A growing number of mortgage brokers are subject to more CFPB oversight

The brokerage channel has seen significant growth. according to Within Mortgage Finance according to estimates, in the second quarter of 2024, 18.2% of first mortgage loans fell to brokers. This is up significantly from 16.9% in Q2 2023 and from an all-time low of 9.8% at the end of 2014.

Targeting LO compensation

According to some industry participants, as the brokerage channel expands, so does its exposure to regulatory scrutiny. Questions remain about certain regulations, which sources believe CFPB inspections will help clarify. This is particularly true of channel-specific, lender-paid, and borrower-paid compensation rules.

Jonathon Haddad, Chairman and CEO Association of Independent Mortgage Experts (AIME), expressed support for the audits, calling them “a long time coming.”

“The broker owners I audited and spoke with are professionals of high integrity, committed to acting in the best interests of their clients, and we believe the audits will confirm this,” Haddad said. “As of right now, the focus is on creative compensation structures – an area that deserves attention.”

The Dodd-Frank Act allows mortgage brokers to be paid by lenders, but these contracts are typically renewed every three months. Borrowers can pay the fees themselves, which leaves room for negotiation.

Sources told HousingWire that the compensation paid by the borrower is often 50 to 100 basis points lower than the compensation paid by the lender, allowing LOs to compete with what is offered by retail loan officers in a competitive market.

While the regulations provide clear guidelines such as prohibiting dual compensation from borrower and lender and prohibiting compensation tied to transaction terms, they offer little clarity on when LOs can switch between lender-paid and borrower-paid compensation structures.

“I believe competition is always good for the consumer and the CFPB should allow brokers to provide consumer credit,” said Thuan Nguyen, CEO and founder of Loan Factory. “But the rule is not clear at all. It is very muddy. This is the risk of running a mortgage broker. We have to deal with it and we have no choice. We want the regulator to clarify this issue.”

Colgate Selden is an attorney with the CFPB SeldenLindeke LLPexplained that some companies do not allow LOs to switch from a lender-paid to a borrower-paid compensation model after certain stages of the transaction—for example, after disclosures or a loan estimate have been issued—due to the risks involved. He noted that the situation “hasn't really been fully tested.”

Another issue on the CFPB's radar, the sources said, is that brokerage firms tend to direct most of their loans to one wholesale lender when they advertise their purchases.

This inspection follows a confrontation (UWM), the largest wholesale lender in the United States. The lawsuit alleges that the company conspired with mortgage brokers to impose excessive fees and charges on borrowers. In response, UWM called the accusations “pretentious.”

“If you broker 99% of your loans to one lender while marketing to people you work with a group of lenders to find the best rates, that has the characteristics of what happened before the 2008 crash and the rationale of LO compounding. the rule. This is a fraud or misrepresentation to the borrower,” Selden said.

A potential safe harbor for brokers is to work with at least three different lenders, not just three different products or scenarios, experts said.

“We're starting to encourage that approach as much as possible,” Sweeney said. “Most people work this way, but there are times when one lender may have two different products that are suitable for that consumer, and then your third choice is from a second lender. It sounds like the CFPB is looking at three different lenders, not three different products.

Amid increased concentration in the wholesale lending market, requests for more lender options are increasing, where UWM and to judge. Many brokers refer to these two companies for their advanced technology, high quality service and sometimes more competitive prices.

At Loan Factory, Nguyen said his brokers work with 200 lenders, and each loan goes through a pricing engine that compares offers. But despite all these options, 40% of Loan Factory's loans go to one lender.

“We have a great team of compliance staff to help. And of course we're planning to hire more now,” Nguyen said. “If the CFPB steps in, it's going to be additional work, adjusted for additional resources.”

The future of the office

Industry experts believe that the CFPB could undergo significant changes during the second Trump administration. , the world's richest man and owner Tesla, SpaceX and social media platform Xit even called on the CFPB to become part of its broader investigation of government spending.

“Traditionally, around D.C., if a regulator initiates an examination or enforcement action, the incoming administration allows it to continue,” Selden said, adding that there has been a situation in the past where enforcement actions have been shut down. “I think even the new administration might want to at least continue to collect data to monitor what's going on in the market.”

But McKay expressed caution.

“If any broker is sitting there crossing their fingers hoping the new administration will fix their compliance problem, that's a bad strategy,” McKay said. “There will definitely be changes within the CFPB, but even if it's still possible that it all goes away, it's more a change in the broker channel than CFPB behavior.”