Examinations – the Most Common Issues Leading to Enforcement

The vast majority of mortgage brokers and lenders come through their banking department examination with a few problems to resolve. However, there are always some companies that have a major issue that is brought to light during the examination and leads to an enforcement action. You don't want to be one of them.

Which are the most common issues that lead to an enforcement action?

1. Unlicensed activity;
2. Material misstatements in loan documents;
3. Failure to produce documents;
4. GFEs that do not disclose all of the fees;
5. GFEs that are not consistent with HUD-1s;
6. APRs not attempted or seriously different from the required calculation.

Make a New Year’s resolution to look through your files to make sure you don’t find these errors. It could cost you plenty.

How to Hire Good Mortgage Professionals

When the 1003s were pouring in and your main concern was getting bodies in your office to get the loans closed, did you pay any attention to who you were hiring?

Unless you are bucking the current trend (and congratulations to you if you are), you probably have plenty of time now to review the qualifications of who you hired and draw up a plan of how to hire the best mortgage professionals as you need them.

Know whom you are hiring. Get written authorization from your prospective employees to conduct extensive checks on them. Check references if you can (although many large companies will not give out any information other than name and dates of employment), do background checks (some states require them, do them even if your state does not require them), do court history checks, regulatory agency checks, and credit checks.

Double verify all information that you receive and document your results. Interview your prospective employees face-to-face. Watch out for body language that contradicts what is being said. Ask pointed questions about knowledge of RESPA, prior office policies regarding statements made to customers, ability to work with supervisors, attitudes, and any prior customer complaints to regulatory agencies and customer lawsuits. Find out about the goals of your prospective employee - do they match your company’s goals?

If you have any hesitation that the prospective employee will meet the highest standards of ethical behavior, do not hire this person. If any reference hesitates before answering any questions about the prospective employee, that is a red flag and should probably disqualify your hiring of this person. Yes, the reference may have a grudge or be stating incorrect information, but unless you have strong indications otherwise, why hire a potential headache? Your prospective employee will inevitably have an explanation for the bad information you are getting about him/her – whom do you believe? Is there a reason to even take a chance on this person? Remember if your guess turns out to be wrong, this person could cost you thousands of dollars in lawsuits or fines from the banking department. Never forget that bad apples move around from company to company, state to state until they are caught. You don’t want them to be caught in your company. Don’t pay attention only to the number of loans they will bring to you. They still can cost more than they earn for you. They can cost you your company.

Colorado Requires Errors and Omissions Insurance

Colorado has adopted a rule, effective November 13,2007, to require that all mortgage brokers maintain errors and omissions insurance in an amount not less than $100,000 per licensed individual for each covered claim and an aggregate of not less than $300,000 per licensed individual. The deductible on the insurance cannot be more than $5,000.

I have stated before that each mortgage company should carry errors and omissions insurance. Even if you are the sole employee of your company, you may not even realize that the statements that you make to a customer or the actions you take might in the future lead to a lawsuit. This is true even if you have done nothing wrong. The coverage will pay for your legal costs as well as any possible settlement or judgment (if the settlement is negotiated by and agreed to by your insurance carrier).

Mistakes happen. And you can’t be everywhere, watching what your employees do and say to every customer. Errors and omissions insurance covers your mistakes and the mistakes of your employees and independent contractors.

Even if you are not licensed in Colorado, it’s a good business practice to have errors and omissions insurance in place now. Talk to your insurance broker to get this done. You can’t afford to be without it. Currently, Ameriquest is a defendant in a lawsuit that alleges that it falsified borrower documents to get approval of the loans. Various mortgage brokers are being brought in by Ameriquest as defendants, claiming that the mortgage brokers provided the falsified documents. Attorneys typically ask for a $5,000 retainer to take the case. Do you have thousands of dollars to defend yourself in a lawsuit, even if you are ultimately successful? If not, get the insurance.

Hiring Real Estate Agents

The refinance boom is long over. Mortgage brokers are looking for every piece of business they can find. Many are contacting customers with whom they have already done business. Others are looking at different relationships with real estate agents as a source of referrals. After all, in many purchase transactions, the buyers’ real estate agents help their clients find a mortgage by recommending a lender or a mortgage broker that they have worked successfully with. Can a mortgage broker hire a real estate agent to act as a loan officer?

It depends. In many states, this relationship is not prohibited by the banking department or the real estate commission (or whatever the agency that regulates real estate agents is called in your state). No matter what relationship you have with a real estate agent, you must make sure the arrangement is compliant with the U.S. Department of Housing and Urban Development's RESPA (Real Estate Settlement Procedures Act) in regard to fee splitting. What’s key to staying in compliance is that the real estate agents do more than just make a referral to the mortgage company. Among other things, they must be made an employee of the mortgage broker (even if only a part-time employee). Indeed, even if the real estate agent performs actual loan officer functions so that there is no question of whether all fees are properly earned, the customer must sign a disclosure statement so that your company is protected against RESPA violations and the customer understands that the real estate agent is wearing two hats. Texas even has a form on its website for mortgage brokers who are also acting as real estate agents or as an attorney in the transaction.

An important RESPA guideline is that all parties involved with the transaction must actually earn the fees that will be charged to the buyer/borrower. Many real estate agents do some of the work involved in the mortgage transaction to ensure that their transactions close, including tracking the loan. By hiring a real estate agent as a loan officer, you can offer them the loan origination commission on top of the real estate agency fee they have contracted for with their customers and clients. But you will now be assured of getting the referral that might have gone to another mortgage broker with whom they also had some sort of relationship.

In some states, you will have to license the office where the real estate agent is originating loans as a branch location of your company. Additionally, if the real estate agent is not an employee of your company, he or she must have a mortgage broker license or be exempt from the licensing requirements. Finally, because there are potential confidentiality and conflict of interest issues, it is best to address how you will handle those situations before they come up.

Staying Alive

Much of the advice that I am seeing in the different publications for mortgage professionals pertains to marketing. After all, without clients, you have no income and will soon be contemplating your next career. But, there is probably nothing more frustrating than getting a loan application in (finally!) and not having a loan program to match it with. During these slow times, you should be doing as much marketing as you can afford but you should also be thinking about the other end of the application process. You must have relationships with lenders with different types of loan programs that you can utilize for your borrowers. Now is a good time to find those programs.

Having new products to offer borrowers means that you will rarely have to turn away business. There are a lot of adjustable mortgages out there that need refinancing. You can get that business if you have loan programs that are more stable for borrowers than the exotic mortgages that were in vogue a few years ago. Borrowers like to know what their expenses will be for the foreseeable future so if you can find a lender with a program that meets this particular need, you’ve got a valuable tool for marketing to a certain segment of the buying/refinance population. Also, if you can find lenders who have programs for borrowers with no documentation or lower FICO scores, that’s another weapon in your marketing arsenal. And make sure you let all of your existing, former and potential clients and referral sources know that you have many ways to get a loan application to closing.

If you are a wholesale lender with innovative programs, make sure you get the word out to mortgage brokers that you can help them close their loans. That is a win-win situation for the lender, the mortgage broker and the borrower.

The days of thinking that a new loan application equals income are gone. You need to use different ways of thinking and marketing to keep yourself in business.

HUD Approval for FHA loans – becoming a Loan Correspondent

With loan programs disappearing each day, many mortgage brokers and lenders are starting to look at FHA loans as a way to get borrowers to a closing. Nothing has been more frustrating in the past few months than getting an application and not being able to close the loan.

