Friday, December 29, 2006

Pre-licensing education and exams

Some of the states, such as Florida, require a certain number of hours of classroom education before you can take a required exam. Other states, such as New Jersey, require you to pass the exam but do not require any licensing education. Should you take a course even if it is not required? Should you take an online course or a classroom course? What are they testing about anyway?

Prelicensing education and passing a test has been required in some states to ensure that a licensed mortgage broker can't just open up an office and start working with borrowers when they have no idea what they are required to do or know. There are state laws and federal laws that apply to each mortgage transaction and a mortgage broker must know all of the laws that pertain to each transaction. Does your state require certain disclosure forms that must be given to each borrower at the beginning of the process? Do you know how long to keep information in the borrrower files? Do you know what documents must be retained in the borrower file? Does RESPA, 1003, GFE mean anything to you? If you are intending to be a mortgage broker or mortgage lender, you are expected to know the answers to these questions for each state in which you are licensed.

If the state requires classroom education, there is no choice about the matter. The only question is from whom you should take the coursework. If the state schedules all test takers for a particular location, then you should take the coursework right before the exam, in the city in which the exam will be given. An example is Florida. Florida reqires 24 hours of classroom education. The exam is given monthly, generally on the 4th Tuesday of the month (but that schedules changes in November and December). If you are an out-of-state applicant, you will be scheduled to take the exam in Fort Lauderdale. I advise my clients to take the classes in Fort Lauderdale on the weekend before they are scheduled to take the exam. This way they are already where they need to be for the exam and by taking the courses right before the test, they will have the best chance to remember what they were taught. My clients have all passed the Florida test.

Other states, like Georgia, require either a certain number of years of full-time mortgage industry experience or a required number of hours of hours of education which must be given by an approved provider. For example, Georgia requires either 2 years of full-time mortgage industry experience or 40 hours of education from a n approved provider (who are listed on the Georgia Department of Banking website). If you live or vacation in Georgia, you can either take classroom education or online courses. You have to know whether you will have the discipline to really learn the material if you use an online course package or whether you need to have a teacher in front of you to answer questions in order to master the laws and regulations that you will be expected to know once you get your license.

Finally, there are states that don't require prelicensing education but do require that you pass a test. Examples of these states are New Jersey and Illinois. Should you take any courses if they are not required? If you have been a loan officer for a number of years in the state in which you will be taking the test, you may already know the material that will be tested. For those license applicants, a course is not necessary. But if you are a new loan officer in that state, or have never closed a loan in that state, take a preparation course. The time and effort it takes to learn the material in the course will help you to pass the exam. Better to be safe than sorry. If you don't pass the test, you will never get your license.

Tuesday, December 26, 2006

Arrests or Convictions

Just about every license application asks whether any of the principals have been arrested or has criminal convictions . Before I prepare an application for a mortgage broker or mortgage banker client, I ask whether there are any arrests or convictions that need to be disclosed. I also counsel them that if they unsure whether to disclose, then they should answer the question "yes."

Many times, the client will tell me that there are no arrests or convictions and I check the "no" box on the application. Then, the FBI and state criminal background search is done and shows an arrest. So, I get a phone call or letter from the Banking Department asking me about the discrepancy between the criminal background search and the response on the application. When I talk to the client about the criminal bckground search results, I learn that the arrest was 25 years ago and they thought it was too old to be disclosed or was dismissed or the records were closed 20 years ago.

Unless the question on the license application specifically states a time limit (i.e., were you arrested in the last 10 years), you must answer "yes" if you were arrested. It makes no difference to the Banking Department if the arrest was 25 or 30 years ago or whether the case was dismissed. When the criminal background check comes back with an arrest, you will need to write a letter of explanation and produce copies of court records.

The discrepancy between the response on the license application and the results of the criminal background check raises questions in the mind of the reviewer at the Banking Department as to whether the applicant is run by honest people or whether someone who is managing the company will lie or cheat to borrowers. Every response in the application will now be scrutinized more closely with a bias against the applicant.

When in doubt about which response to make about arrests or convictions, check the "yes" box and explain the circumstances of the arrest or conviction. Unless it has to do with a matter involving honesty, theft, embezzlement, or fraud, the fact that a principal of the applicant company has been arrested or convicted (of maybe possession of drugs or driving while intoxicated) will not be a critical factor when the Banking Department makes its decision about the license application. If the conviction is for a crime that involves dishonesty, fraud, theft or embezzlement, it will be difficult to get that application approved. That person should not be a principal of the applicant.

Thursday, December 21, 2006

How much money should you put into your company?

The answer to this question is different state by state and whether you are a mortgage broker or a mortgage lender.

If you are a mortgage broker, many states have a required minimum net worth of $25,000. New Jersey even requires a minimum net worth of $50,000. What is net worth? It is assets minus liabilities. For a new company, assets usually consist of cash (in your company's checking account) , computer equipment and furniture. It does not include your car, unless title is in the company's name. Existing companies might also have accounts receivable and prepaid expenses. Liabilities are the amount of money a company owes. New companies usually do not have any liabilities.

Even if the state that you are interested does not have a minimum net worth requirement, the licensing department might want to see a company's financial statement. They are looking to make sure that you can pay any claim that may arise after you are licensed. In order to get approval for a license, you must demonstrate to the banking department that you are serious about your financial responsibilities. The more assets you can show, the better. For existing companies, I counsel my clients not to distribute all of the profits to the shareholders of a corporation or members of a limited liability company. That lowers the net worth of a company. If the company shows that profits are retained to maintain operations or grow the business, the licensing department looks favorably at the company's application.

The requirements for a mortgage lender license are even higher, typically $100,000 to $250,000. And most states do have a net worth requirement. If a mortgage lender needs a warehouse line of credit in order to fund its loans, the warehouse line creditor may require even an even higher net worth.

Regardless of whether a states requires a minimum net worth, at least at the very beginning of your company's existence, you should put in and keep as much money in the business as you can to show the licensing department that you are serious about being a successful company that intends to be an upstanding member of the community.

Wednesday, December 20, 2006

What is the Mortgage License Solutions blog about?

This blog is for loan officers who want to start their own companies and don't have the time or inclination to figure out what all the paperwork involved in getting their mortgage license is all about. It is also for existing mortgage lenders or brokers who want to expand their territories and have questions about the requirements in other states.Different posts will answer questions that I get from clients and prospective clients such as "How much money do I need to start the business?" Or "what is a surety bond and how do I get one?"I've been a real estate lawyer for 20 years and I've seen interest rates as high as 17% and as low as 5.25% for 30-year fixed rate mortgages. I've counseled clients in the mortgage industry when the phones were ringing off the hook during a refinance boom and when purchase money mortgage applications were only trickling in. I've spent almost a decade helping clients get mortgage broker and lender licenses and keep those licenses so I have heard and answered many of the questions that you have about the process.In the weeks to come, I will discuss the most frequent questions that I get from clients. If you have a question that you want to see answered in this blog, just send me an email at and you can become part of this blog too.