Rule April 1, 2011, under the Federal Reserve. The Federal Reserve’s Final Rule about loan originator compensation and steering takes effect on April 1, 2011. The rule, which is intended to protect borrowers from unfair lending practices stemming from loan originator compensation practices; and applies to “mortgage brokers”, loan officers, and loan originators employed by creditors.
Once HUD announced that the net-branch model was no longer acceptable, that left the brokers with an option to become a full mortgage branch or break away and become a sponsored broker or STPO. The new requirement resulted in the brokers
losing their identity and prevented the non-supervised mortgagee DBAs (Doing Business As) business structures.
Brokers are now looking for FHA sponsorship in order to keep their FHA mortgage loan production moving. When the brokers apply for sponsorship with a sponsoring mortgagee, the sponsoring mortgagee is citing ML 2011-02 which requires the broker to have a quality control plan and historical quality control audit reports of the mortgage loan production for the past 12 months. The broker has no options but to have the post closing audits performed in order to receive sponsorship. Unfortunately, many of the brokers who were in a net-branch, paid a fee to the net-branch for each loan to be reviewed for post closing quality control. However, the net-branch is not releasing the reports to the broker.