Mortgage broker-owners received an ominous warning from Broker Action Coalition (BAC) Chief Advocacy Officer and co-founder Brendan McKay who took to LinkedIn last week to share, “The CFPB has begun auditing mortgage brokerages,” particularly the industry’s mega brokers that employ over 1,000 loan officers.
Also the broker-owner of McKay Mortgage, McKay stated in his LinkedIn post that the Consumer Financial Protection Bureau (CFPB) has “created regional teams to complete these audits, and everyone should prepare for this to be a continued practice."
McKay shared his opinion about the increased scrutiny on mega-sized brokerages and mini-correspondent brokerages via his LinkedIn post, saying “It makes sense. As Mortgage Brokers become a larger part of the market share there’s really no argument that a >1,000 Loan Officer Brokerage should not be subject to the same audits of a similarly sized lender.”
There are only a handful of mega brokerages that currently employ more than 1,000 MLOs: NEXA Mortgage employs 2,791 MLOs; Loan Factory employs 1,366 MLOs; Edge Home Finance Corp. (1,161 MLOs), and C2 Financial Corp. (1,059 MLOs), according to Modex.
After the BAC met with the CFPB last week, McKay bullet-pointed main takeaways from their discussion on LinkedIn:
- Large Brokerages should prepare for a CFPB audit and get their ducks in a row now.
- If a Brokerage advertises shopping multiple lenders for the best rate and sends most of their business to one lender, this is a problem.
- Brokerages should note the reason they sent every loan to the lender they sent it to.
- The anti-steering agreement should have options from three different lenders.
- The reason for a transaction going to borrower-paid compensation (BPC) should be noted.
- Expect scrutiny on regulatory issues that exist at the Federal level but not the State. Examples include, but are not limited to, varying comp plans between lenders, states, and regions, and BPC scrutiny related to LO Comp.
Industry peers who commented on McKay’s LinkedIn post were not all that surprised by the announcement. That included freelance mortgage consultant Mike Cush, who is also the former vice president and COO of Union Plus Mortgage Company.
“This is welcome and overdue,” Cush commented on McKay’s post. “And might not go that well for some of the folks that openly disdain the rules.”
Broker CEO and President at 14 Loans whose LinkedIn handle is 'Ashan F.' inquired in his comment whether a small broker-owner could avoid CFPB audits by hanging their license with another brokerage. "The audit is for brokers, so, instead of me doing loans under my small brokerage, I hang my license with any other brokerage, I won't have to worry about audits then? Will it be the brokers, who have to maintain the files of closed loans and keep themselves prepared for audits and not the loan officers, sharing their comps with the brokers?” Ashan inquired.
In his reply to Ashan's comment, McKay stated, “Yes, you would not have to directly deal with an audit if you worked for someone else. But at this very moment, I believe large broker shops are more likely to see an audit like this than a small one.”
McKay further clarified in his reply that “Loan officers are not audited. Businesses are (whether lender or broker). Loan officers can be investigated because of a specific complaint, or as the result of an audit finding something suspect [sic] on one of their files.”
Additionally, FCM TPO senior account executive Cassie Mead commented on McKay’s mention of brokers and brokerages that send most of their business to one lender, inquiring what the CFPB would consider “most of their business.”
McKay replied to Mead’s comment stating: “I think it's important to note that it's only relevant if you're advertising something that's very different than [sic] what your results show. If you don't make claims about how many lenders you shop for the best price, a brokerage could send 100% of their business to one lender and there's no reason to believe they'd have a regulatory problem."
Notably, McKay added in his reply: “Personally, I wouldn't be a huge fan of the practice, but that's an entirely different conversation.”
When asked if there are any further updates today on the CFPB mortgage broker audits, McKay told NMP in an emailed statement that "the BAC will continue to communicate with the CFPB on this topic, and Brokers can expect further guidance from the BAC to better prepare their Brokerages for a potential audit."
Former CFPB Supervisory Highlights: Regulation Z For Brokers And Mini-Correspondents
The warning signs draw all the way back to a 2013 Supervisory Highlight that includes a section on Regulation Z, which prohibits compensating mortgage loan originators in an amount that is based on the terms of a transaction.
In other words, Regulation Z prohibits steering incentives. A broker or loan officer cannot get paid more if the consumer takes a loan with a higher interest rate, a prepayment penalty, or higher fees. It also prohibits dual compensation, so an MLO cannot get paid by both the consumer and another person such as the creditor. It also requires that MLOs meet set qualifications and screening standards, including Character and Fitness Requirements, Criminal Background Checks, and Training Requirements, depending on whether they work for a bank, thrift, mortgage brokerage, or nonprofit organization.
However a 2014 CFPB Supervisory Highlight more directly aimed at “mini-correspondent brokerages” or mortgage brokers transitioning to a correspondent lending model. The CFPB expressed its concern that some mortgage brokers may be shifting to the mini-correspondent model, believing that “mini-correspondent” label would exempt them from important consumer protection rules affecting broker compensation.”
The 2014 CFPB guidance on mini-correspondent lenders explicitly states that TILA and Regulation Z prohibit loan originators, including mortgage brokers, from ‘‘steering’’ consumers to transactions not in their interest in order to increase the broker’s compensation.
“I think there's reason to be hopeful that this could be the case here, given that it's not only the first time some of these brokerages have been audited but also the first time the entire channel has been subject to these types of audits," McKay added.
NMP is currently waiting for the CFPB’s statement in response to McKay’s announcement.