Mortgage brokers can only get approval from the Department of Housing and Urban Development (HUD) as a Loan Correspondent (also known as a “mini-eagle”). The requirements are a bit onerous for new companies but not as difficult if you have been in business for a while. The first requirement is that the applicant be an entity, either a corporation, limited liability company or a partnership. No sole proprietorships are allowed. Your company must be licensed in your home state and every state where you maintain a branch office. Part of the application is your company’s certified, audited financial statement showing at least $63,000 in net worth for one office and an additional $25,000 in net worth for each branch office (up to a maximum of $250,000 in net worth). At least 20% of your assets must be liquid (cash or securities that can easily be converted to cash). The financial statement cannot be more than one year old. The owner that is designated to supervise all FHA loan activity must have at least 3 years of mortgage origination experience. Your company cannot share office space with anyone else (you will submit photos of the inside and outside of your offices, including a photo of signage showing your company name). The offices must be staffed by at least 2 employees and must be furnished with typical office furniture and furnishings (chairs, desks, computers, phones, fax machines, etc.). You must have a sponsor who will send a certification letter that it will fund all FHA loans originated by your company. Your company and its principals must have satisfactory credit histories and you will be submitting credit reports as part of the application package. You must also certify on the application that neither the company nor its principals have been restricted, suspended, or otherwise sanctioned by any state or federal licensing department and HUD conducts background checks. And you must send in a HUD-approved Quality Control Plan. The application fee is $1,000.00 which is non-refundable.

FHA loans are more useful in certain parts of the country than others because of their restrictions but you should investigate whether you want to offer FHA loans to your customers and whether you meet the approval requirements.

File Your Undertaking of Accountability in New York

Many mortgage companies hire their loan officers as independent contractors and not as W-2 employees. Some states require that all persons that work for you be paid as W-2 employees (such as Virginia) and others do not (such as California). New York does not require that you pay everyone as a W-2 employee but it has a requirement that you notify the Banking Department of everyone who is an independent contractor by filing an Undertaking of Accountability. Through this filing, you agree to be responsible for the actions of all of the listed persons even though they are not your employees. When such listed persons are no longer doing work for you, you must notify the New York Banking Department of that fact as well.

What are the repercussions of not filing an Undertaking of Accountability? Since it is a Banking Department regulation, you are in violation if the Undertaking is not filed. This can lead to penalties and fines when the Banking Department finds out about it. The usual circumstances under which the Banking Department discover the omission is during an examination or when the independent contractor applies for his own license.

Should You Renew All of Your Licenses?

The mortgage business is still very quiet and predicted to stay that way for at least another year. Those mortgage companies that hold licenses in multiple states may be wondering whether it is economically feasible to maintain all of the licenses it holds.

I recommend that every license should undergo an analysis of whether the costs of keeping the license are justified by the fees and commissions earned in each state. How much do you earn in each state? Then you must calculate how much the renewal fee for each license is, add in the fees to file the company annual report with the Secretary of State, the premiums for surety bonds, whether you must maintain a certain minimum net worth that is greater than you would normally retain in your business account, and the cost of any brick and mortar offices and employees in each state. Don’t forget to subtract any taxes you must pay on the income that you earn from each state. The resulting number should determine whether you want to renew that state’s license.

If the income you earn from any state is outweighed by the costs of sustaining the license, you must determine whether there are other factors that could tip the scales in favor of renewing the license. Do you have a great referral source for that state that you do not want to lose? Do your customers have second homes in that state and use you for the mortgages on both homes?

Maybe there is no good reason to keep the license. In that case, you may want to inquire as to whether the license can be made inactive. Some of the states that permit inactive status are Arizona, Florida, Montana, New Jersey, New York, Oklahoma, Texas, and Washington. When a license is inactive, you cannot broker or originate mortgages in that state. However, you do not have to go through the licensing process again when the market turns and you want to go back into business in that state. All that you must typically do is apply for re-activation and pay a re-activation fee. It is quicker and much less difficult than re-applying for a new license even if you had perfect examinations in years past.

If your marketing plan has drastically changed for the next few years and the state in which you don’t want to be licensed does not have inactive status, then it makes sense to surrender the license.

Starting Your New Business (Part II)

Before you even open your doors, you must have a marketing plan in place. This requires you to sit down and assess your competition and decide how you will be different from your competitors. Are you going to specialize in one segment of the population? Are you going to specialize in only a few products? How will you find your customers? What will be the budget for your marketing and how will it be spent? The more you write down about the research you have done and the specific plans you have for the first year, first three year and first five years of operations, the more likely your chances are that you will succeed. The climate for new mortgage companies is very difficult right now. All over the country existing mortgage businesses are shutting down. You must have a strategy for getting new business.

You must also plan for how loans will be processed and closed once you or your loan officers bring the new business in the door. Will this function be done in-house or will it be outsourced? Do you have the knowledge to do everything yourself in order to keep costs down? Do you know which software to buy? Do you have a source for credit reports, appraisers, relationships with title companies, and real estate lawyers? It is imperative that you do your research before you start your business. Otherwise, you will be throwing your money away as you learn on the fly.

When you have done your research, set up your systems and your license has been approved, you are ready to open for business. Good luck and I hope you reach your goals.

Starting Your New Business (Part I)

Although there are plenty of companies out there that are shutting down, I am still getting phone calls from people wanting to start their own company. What should the owner of a new company do to ensure a successful beginning?

First, create a corporation or limited liability company because of the liability protection it provides. You will run into lawsuit-happy clients or unknown amounts of fines levied by the banking department. You do not want to put your personal assets at risk. Consult a lawyer and accountant for advice on the best entity to create for your personal circumstances. After you have the entity created, you must get a federal taxpayer identification number for your company.

You must decide whether you need office space. Some states allow home-based mortgage companies. If you have no employees, this can be a great way to cut your overhead significantly. If your state requires an office, then concentrate on finding the cheapest office space that will work for your business plan. If you do not intend to have clients come to your office, you do not need to pay top dollar for rent and furnish your space expensively. Find out if your town or county require a business license or permit.

Make sure you have enough cash in the bank to run the business for several months even if you do not show a profit. Some states require a certain minimum net worth to ensure that you properly capitalize your business. Even if your state does not have a minimum, you should have a good-sized balance in your company’s checking account.

If you are a mortgage broker, find lenders to whom you will broker your loans. If you are a mortgage banker, know to whom you will sell your closed loans. Get your broker or banker license from your home state and any other states where you think you can find borrowers. Create a marketing plan.

Buy insurance. Every business needs several types of insurance. Even if you are a home-based business, you will need separate insurance from your homeowners’ insurance (which will typically exclude coverage for business activities in the home). You will need property and casualty insurance, business interruption insurance, workers’ compensation, if you have employees, and errors and omissions insurance. Error and omissions insurance covers your company in the event a client holds your company liable for something you did or did not do that you were supposed to do. It will cover you when you get sued for something a loan officer said or did that he wasn’t supposed to say or do, or when the outcome of a loan application displeased the borrower and he holds your company responsible for the bad outcome. Even if you win the lawsuit, the costs of defending your company will cost thousands of dollars. Errors and omissions insurance will pay for your defense and any judgment that your company is found liable for.

This is just the very start of what you should do before you open the doors to your new mortgae company. I will use my next few blog entries to outline the rest of the steps that need to be taken.

The Nationwide Mortgage License System

There is more regulatory activity to report. Although there has been talk for a few years about a nationwide database of mortgage brokers, Massachusetts, Kentucky, and Nebraska are among the first states to start implementing a new system that has been agreed to by 38 states.

All current licensees (if you're licensed in any of the participating states) will need to register through their state banking department (or whatever your state equivalent is called) web site. The Nationwide Mortgage Licensing System ("NMLS") is a web-based system that will allow state licensed mortgage lenders and mortgage brokers to apply for, amend, update or renew a license online in their state as well as in other participating states. Only one registration is required for as many licenses as the mortgage lender or broker has. Additionally, the NLMS has created one set of license applications that all participating states will use.

Although the system will not be up and running until January 2, 2008, some states are requiring preliminary registration right now (i.e. Massachusetts).

New Massachusetts Licensing Requirements

There are more new regulations that have taken effect in Massachusetts as of September 7, 2007.

