To understand the phenomenon, he focused on a subset of retail mortgage branches – the so-called expense management branch (EMB), which he described as “the brick and mortar” sales offices.
He said: “In the old days, there were net branches that really didn’t operate on the up and up, they had structures (that) simply weren’t licensed and didn’t have a license to originate FHA or VA loans.”
The unscrupulous ones would look for a sponsoring parent entity and essentially rent a license from the sponsor, he said.
“They would keep their employees at the branch entity; they would own all the assets of the branch; everything would be done in the name of the branch manager and they would simply pay a fee to the corporate parent. That would enable them to sort of piggyback under the license of the parent entity, and originate FHA loans,” he explained.
While it was not strictly speaking an illicit activity, it did violate the spirit of the rules for originating FHA loans.