Table Funding vs. Direct Lending: Minimizing Risk and Liability in Mortgage Origination in California

Scheer Law Group, LLP (SLG), understands the advantages and disadvantages of origination models for non-depository lenders and mortgage brokers. With increased regulatory scrutiny of lenders’ and brokers’ origination practices, all financial institutions, secondary market investors, and intermediaries should know the differences between table funding vs. direct lending in California and ensure their origination model is compliant with state and federal law.

About Us

SLG is a leader in the multi-billion-dollar state of California mortgage industry. This multi-attorney law firm represents nationally recognized lenders, mortgage brokers, business owners, and investors in both litigation and transactional matters throughout the state. Headquartered in Orange County with offices across the state, SLG’s highly trained legal team provides unparalleled service in creditor bankruptcy, real estate, financial services, and business law.

The firm is committed to value-driven, results-oriented representation backed by decades of industry experience.

California’s busiest courthouse districts play critical roles in resolving disputes that can involve table funding and direct lending. In Southern California, lenders who encounter issues related to table funding may see these matters resolved in the Stanley Mosk Courthouse in downtown Los Angeles, a block from the terraces of Grand Park and a short walk from the courthouse steps of City Hall.

Orange County lenders involved in issues around broker liability and funding source compliance often find themselves in the Central Justice Center in Santa Ana, a short walk from the historic Old Orange County Courthouse and the Civic Center arts corridor. Litigation related to mortgage origination also takes place in northern and central California.

What Is Table Funding?

Table funding is a mortgage transaction structure where a mortgage broker originates a loan but outsources funding to a separate lender at closing. The funding lender is named on the note and deed of trust and acquires the loan immediately after closing.

While table funding allows mortgage brokers to provide loans to consumers without maintaining warehouse lines of credit, California table funding laws regulate this arrangement to avoid fraud and other abuses in the origination process.

In California financial operations, table-funded transactions are considered brokered loans for which there are special disclosure requirements and specific licensing standards. For lenders that engage in table funding, specific documentation, risk-based controls, and provisions in the lender-broker contracts can help minimize legal and financial exposure.

Lenders that engage with mortgage brokers should have clearly written policies regarding these relationships and not otherwise assume brokers’ underwriting, loan processing, or compliance with state law.

What Is Direct Lending?

Direct lending is a loan origination structure where the lender’s name is on the note and deed of trust at closing, and it funds the transaction with its own money or through a warehouse line. The direct lender manages the entire origination process from underwriting to funding, so the regulatory requirements are often more extensive but also more manageable by the lender.

Direct lending laws in California require institutional infrastructure to manage lender risks, including well-developed compliance and quality-control programs and proper licensing.

Direct lenders face higher civil liability risk if they do not have the internal procedures, systems, and checks and balances to manage origination activities. However, direct lenders have more control over the origination process, can deploy disciplined risk-management strategies, and do not rely on brokers or other intermediaries.

Key Considerations for Both Models

As per the data from the Federal Financial Institutions Examination Council (FFIEC)/Consumer Financial Protection Bureau (CFPB), in 2023, the portion of first-lien, one- to four-family, built on site, owner-occupied closed-end home-purchase loans with independent mortgage companies not affiliated with a banking organization reached 63.1%. This category accounted for 60.2% in 2022, and this 2.9 percentage point hike is the largest gain in all categories.

Considerations for both models include:

• Relationships. Whether table funding or direct lending, the relevant institutions and individuals should be appropriately licensed under California law. Lenders should also have robust broker agreements that clearly define the broker’s duties and responsibilities.
• Documentation. Regulators will look closely at the source of funding, underwriting procedures, and documentation used in both table funding and direct lending. In table-funded transactions, a lender should establish thorough pre-fund auditing procedures. For direct lenders, it is most beneficial to maintain well-defined underwriting guidelines and an updated compliance checklist.
• Compliance. Compensation and other benefits in table-funded loans are of particular concern because, as in most consumer lending contexts, federal law limits broker compensation and requires disclosures to the consumer and investors. Direct lenders must have systems in place to track compensation, document key decisions to avoid steering risks, and otherwise ensure compliance with all federal requirements.
• Liability after closing. In table-funded arrangements, lenders can be held responsible for errors by brokers after closing. For direct lenders, it is critical to have post-closing checks and compliance tools to avoid repurchase demands, regulatory enforcement actions, and investor-based litigation and liability.

FAQs

Is Table Funding Allowed in California?

Yes. Table funding is legal in California; however, it is subject to state licensing and broker-compensation requirements. If a broker originates a loan with another lender’s funds at closing, the loan may be considered a brokered loan for disclosure and compensation purposes. Lenders should have airtight agreements, oversight processes, and compliance controls with table funding arrangements.

What Is Table Funding in Lending?

Table funding is the practice of a mortgage broker originating a loan and using the funds of a different lender at closing. The funding lender is disclosed on the closing documents, and assumes the loan immediately after funding. Table funding enables lenders to secure new production opportunities but demands regulatory compliance while also requiring explicit contracts and quality controls to effectively manage risk.

What Type of Mortgage Company Engages in Table Funding?

Table funding is most often utilized by mortgage brokers or non-depository mortgage companies originating loans with no capital of their own. They form a wholesale or funding lender to supply the actual loan funds. Through broker-lender partnerships and strict underwriting controls, along with contractual agreements, companies can satisfy state and federal compliance requirements for risk management in heavily regulated states such as California.

What Are the Three Types of Lenders?

Origination sources are often described as direct lenders, wholesale lenders, and correspondent lenders. Direct lenders originate loans with their own funds and underwrite and close the loans.

Wholesale lenders fund loans that have been originated by brokers, including table-funded loans. Correspondent lenders originate and fund loans, but typically sell the loans to investors after closing. Each category presents different compliance and operational issues for financial institutions.

Hire a Financial Services Lawyer

A financial services attorney at Scheer Law Group, LLP, can assist you in your lending needs. Hire a financial services lawyer with us as soon as possible. Contact us today for more information.