All mortgage lender and mortgage broker license applicants now submitting applications must comply with new net worth and surety bond requirements. Mortgage broker applicants must submit recent financial statements that have been audited or reviewed by a certified public accountant with their application. Additionally, the Division of Banks requires mortgage lenders to maintain a net worth of not less than $200,000. The net worth requirement must be proved by the submission of company financial statements, at the time of initial application and on an annual basis, which have been audited in accordance with generally accepted auditing principals (GAAP) by an independent certified public accountant. The Division of Banks requires mortgage brokers to maintain a net worth of not less than $25,000 and mortgage brokers must submit company financial statements, at the time of initial application and on an annual basis, which have been audited or reviewed by an independent certified public accountant.

There are also new surety bond requirements that are now in effect. Mortgage lenders must maintain a surety bond in a sum to be based on the amount of the Applicant's aggregate mortgage loans, as determined by the Division of Banks, but in no event shall the sum of the bond be less than $100,000, up to a maximum of $500,000. Mortgage brokers must maintain a bond of $75,000.

Rogue loan officers

"Rogue" loan officer is the term for a loan originator who does not behave ethically. The rogue behavior can include copying customer lists and customer information just before leaving to move on to another company. It can include putting customers in loan programs that are not suitable for them. Or they do not follow your company's rules and procedures.

Rogue loan officers are very costly to your company and to the business of mortgage origination in general. Every time a rogue loan officer acts in a way that is detrimental to your company, it may cost you money. You may be sued by an unhappy customer, investigated by your state banking department or "requested" by an investor to buy back a loan. Even if you can placate the banking department or settle the lawsuit, it costs you money and puts your insurance company on notice (you do have errors and omissions insurance, don't you?). The larger the number of complaints about rogue loan officers, the more likely there will be further regulation of loan officers. And regulation always costs money, either licensing the loan officer or paying for continuing education or paying for an increased number of banking department examinations because your company is on their watch list. Moreover, regulation doesn't seem to stem the tide of rogue loan officers.

The only way to ensure that rogue loan officers don't hurt you is to supervise all of your loan officers very closely. Check loan files, watch what your loan officers are doing, especially after normal business hours, make sure your branch managers are supervising closely as well. Most rogue loan officers do not have a criminal background or even a regulatory problem with any state banking department. They skip out before they are found out. The last thing you need in these difficult times is one or two rogue loan officers putting you out of business.

Watch out for net branching

Many mortgage brokers consider the benefits of net branching when licensing and compliance issues arise. A net branch is an office at which a lender or mortgage broker allows a separate company that does not hold a valid lender or broker license in a particular state to originate loans under the lender’s or mortgage broker’s license. The net branch arrangement usually is set up so that a branch office rents its own space, hires its own employees, contracts with its own vendors and gets a part of the profits from that branch office. It uses the licensee’s name so that it has the appearance of being a branch but is typically a separate company.

The Federal Housing Administration prohibits net branching. The states that specifically prohibit this practice include Arizona, New York, Rhode Island, Georgia, and Florida. But remember all states prohibit unlicensed entities from brokering or lending. If your branch payments for closed loans are made to your corporation or limited liability company you have just violated the law.

Penalties for violating the laws against net branching or unlicensed lending or brokering can include fines, license suspension or revocation for the licensee and fines and possible criminal charges filed against the unlicensed entity. Even if you are not discovered by a state’s banking department or FHA, mortgage brokers can be left without their promised payments from the licensee if the licensee closes its doors or files bankruptcy before your company has been paid. There are also many licensees that are slow to pay even if they are still open for business.

Changes to Texas Mortgage Broker Licensing Law

Texas has a new licensing statute that takes effect for applications received on and after September 1, 2007. One of the changes is higher fees to license loan officers: the application fee is $275, $20 is for the recovery fund fee, and $39 is for the background check, for a total of $334.

A mortgage broker company principal will need to have 36 months of origination experience and 90 hours of classroom education taken within the last 2 years if the principal was not previously licensed as a broker or loan officer or 30 hours of classroom education if the principal was licensed as a loan broker. Loan officers must have 18 months of loan origination experience and 30 hours of classroom education taken within the past 2 years or 60 hours of classroom education if the loan officer does not have any origination experience.

Starting January 1, 2008, mortgage broker companies will have to be licensed (unless the company is a sole proprietorship) as well as having the loan officers licensed. The company will have to designate a principal as the company representative and that principal must be a licensed mortgage broker. The company will have to pay a $175 fee for the company license. There are no forms for the company license application created yet.

Additional parts of the changes to the law will take effect on November 1, 2007, however, the regulations to implement those parts have not been finalized.

You Really Need a Shareholder/Operating Agreement

If you are an owner in a corporation or limited liability company with at least one other person, you should have a shareholder (for corporations)/operating (for LLCs) agreement.

Why do you need one? Do you want to spend thousands of dollars in legal fees if one of the owners wants to get out and sell his/her interest in the business or disagrees with your ideas of how to run the company? Litigation is always more expensive than drawing up an agreement before the fighting starts. The ideal time to draw up a shareholder/operating agreement is before the company is formed. But even if you have been in business for a number of years, it is never too late to put everything in writing in advance of problems occurring.

A basic agreement should include sections about how to distribute profits and losses (this may not be done evenly depending on each owner’s contributions and time spent in the business), how to bring in new owners, how each owner will be allowed to sell his interest in the business, what happens in case of the death of an owner, how to resolve business disagreements, how much of a commitment to the business is required, and what could trigger a dissolution of the business.

It is imperative that you consult a business lawyer who has drafted these types of agreements before to help you with your agreement. You may also need to consult with your accountant and an insurance agent (typically a company buys life insurance to cover the buyout of a deceased owner). In discussing the different points of the agreement, you will discover that your partners may have very different views than you do. If relations are still friendly between you and the other owners, coming to an understanding about how the company will proceed in the future is more likely than if all of the owners are hostile.

A shareholder/operating agreement can be changed after it is drafted and signed but at least it serves as a starting point for how to decide questions that are very likely to arise in the life of a company. Business is like a marriage in some ways but most participants do not expect it to be for life. At some point, you will want to get out. If you do not have a shareholder/operating agreement, you could wind up in court, like a divorce action. And we all know that divorce isn’t pretty or cheap.

How Will You Survive the Subprime Mortgage Mess?

I'm sure you are no different than all of the other mortgage companies who are finding their investor sources drying up. I read something new about the subprime mortgage mess in the newspaper every day as do your customers. This is the time to let them know that you are still around and that you still have options for their varying needs.

I know that volume is down and some of you may even be wondering how you will stay in business. In down cycles, you must work harder to keep the phones ringing. If you have been keeping a stash of tips on marketing for when you "have the time" this is the time to get that stash out and start implementing those ideas that sound good to you. Some of them will work and some won't but you will not know which is which until you experiment. Most of the marketing suggestions that you hear about have something to do with customer contact, either existing customers or potential customers. In the current climate, most potential borrowers, especially those with more difficult credit histories, are anxious to know that there is a mortgage out there for them. Although many lenders and investors are tightening up or eliminating programs, if you can find those lenders and investors that are still offering mortgages to your types of customers, then you must educate your customers and potential customers that you are the one who will help them buy a house or refinance their current mortgage.

Only those mortgage brokers and lenders who can weather the difficult times will be around when the upcycle comes again.

Licensing in a "Brick and Mortar" State

I periodically receive phone calls and emails from mortgage companies that want to get licensed in all states. Since there is no "national" license, such a company must get 51 licenses (including Washington DC). When they hear that some states require a physical presence in their states, they realize that such licensing will be very expensive.

As of today, the following states require an office in their state for a mortgage broker license: Alabama, Arizona, Hawaii, Missouri, Montana, Nevada, New Jersey, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, and Texas. For mortgage lenders, the states are: Arizona, Hawaii, Missouri, Montana, Nevada, New Jersey, Ohio, Oklahoma, Pennsylvania, and Texas.

