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.