As published in Scotsman Guide's Residential Edition, October 2006.
With rates increasing, profit margins slipping and ongoing government pressure to limit broker compensation, a number of mortgage brokers are looking at becoming correspondent lenders.
Becoming a correspondent can give brokers a distinct advantage by giving them the bargaining power and lev-erage of a large lender. Unfortunately, brokers might not know the steps to take to make a smooth transition from broker to banker.
Before you decide to take that next step, consider the four Cs of correspondent lending: compliance, control, compensation and cost.
To be successful, correspondent lenders must pay keen attention to compliance. A weak culture of compliance has brought down many large lenders over the years. Fraud is the biggest threat to an up-and-coming company that often lacks the capital to repurchase a loan.
The risk of fraud increases dramatically when a company has processors in multiple branches performing compliance reviews. Having different people perform compliance checks remotely could lead to inconsistent interpretations of guidelines. Ultimately, the business can be accountable.
Centralizing the processing function creates better control and consistency. It is also generally easier to manage. In addition, it creates a single point of contact for the lender, which can increase communication.
Most contracts require the correspondents to repurchase loans in case of fraud. Investors typically don't enforce this contract because of the limited capital of most broker shops, however.
Certain instances can trigger an investor to force a buyback. For example, occupancy fraud has been found to comprise more than half of mortgage fraud. There is a good chance that if your shop is doing 150 or more loans annually, there is some form of embedded fraud.
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