Even within the requirement of brick and mortar, the different states have different requirements. Some states permit any home office, other states allow the home office if you can prove that the home is zoned for office use and/or there is a separate entrance for the office. Some states permit month-to-month leases on these offices, other states do not and even require leases of at least 6 months to 1 year. In addition to the expense of the rent on these offices, certain states require that the office be staffed by a W-2 employee. Since I am aware that some mortgage companies do not pay branch managers or loan officers as employees but treat them as independent contractors, this can be an additional expense.

I am frequently asked whether my office or some relative’s address can be used as the "office" that is required in brick and mortar states. My office is not used for any client’s needs and I tell clients that a relative’s address can in some situations be used as the office. Again, because each state has a different requirement, I need to know the particular state that someone is inquiring about.

Because a brick and mortar state is a much more expensive state in which to operate, I caution clients that there must be a good reason to go into that state, other than part of a 50-state strategy. If a loan officer has family, friends or a real estate agent who will refer a steady stream of business, the costs of maintaining the office will be offset by the fees you will earn. Likewise, if your clientele are buying second homes in a particular state, that state is a good candidate for spending the money to retain an office. And each year, you should conduct a cost-benefit analysis to determine whether you spent more on the office than you earned in fees to decide whether to renew your license in a brick and mortar state.

5 Tips to Keep Your Company out of Legal Trouble

Litigation is very expensive and can even cost you your business. Here are some pointers on
staying out of court.

1. Many business owners sign agreements without legal assistance, but it’s very important
to have an attorney review the contract beforehand. Why is that?
Every business owner looking at a contract must realize that the contract has been drafted to protect the party that has prepared the contract. So, if you are looking for office space and the landlord gives you a lease to sign, remember that the lease favors the landlord. The same is true for any contracts for goods or services that you are buying or if you are having someone perform any type of service for you. An attorney who reviews the contract for you before you sign it can point out the contract provisions that are detrimental to your interests and can negotiate changes in the contract or suggest negotiation strategies for you to try against
the other party. Once a contract is signed by both parties, you are bound by the terms of the contract as it was signed.

2. How can a company avoid one owner leaving the other with all of the company's
debts and problems?
This is such a common situation when two friends start a business together. They figure that their friendship will overcome any questions that come up about how to handle company business. Every limited liability company or corporation should have an operating or shareholders' agreement.

3. What’s the basic information to include in an operating or shareholders' agreement?
All operating or shareholders' agreements should discuss how much and what each owner will invest in the business, how much time each partner will invest in the business, whether full-time or part-time, how the profits and losses will be divided (which may or may not correspond exactly to percentage ownership interests), and what will happen when one owner wants to leave the business or dies.

4. There are all types of liabilities that undermine a business, especially when a company isn’t insured. What type of insurance does a mortgage company need?
A mortgage company will need property and casualty insurance to protect business equipment, furniture, and files, workers’ compensation if they have employees at the workplace, and automobile insurance on all of the company cars. They will also need something called errors and omissions insurance which will protect your company when a loan officer or processor makes a mistake or does something he/she shouldn't have. A mortgage company should consult an insurance agent to find out the types of insurance that it will need for its business.

5. What should a business owner look for in an attorney when searching for one to provide general business advice?
Just like doctors have become specialists, attorneys have also become specialists. A business owner wants to find an attorney who specializes in business law. And if that business owner has a small business, he or she wants to find an attorney who is knowledgeable about small business, not large corporations. Business owners should start with the lawyers they know or ask the businesses they admire who they use as their business attorney. Also use a specialist when having mortgage-related problems. They know your industry better than a general-practitioner.

Changes to Massachusetts Licensing Regulations

Massachusetts' regulations regarding industry experience have changed.

Previously, there was no explicit standard about industry experience requirements. The Division of Banks evaluated each applicant's experience and decided whether the applicant could be trusted to comply with state and federal statutes and regulations concerning the mortgage process.

Now, mortgage brokers must show 3 years of full-time or the equivalent in part-time mortgage industry experience. The experience can be gained by working as a mortgage broker in another state, or working for another mortgage broker or lender or bank in Massachusetts. You don't get any credit for working for an unlicensed broker or in an unlicensed branch office.

An applicant for a mortgage lender license must show 5 years of full-time mortgage industry experience, likewise gained by working as a mortgage broker in another state, or working for another mortgage broker or lender or bank in Massachusetts.

Branch managers must show 3 years of full-time mortgage industry experience.

Changing Rules for Loan Officer Licensing

Over the next year, many states who do not currently license loan officers will start doing so. The push comes from a belief that registration/licensing will improve the professionalism of loan officers. The various states that already have loan officer licensing require pre-licensing education or experience, registration or licensing of the individual loan officers, and continuing education needed for renewals of the registration or licensing. The new states will have similar requirements but each state will have a different date for starting the registration/licensing process and who is required to comply.

I will be keeping readers of this blog up-to-date with the new loan officer regulations as the states roll out their new regulations. This will allow you plenty of time to familiarize yourself with your state's new requirements and to get you ready for compliance with the new law.

License Expiration Dates

If your company has more than one license, someone needs to keep track of your license expiration dates so that you do not let any license lapse. A very few states have licenses that never expire so you only have to keep track of other compliance issues such as annual reports.
If you are in a large mortgage company, you probably have a compliance department and it is their job to keep track of all expiration dates. But if you don't have a compliance department, you need a compliance person. In a very small company, that person might be the owner. Or it might be an administrative assistant. You might even outsource the function to a law firm or company that provides compliance services. I have several clients that just send me all of the compliance paperwork that they receive from the various banking departments and secretaries of state.

I have a calendar marked with all my clients' license expiration dates and also marked about 2-1/2 months before each license expiration date. At 2-1/2 months before each expiration date, I send emails to my clients reminding them that they should be receiving renewal materials from the banking department and that they should forward them to me as soon as they receive them. I start the renewal process as soon as the state permits so that I can get any additional information that is required from the client. For example, in states that require continuing education, the license renewal application asks for details about what courses were taken and who the education provider was.

If you are keeping track of your own license expiration dates, you need to set up your own system so that you get the renewal process completed before the expiration date. In some states, going past the deadline means you pay a late fee. In other states, you might need to start all over with the application process and that can take several weeks, time that you cannot take in any new applications in that state.And who can afford that?

Subleasing Office Space

When times are tough, the way they are now, some companies find that they must reduce expenses. The fastest way to do this is to close offices and lay off staff.

When you close an office, you will frequently find that your lease does not let you just walk away with no repercussions. Most leases require that you pay rent until the end of the lease term (which could be years away). If you stop paying rent, your landlord will sue you for the rent for the balance of the lease term.

However, most leases will let you assign or sublet your space. If you can find another company who wants your office space and the landlord approves the new company, you won’t be sued for breaking the lease. You still will remain liable if the new tenant doesn’t pay but it will save you plenty of money until that problem happens, if it ever does.

How do you find this new company? Talk to a commercial real estate agent. The more time left on the lease, the more money you have at risk for breaking the lease.

What if you are looking for new office space – either because you are expanding or contracting? Also check out space that is being sublet. Plenty of companies are going out of business or just consolidating space so there are a lot of options out there that could offer you a very cheap rent.

Whatever you do, consult a lawyer before entering into a sublease. It is a much more complicated document that a regular lease so you need expert advice before you sign on the dotted line.

Avoid These 5 Advertising Mistakes

Advertising plays a prominent role in many mortgage companies’ efforts to find new borrowers. As your customers get bombarded by more and more advertising messages, the urge to create an advertising piece that will stand out from the crowd becomes more urgent. This sense of desperation leads many mortgage lenders and brokers to create promotion pieces that cross the lines of permissible advertising. Make sure you don’t make these mistakes that can lead to costly penalties.

