Banking Department Frequently Asked Questions

Many state banking departments include Frequently Asked Questions (FAQs) on their websites that give answers to questions you had and to some you didn’t have but should have had. It can give you insight on how to approach an issue when dealing with a state regulator or learn that you don’t need a license to make or broker that one loan (only permitted in a few states).

For example, the North Carolina Commissioner of Banks website includes Frequently Asked Questions about examinations. Although some of the information is specific to North Carolina laws and regulations, I find that the majority of information can be applied to most states. One question that I found interesting was about whether referral fees were permissible.

Although I am aware that many mortgage brokers and lenders pay “referral” fees, they should all be aware that it is a RESPA violation. In many states, it is also done to do an end-run around state licensing laws. After all, if you don’t call it a “commission” or “bonus” when the loan closes, how can anyone say you are paying an unlicensed loan officer in violation of the state’s licensing statute? Every state comes down hard on paying fees to unlicensed mortgage originators, no matter what you call the originator (e.g., a net branch) or what you call the fee. Expect to pay a heavy fine or have your company placed on probation if you are caught.

The Washington D.C. Department of Insurance, Securities and Banking’s FAQs lets you know that the exemption for making 3 or fewer loans per year is now gone. You need a license to make or broker even 1 loan. On the other hand, Massachusetts’ Division of Banks FAQs lets you know that 5 or fewer loans per every 12 consecutive months exempts you from their licensing requirements.

Most FAQs deal with licensing qualifications and are helpful to know when diciding whether you should even submit a license application (minimum net worths, minimum number of years of origination experience, etc.). I suggest you look over the FAQs on the banking department websites of every state in which you are licensed and any state in which you are interested in becoming licensed to learn as much about what you need to know as possible.

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.