1. Don’t lead consumers to believe the government or their existing lender is sending them mail. Many mortgage brokers use direct mail to solicit new business. Companies have distributed solicitations that use names of mortgage lenders in such a way that consumers believe it was sent to them by their lender, leading consumers to also believe, based on these solicitations, that their private financial information has been shared with another entity. These actions are a violation of the regulations of HUD and of the various states that regulate mortgage brokers and lenders. In addition, they can lead to consumer complaints to the regulatory agencies. The number of complaints the agency receives about you impacts how often you will be examined.
2. Do not omit the APR when advertising an interest rate. No matter what state you are conducting mortgage activity, all lenders and brokers are subject to the application of federal Truth-in-Lending laws, specifically Regulation Z. The statute requires, among other things, that if a lender or broker advertises a particular interest rate, they must also quote the Annual Percentage Rate, or APR. The APR is correctly defined as the "cost of money borrowed, expressed as an annual rate." The APR takes into account the note rate, which is the rate a borrower’s monthly payment is based on and any and all lender fees and finance charges. Yes, most borrowers don’t understand APR but you are still required to use it in your advertising and be able to explain it to a potential customer.
3. Do not use terms that indicate unlimited access to credit. Advertisements that contain terms such as "bad credit no problem" (or similar phrases) or language that implies that an applicant will have total access to credit without clearly and conspicuously disclosing the material limitations on the availability of credit are prohibited under many state laws. In most states, lenders and brokers need to list any limitations to getting the advertised mortgage, including income requirements, limitations for consumers with bad credit (such as a higher rate), and that restrictions as to the maximum principal amount of the loan offered may apply.
4. Many states require names, addresses, and license numbers in advertising. This one is easy to comply with. You just need to know which of the states in which you are licensed requires such information on advertising materials. In some cases, there is also specific language that must be used such as New York’s broker language: “Registered New York Mortgage Broker by the NYS Banking Department - all loans arranged by third party lenders.” Or California’s requirement to use this language: “Licensed by the Department of Corporations under the California Finance Lenders law (or Department of Real Estate or Residential Mortgage Act).” Just remember to add the required information to all advertising materials, including, but not limited to, direct mail, brochures, web sites and television and radio advertisements.
5. Be aware of the catch-all “fraudulent, deceptive or misleading” prohibitions. Both the Federal Trade Commission and different state regulatory agencies have statutes that prohibit an “unfair or deceptive act or practice for a mortgage broker or lender to make any representation or statement of fact in an advertisement if the representation or statement is false or misleading or has the tendency or capacity to be misleading” or variations of this phraseology. Lately, the regulators are cracking down on advertisements regarding low interest rate loans that fail to mention that there may be negative amortization. If you think, but are not sure that your advertising contains inaccurate or misleading language, change the advertisement.
If you violate an advertising statute or regulation, at best, you will be asked to “cease and desist” the prohibited advertising and be subjected to increased scrutiny of all of your business activities. At worst, you could lose your licenses and pay heavy fines.

Continuing education

About half of the states require continuing education for loan officers, branch managers and company principals after you get your license. The number of hours varies by state. The type of education also is dictated by each state's regulations.

Most of the states permit online coursework. This is very convenient for those who need the continuing education hours for a state outside their home state. You sign up, take the coursework, and then pass a test to show that you paid attention to the coursework. You must make sure you get your certificate from the continuing education provider to show that you completed the courses.

A few of the states require that you attend in-classroom education which means you need to travel if this is not your home state. Other states require that you use only approved providers.

The important thing to remember about the continuing education requirement is to complete it in a timely manner. Some states require that it be completed during a calendar year and other states permit you to take your continuing education anytime before you need to renew a license or to submit an annual report. For mortgage brokers who are licensed in many states this means being very organized about when to take the continuing education for each state.

If you don't take the continuing education, you might not get your license renewed - a very expensive lesson in compliance.

Need a mortgage license solution?

I've been writing about topics that come up frequently in my practice as an attorney to mortgage brokers and lenders. But I'd love some ideas from my readers. If anyone has a topic they would like to see addressed in my blog or has a question that they need an answer to, please send me an email to Robin@mortgagelicensesolutions.com and I can write about it here.

Timing and Your License Application

One of my clients just received his Pennsylvania licenses last week. He has separate licenses for 1st and 2nd mortgages and a main Pennsylvania office and a branch office in another state where his company is headquartered. This week, he received the paperwork for his renewal licenses. He asked me if he needed to bother with a renewal since he just had received his licenses. Unfortunately, I had to tell him that his licenses would expire on June 30th and if he didn't renew, he would not have any Pennsylvania licenses when they expired.

No one has any control over how long it will take the banking departments to review and approve a license application. Sometimes, you get lucky and your new license is approved just after all the renewals were processed. So your license is good for the maximum number of months. Or you've applied in one of the states, like California or Virginia, where the licenses never expire. But, in most states, you can only hope that the approval will be given long before the license period runs out before you have to renew.

I also caution my clients not to submit license applications during renewal season (which varies by state). When it is renewal season, most of the reviewers are concentrating on the renewal applications and the new applications sit unnoticed. I urge them to wait a few weeks so that the application and license fees are still in their bank accounts, not in the Banking Department accounts, just gathering interest for someone else.

Check with a licensing expert before you make a timing mistake.

Hoard Your Cash

I'm hearing from a few clients that their phones are so quiet that they are going into crisis mode. They have asked me what the effects of breaking vendor contracts and leases would be or if they should file for bankruptcy to get out of their contracts.

While bankruptcy may be an acceptable option in other industries, in the mortgage industry, it is a huge problem. After all, if you cannot manage your own finances, how can you advise a borrower which is the best mortgage for him? If you cannot make the rent, what will stop you from dipping into fees that you receive in advance from borrowers?

This is why every license application contains a question as to whether the company or any of its principals have ever filed for bankruptcy. If you file for bankruptcy after you receive your license, you must immediately notify the banking department. The banking departments want to make sure that a licensee has enough financial smarts to know how to weather the tough times, such as we are experiencing right now.

I have been in the mortgage industry for over 15 years. I have seen real estate booms and real estate busts. I have always advised my clients to enjoy the good times but to also set aside savings for the difficult years. I also tell them to watch the overhead. Do not set up multiple branch offices with rent, utilities, and equipment to pay for unless you can sustain these expenses when the applications dry up.

So hoard your cash. And negotiate with your contract vendors, don't break your contracts and open yourself up to lawsuits and bad credit ratings.

Staying in Compliance

I recently had a conversation with one of the state banking department regulators about ongoing compliance with that state's rules. This particular state had a minimum net worth requirement.

I have many clients who ask me about how to comply with a minimum net worth requirement when they first get their license. For example, New Jersey has a $50,000 minimum net worth requirement for first mortgage brokers. The minimum net worth is $150,000 for first and second mortgage brokers. This is a very high hurdle for many companies. Potential clients ask me all the time "do I need to keep that amount in the company name all the time?" They figure that they can put the money in when they apply for the license and immediately pull it out after the license is granted. Unfortunately, that isn't allowed. The rules usually state "must maintain a minimum net worth of $_______" or "shall register all loan orginators."

How do the state regulators find out that a company hasn't been following the rules after the license is granted? It is carelessness that trips up many companies. Many times that carelessness is uncovered when an examination is conducted by the banking department. Mortgage companies hand the examiner a balance sheet with a negative net worth or a file that has a 1003 signed by a loan officer who is not registered. Or a branch office has not been licensed.

The penalties can be huge. That state regulator that I was talking to mentioned that a company that had not maintained the minimum net worth had their license revoked. Other infractions have cost other brokers and lenders thousands of dollars in fines.

Can you afford to pay large fines or lose a license just because you think you won't get caught breaking the rules? The state regulators don't go after just the big fish. They will go after any licensee, no matter how small or large.

Why You Should Have More Than One License

Have you ever turned away business because you didn’t have a license to do business in another state? How could that possibly happen?

It happens when a relative calls who lives in another state and asks whether you can originate or broker a loan for him. Or your loan officers tell you about their friends who live in another who would give you their business. Or perhaps you are on the border with another state and your advertising pulls in from your neighboring state. There are many scenarios where you are thinking that you wished you had a license to broker/lend in another state or states.

With each new state, you add thousands to millions of new prospective borrowers to whom you can advertise and market your business. You are not limited to just your home state. And let’s face it, the phones aren’t ringing off the hook in many offices. It’s not like the good old days from a year ago. You don’t want to have to turn away any business.

Challenges of Having More Than One License

Have you ever seen the commercial where the lady says “we intend to go global, right after we go national”? I get many inquiries about getting a “national” license. There is no national license for mortgage brokers or mortgage lenders. You get each state's license one by one.

I have clients that are regional – either in New England or the southeast corner of the United States or along the Pacific coast. It helps if all of your states are in the same time zone. Are there any downsides to having more than one license?

The major challenge that my multi-state licensed clients face is the notion that what one state requires or permits may not be the same in another state. I tell those clients that each state is like a mini-kingdom with its own rules about everything. Some states have required disclosures, other states do not. Some states require that you keep a trust account, others do not. You must be knowledgeable about each state’s rules and regulations and follow them. You can plead ignorance only during the first state examination. After that, the fines and penalties for not following the rules become expensive.

The other major challenge when you have multiple state licenses is that you must keep on top of the license renewals, banking department annual reports and secretary of state annual reports (when those pesky Certificates of Authority?). For one or two states, this is not a big problem, with several states to keep track of, you might need an employee to keep track of all of your requirements. Or you can hire outside help, which I provide for many of my clients who don’t want to be bothered with remembering when it’s time to prepare another filing.

Examinations (also known as Audits)

You get a letter out of the blue from the state Banking Department. They are coming in about 2-3 weeks to review your books, records and files. What do you do?

Most of my clients first panic. An examination seems to trigger the same reaction as a tax audit. Most people who receive a notice of a tax audit call their accountant. Most of the mortgage brokers/lenders out there never call for help. They figure they will muddle through it. And sometimes they do. But, sometimes the examination costs them serious dollars.

The letter announcing the examination is accompanied by a list of the books and records that they want to examine and a questionnaire to be answered. A point person should be designated for the examination. This person should be someone who is familiar with all aspects of the licensee and familiar with the laws and regulations of the state that is conducting the examination. At this point, outside help should be retained to assist and give expert advice with respect to how to get through an examination. The books and records to be examined should be retrieved from storage immediately and reviewed by the point person. Typically, the examination will look at closed borrower files, files in your pipeline, and files from borrowers that have had their applications denied. All of the files to be examined should have all of the required documents with the appropriate signatures in them. The point person should also collect the company books and records that will be examined and review them in advance to ensure that there are no surprises. If the state requires a minimum net worth, make sure that all financial statements show the required net worth. If the examination requires proof of surety or fidelity bonds, make sure you have your copies in your files and in full force and effect. Have the questionnaire completed well in advance of the examination and if you have retained expert help, have them review the questionnaire before you give it to the examiner.

The examination could take place in your office or in the banking department’s office, with you sending them the files. It will take a few days for the examiner to review all of the books and records that were requested. The point person must make himself/herself available to answer follow-up questions or provide more documentation, if requested.

Make sure the point person and the principal of the company attend the exit interview when the examination is complete. Take notes of what was said and keep the notes. You will be receiving a written report of the results of the examination. Sometimes the findings in the written report differ from the oral exit interview. That is when your notes from the exit interview could be very important. If the examiner found problems with your books and records, you must make the changes that are required. And you must indicate to the banking department that the problems that were found will never happen again.

Florida Mortgage Licenses

Many mortgage brokers and lenders on the East Coast find themselves with customers who ask them if they can do their loan for their condo or house in Florida. You can close that loan only if you are licensed in Florida.

Florida is a relatively easy state to get your license. For companies, they offer 3 levels of licensing – broker, correspondent lender, or mortgage lender. Each of the company licenses requires a principal to have taken 24 hours of classroom education and then to have passed a test. This requirement is not as onerous as it sounds. The classroom education is given by various approved schools in Florida. Many of my clients schedule the classroom work the weekend before the test and take the test the following Tuesday. The classroom work is geared totally towards the exam and so far all of my clients have passed the test on the first try. The principal must also have 1 year of mortgage broker experience.

If you don’t want to deal with minimum net worth requirements or surety bonds, you apply for a mortgage broker business license. The major restriction with the mortgage broker business license is that all of your loan officers must be licensed individual mortgage brokers.

If you need to get certified financial statements for another state anyway, go for the correspondent lender license. You get much higher income from your brokering. But you need to maintain a $10,000 surety bond and show the Florida Department of Financial Regulation that you have $25,000 minimum net worth and that is where the certified financial statement comes in. Mortgage lenders must maintain $250,000 net worth.

There is also a fingerprint requirement, but no in-state office required.

Certificates of Authority

Most companies do not realize that you cannot just start doing business in another state without filing certain documents with that state’s government. The document is usually called an “Application for Certificate of Authority to Transact Business.” In most states, it is filed with the Secretary of State.

The Application usually requires you to list who the officers and directors (or members of the limited liability company) are, their home addresses, and the name and address of the registered agent. A registered agent is the person or company located in that state who is authorized to receive service of process or any legal documents on your behalf. Although the filing of the Application for Certificate of Authority is fairly automatic, it can be rejected if your company name is already taken by an existing company or if that state requires that you first get permission from the banking department to use your name. In some states, certain words trigger the permission issue, words like “mortgage,” “finance” or “loan.” If that state requires banking department approval, they could prevent you from using your real company name if they believe that it is “confusing” (this could mean either another company has a similar name or that you are a mortgage broker with the word “banker” or “lender” in your company name). In that case, you must use an assumed business name (also known as a “dba”) in that state.

You cannot get a mortgage broker/lender license without first getting the Certificate of Authority since every application asks for the date on which you received your Certificate of Authority.

Mortgage Licensing – What the Application Process is Like

Most of my mortgage broker and lender clients have no idea of what to expect when they hire me. They just know that I will take care of all the details of the application process so they can do other things (like close loans if they are an existing company).

Most applications are still very lengthy and each one is different from the other. The first one that I do for a client is the most time-consuming one for the client because I need to get all of the information that the application requires. By the time I get to the client’s third or fourth state, I have just about all of the information I need and only need to ask a few questions.

After I submit the application, we are forced into a waiting game. The banking departments are all under-staffed (typically there are 1 or 2 people reviewing applications). Depending on how popular a state is (California and New York are very popular, Iowa and Maine are not as popular), the waiting time for review can be 2 weeks to 3 months. If there are any missing documents or questions about one of the responses, a deficiency letter goes out and we need to correct the deficiencies. Many times I send out an application that I know has deficiencies just so that I can get the review process initiated. Depending on how busy a client is, I can turn around the application and re-submit it in days. Other clients do not clear the deficiencies for several weeks.

The reviewers at the banking departments do not get paid better if they process more applications or review them faster. So it is always a struggle to get them to move an application along towards an approval. Sometimes, there is more than one round of deficiencies and the reviewer will ask for something new that was not requested on the previous round. If your new application comes in during renewal season, your application won't be looked at until the renewals are all processed. Typically, the application gets reviewed by about 3 or 4 layers of reviewers, as you go up the chain towards the head of licensing, and each reviewer can raise a new question or ask for another document before signing off and passing it to the next person up the ladder.

And you cannot solicit business from that state until you have the license (although some states will permit you to start once they give the approval).

Mortgage Licenses and Annual Reports

Once you have your license as a mortgage broker or lender, you still have regular contact with the agency that granted you the license. Just about every state requires an Annual Report. Most of them are due in the first 4 months of each year.

The first one that you file is obviously the most daunting. You've never seen the form before, you didn't know that you should keep the information that is being asked for and they may even require that you input the information onto their form online.

The states will send out a reminder that the Annual Report is due in 2 months (this is the typical amount of notice that the states give). At this point, you should appoint someone in your office to gather the information that will be needed for each state. Although some of the information is common to all of the Annual Reports (i.e. information on your profit and loss statement and your balance sheet), how many loans and the total dollar ammount of the loans you closed in Virginia will not help you with the California Annual Report. Depending on how many states you are licensed in, this can be a very time-consuming job. And that person needs to keep track of the dates that each Annual Report is due.

For states that require that you submit certified financial statements each year, you have to give your accountant enough notice so that this work can be squeezed into his busy tax season. Most states do not have any mechanism for allowing an extension of time if your accountant can't get your certified financial statement together on time. You will be facing fines and penalties from each state in which your financial statement is late.

The second year and every year after should be easier when you know what will be asked for. Just create a computer program to store and retrieve the information that you know each state will need. But also be aware that each state can ask for additional information that it had not asked for in the previous year.

There is plenty of aid out there to help you get your information organized and inputted on the Annual Report form so that your filing is timely. You really do not want to be late. The penalty may exceed the cost of hiring someone to help you.

Getting Your California Mortgage Broker License

California is the state with the largest population and some of the highest housing prices in the country in its different markets. That combination is the reason that I recommend getting a mortgage broker license from California to all of my clients. Even the clients located in the east coast states are willing to work with the time zone difference in order to get the business from California borrowers.

California offers two different licenses for brokers and two possible licenses for lenders but the one that most of my clients can qualify for is the Finance Lender Law License. The application lets you get a license that permits you to lend, broker, or do both.

The requirements are fairly straight-forward. You don't need a physical office in California, nor is there any pre-licensing education or testing requirement. Just have $25,000 in net worth, a $25,000 surety bond, fingerprints, and complete the application.

The quirky thing about the California Finance Lender Law License is that if you are a broker, you must broker only to lenders who have the Finance Lender Law License. This means you cannot broker to banks, savings and loans, and credit unions. A mortgage broker must make sure that the company that they are brokering to does have the Finance Lender Law license (ask your account executive and double-check by checking the database on the California Department of Corporation's web site).

The real estate broker license from the Department of Real Estate also lets you be a mortgage broker. But, for out-of-state mortgage lenders and brokers, the Finance Lender Law License is the way to go.
How long will it take? Unfortunately, California is not one of the quicker ones - plan on 6 months to get your license.

Getting your New York Mortgage Broker License

New York has one of the most detailed applications for mortgage licenses and one of the longest timeframes in which to get the approval for the license. But the large population in the state coupled with some very high housing prices (and therefore mortgage amounts) make New York one of the most coveted licenses for a mortgage broker that can generate business in that state.

The lengthy process starts with word approval from the Banking Department if you are a corporation or limited liability company (LLC). Even if your company is from out-of-state, you need the Banking Department approval to use certain words in your company name. "Mortgage" is one of the words that require approval. If another company has a similar name, you will need to use a different name in New York. It takes about 2-3 weeks to get the approval.

Completing the application is where most of my clients stop cold. The personal questionnaire is 7 pages long and asks about your spouse, parents, dependents, professional references, personal references, military history, and 15 years of employment history in detail. It asks about your initial contribution to the company, outstanding debts in excess of $10,000, and your income sources.

New York requires 2 years of mortgage industry experience and the principal who has it must draft an affidavit detailing each company he/she has worked for, its address and telephone number, the supervisor that the principal worked for, and job duties.

New York also requires fingerprint cards and credit reports from all owners of more than 10% of the shares. Lately, reviewers have been requesting leases and subleases for the office address, copies of licenses from other states, if applicable, copies of passports, and authentication from the county clerk confirming that the notary public that is used to notarize signatures on the application has a valid notary commission.

When you first submit the application, it goes through a preliminary review. If the application is deficient, the entire application is returned with a letter listing the deficiencies. When the application is re-submitted, it may be accepted for 90 day processing or it may be returned with another list of deficiencies. The first goal is to get the application accepted for 90 day review. The 90 days is not hard and fast and the applicant may be asked for additional documentation or clarification of documentation that is already part of the application. When you are asked to submit the $10,000 surety bond, you know you are near the end of the process.

If your application is approved, you must pick up the license in person at the Banking Department, even if you are from out-of-state. The Banking Department assigns you a date and time for the pick up and there is a meeting to explain certain requirements of maintaining your status as a licensee.

All together, the application process takes about 7-8 months from start to finish. Luckily, the license never expires.

Surety bonds

Most of the states require surety bonds as part of the licensing process. What is a surety bond? A surety bond is a contract with an insurance underwriter, which ensures that the Banking Departments can collect unpaid fees from the licensee.

The surety bond requirement varies from state to state. It can range from $10,000 for a New York mortgage broker license to $150,000 for a New Jersey 1st and 2nd mortgage broker license. Mortgage lenders tend to have higher requirements than mortgage brokers although some states don't require the surety bond at all because they require higher net worths or proof of a certain dollar amount in the bank.

From where do you get a surety bond? I use a company that specializes in surety bonds for the mortgage industry. There are a few out there. I like the fact that they know what the requirements are for each state and what form of surety bond each state requires. That saves me a lot of time. If you go to the insurance agent who sold you your business insurance, he will probably ask you for a copy of the surety bond language. It is available on the banking department web site.

Most insurance companies require you to complete an application and for you to submit both company and personal financial statements. And they will pull the credit reports of the owners to ensure that you are a good credit risk. Because you are taking most of the risk. Most underwriters require a personal indemnity from the owners of the mortgage company.

It can take a few weeks to several weeks to get the surety bond so don't wait until the last minute to get yours. It will hold up the application process.

How Long Will It Take to Get your Mortgage License

I am frequently asked how long it will take for a mortgage company to get a mortgage broker or lender license. I have to say as in most of my responses, it depends upon which state you are asking about.

There are the less populous states, who tend to be the less popular states, such as Iowa, New Hampshire, Arkansas, and Mississippi, where the first review takes less than 3 weeks. If the application is perfect, then you have a license in your hand in less than one month. The other end of the spectrum is New York, which can take 8 months, and I've never seen a perfect application submitted to New York.

Many times, the problem is that the mortgage company is so eager to get that application in to the Banking Department that they do not submit each document that is requested or answer every question. The licensing reviewers will not let you skip a question or leave out one of the required back-up documents, i.e., letter of reference, updated financial statement, bank check instead of company check for the fees. The devil is always in the details. You cannot be too detail-oriented when submitting a license application.

Another answer that I give to this question is that the timing is dependent on whether the banking departments are also in renewal season. A few states have licenses that never expire so that is not always an issue. However, most states issue licenses that need to be renewed every year or every two years. Most licensing departments are under-staffed. I'm sure they have offices piled with appllications waiting to be reviewed. When renewal season comes around, a reviewer may be pulled from new applications and re-assigned to processing renewal applications. That means your new application sits in a corner for maybe a month until the backlog of renewals has been cleared.

If you consult with a company or law firm that specializes in mortgage company licensing and you get an answer to the question "how long will it take" that sounds much shorter than the responses you have been receiving from other companies or law firms, find out why they can give you such a favorable answer. It's better to know upfront that the process is slow than to gear up and hire loan officers for a license that won't be in your office for several months, no matter what you have been promised.

Mortgage Brokers and Lenders and Certified or Audited Financial Statements

Many states have minimum financial requirements for mortgage brokers and lenders. The more serious states want you to prove that you have established and continue to maintain the required net worth by submitting certified (also known as audited) financial statements, both with the initial application and annually, either with the renewal application or the annual report.

What is a certified (or audited) financial statement? It is a personal financial statement (if you are a sole proprietorship) or business financial statement (for corporatations, limited liability companies and partnerships) which have been reviewed and authenticated by a certified public accountant.

Let's break out that definition into its different components. A financial statement consists of a balance sheet and a profit and loss statement. The balance sheet shows either your personal assets and liabilities (for sole proprietorships) or the business' assets and liabilities (for corporations, limited liability companies and partnerships). The profit and loss statement details your income (and its sources) versus your expenses, in their various categories. Before you start the business, the profit and loss statement is a guestimate of what you hope to take in as income against what you will need to spend to keep the business going. Once the business is licensed and hopefully making money, the figures are actual calculations in each category of income and expense.

What do I mean by "reviewed and authenticated by a certified public accountant"? The Banking Department is not taking your word on what figures appear on the financial statement. It wants you to hire a C.P.A. who will review all of your financial books and records and verify that what you have stated on the financial statement is the truth. The certification process is very quick before your company starts business and will cost you relatively little at this point. Once you are conducting your mortgage business, the review of your books and records and the verification of each piece of information will take several weeks and can costs thousands of dollars. Why so much money for the certification? Because of liability issues. Accountants get sued if there is a discrepancy between what is in the financial statement that they have certified as accurate and what is really in your books and records. Think Enron. Their accountants, Arthur Andersen, don't exist anymore, stemming from the fallout from the Enron debacle.

Where certified or audited financial statements are required on an annual basis, some states, such as Virginia and New Hampshire, require their submission at a fairly early date (February 1). For those companies whose fiscal year ends on December 31st, this deadline is very difficult to adhere to. However, there is no way to get an extension and you could be in regulatory trouble if you cannot find a C.P.A. who can work within these timeframes. Accordingly, it is important to find a C.P.A. who understands the mortgage industry requirements and whose fee will work within your budget.

License Renewals

Only a few states, i.e., New York, Virginia, and California, issue mortgage broker and mortgage lender licenses that never expire. The vast majority of the states issue licenses that expire every year. The rest of the states have licenses that are renewed every 2 years.

The Banking Department (or whatever they call it in each state) will send out a renewal application about 2-3 months in advance of the expiration date of the license. More and more, the renewal is done online and the information is inputted. Some of the smaller states have very streamlined renewal procedures. They just require that you notify them of any changes since the previous year. The more time-consuming ones need to include updated surety bonds, Certificates of Good Standing, and proof that continuing education was completed. It takes several weeks to get all of the documentation together so you have to be very organized and keep on top of each requirement to ensure that you can send in a complete renewal application.

What should you do if the renewal license application isn't complete and the deadline is drawing near? I send in whatever I have and forward any missing documentation as I receive it. I have found that most states will grant some leeway if the renewal application is in their office. At least then they know you are trying to renew your license. If you have missed the deadline because you are still waiting for one last piece of paper, the Banking Department will not let you continue to broker or originate loans and will assess fines for a late filing.

Most of the Banking Departments take several weeks past the expiration date of your license to process all of the renewal applications. They know that lenders may not let brokers close loans if the new license has not been issued. The Banking Departments will usually confirm with the lenders that a renewal license is pending and that the Department is allowing the broker to cintinue to close loans while the application is being processed.

What if you have decided that you do not wish to renew your license in a particular state? Check that state's requirements. Some states merely let the license lapse on its expiration date and no further action is necessary. Other states require you to let them know that you are not renewing and you must comply with that instruction. You never know when you might change your mind and want to re-apply.

Licensing your loan officers

The trend in licensing is towards more regulation rather than less regulation. As the real estate market stabilizes or declines, foreclosures are starting to increase. This alarms consumer advocates and legislators who clamor that bad mortgage originators are steering borrowers to mortgage loans that they cannot afford. The cure, to them, is registering or licensing loan officers.

Colorado is the latest state to require licensing. It doesn't even license mortgage lender or broker businesses - it only licenses the loan officers.

Registration of loan officers, in the states that require them, such as New Jersey, Connecticut, Arkansas and Wisconsin, merely require the filing of the application and the payment of a fee.

The licensing states, such as Utah, Illinois, North Carolina, and Texas, require passing an exam, background checks, a certain number of years of mortgage industry experience, or continuing education.

By requiring your loan officers to be licensed in the states that require it, you are ensuring that they are knowledgeable about the laws and regulation that govern the industry.

Mortgage license solutions and your credit report

Many of the states request that you send in a current credit report or agree that the banking department can pull your credit report. What are they looking for? The same things you are looking for when you have a potential customer - how good you are at managing money.

Does your credit report have a low FICO score? Lots of late pays? Open judgments? Some states, like West Virginia, will automatically deny the application if you have a FICO score in the 500s. Other states will also deny the application if you have open judgments and refuse to pay (no matter what the reason for the non-pay). The banking departments take the position that if you can't manage your own finances, how will you be able to advise consumers on what is the best financial decision among the many loan programs that are out there.

What do you do if you suspect you have a problem credit report? First, get a copy of your credit report and FICO score. Review the report and note any items that would raise a red flag. If there are problems with your credit report, pay the judgments, take a few months to make all of your payments on time, get your FICO score up. If you cannot solve this dilemma, do not become an owner of record. Let your partner be the one to submit only his/her credit report.

Mortgage license solutions for brick and mortar states

One of the most vexing problems that mortgage brokers and lenders face when they wish to expand their territory is the requirement of some states that they have a "brick and mortar" presence in that state. What is a "brick and mortar" presence? It means a physical office in that state.

Currently, about 2/3 of the states do not require an office in their state. This makes them very popular in terms of getting a license. But there are some very lucrative states, including Texas, New Jersey, Pennsylvania and Arizona, where a mortgage broker or lender must have a physical office in those states in order to get a license. Georgia requires an office if your home states requires an office.

What constitutes an office? Again, it varies by state. Many states permit home offices, other states permit home offices if the town zoning laws permit that home office to exist. Some states permit executive suites so long as the suite is a fully enclosed office in which customer files can be locked away. If the "office" consists of a desk in a shared room with a common receptionist, that will not qualify as an office.

If you intend to get a license in a new state where one of your loan officers is living or intends to live, and they have a "brick and mortar" requirement, first find out whether a home office will qualify. That is your cheapest option. If the state does not permit home offices, find the cheapest office arrangement in that state. Especially in this age of customers finding a new mortgage loan on the internet, your office doesn't have to be the nicest one in the largest city, where the rents are the highest. Chances are your customers will never see your office so conserve your cash.

Mortgage Industry Experience Requirements

One of the reasons that the states require that mortgage brokers and lenders be licensed is to ensure that a person who has no experience cannot just open a mortgage business and start originating loans.

Many states require that before you can be licensed, either as a company or as an individual loan officer, you have a certain amount of loan origination experience. For example, New York requires 2 years of full-time mortgage industry experience for mortgage brokers and 5 years of underwriting experience for mortgage lenders. And the experience must be in loan origination. Arizona requires 3 years of industry experience, but loan processing only counts as half the equivalent time of loan origination. For example, if the president of the mortgage broker company has 2 years of loan processing experience and 1 year of loan origination experience, that will not be sufficent to satisfy the 3 year requirement. The loan processing experience will count as 1 year, not 2, plus the 1 year of loan origination experience equals 2 years of mortgage industry experience.

The states that have mortgage industry experience requirements have different ways for how you prove that you have the needed experience. Georgia and Arizona, for example, require letters from previous employers. This can be problematic when the company you worked for is no longer in business. In those cases, you need to track down your supervisors and have them write letters about your experience with the defunct company. Other states, such as Florida, will allow a letter from an industry professional who has knowledge of your work experience to confirm that they have known you as a mortgage broker or underwriter for the requisite period of time. Still other states contact your past supervisors and request that they complete a verification form and send it to the banking department.

As tempting as it may be to fudge this requirement, remember that if you do not have the experience to originate loans and do not know what the laws and regulations are in the state in which you want to be licensed, you will make mistakes that will cost you a great deal of money.