A certified financial statement is one that has been reviewed by a certified public accountant (CPA) to ensure that the numbers reported in the statement are accurate and are not subject to material errors or omissions. Because the accountant is attaching a certification to the financial statement that he has reviewed the figures and found them to be accurate, he may incur liability if the figures in the financial statement turn out to be wrong. Because of the possible liability, many CPAs do not certify financial statements anymore. Those that do charge a large fee. For this reason, mortgage brokers and mortgage lenders are looking for reasons not to need a certified financial statement. There are two grounds for needing one: the state in which you are licensed requires them (for proving your net worth) or you want to originate FHA loans.
Although the SAFE Act changed many requirements for licensing, there are still a number of states (i.e., New Jersey for mortgage lenders, Illinois Residential Mortgage Licensees, California Residential Mortgage Lender Licensees) that require certified financial statements. You must provide such a statement as of the end of the most recent fiscal year. Some states do require a minimum net worth, other states do not. No matter in how many states you are licensed, you only need one certified financial statement. The statement must be in .pdf format and must be uploaded through the NMLS.
The ability to broker or originate FHA loans also comes with the requirement that you get a certified financial statement. If you are an FHA Loan Correspondent (also known as a “mini-eagle”), you should be aware that 2010 is the last year that FHA is approving your Loan Correspondent status. Starting in 2011, the investors to whom you will broker your loans will be responsible for the approval and oversight of you. Therefore, it is possible that each lender will have its own set of requirements. It is likely that many lenders will insist on certified financials so that they are more assured that you are not under-capitalized.
It is still required by the FHA that mortgage lenders who are originating FHA loans have a required minimum net worth that must be corroborated by the submission of a certified financial statement.
Since government loans are a large percentage of the loans that are being originated these days, it is likely that the need for (and expense of) a certified financial statement is not going away any time soon.
Showing posts with label audited financial statement. Show all posts
Showing posts with label audited financial statement. Show all posts
Monday, November 8, 2010
Monday, February 22, 2010
How Much Money Should a Mortgage Broker or Lender Put into Its Business?
The answer to this question is different state by state and whether you are a mortgage broker or a mortgage lender.
If you are a mortgage broker, many states have a required minimum net worth of $25,000. New Jersey even requires a minimum net worth of $50,000. What is net worth? It is your company’s assets minus liabilities. For a new company, assets usually consist of cash (in your company's checking account), computer equipment and furniture. It does not include your car, unless title is in the company's name. Existing companies might also have accounts receivable and prepaid expenses. Liabilities are the amount of money a company owes. New companies usually do not have any liabilities.
Even if the state that you are interested in does not have a minimum net worth requirement, the licensing department might want to see a company's financial statement. They are looking to make sure that you can pay any claim that may arise after you are licensed. In order to get approval for a license, you must demonstrate to the banking department that you are serious about your financial responsibilities. Many states require an audited financial statement. This requires a very thorough review of your records by a CPA. Many accountants do not even prepare audited financial statements anymore. The accountants that do this type of work charge thousands of dollars to prepare the audited financials. If your state does not require a CPA-audited financial statement, it requires the president (or other officer) to swear that the financial statement is true and accurate.
The more assets you can show, the better. For existing companies, I counsel my clients not to distribute all of the profits to the shareholders of a corporation or members of a limited liability company. That lowers the net worth of a company. If the company shows that profits are retained to maintain operations or grow the business, the licensing department looks favorably at the company's application. Obviously if you are a start-up, you may have a limited amount of assets, but if you are adding new states, the licensing departments want to see how you have done in the past few years, when times have been more challenging.
The requirements for a mortgage lender license are even higher, typically $100,000 to $250,000. And most states do have a net worth requirement for lenders. If a mortgage lender needs a warehouse line of credit in order to fund its loans, the warehouse line creditor now requires a much higher net worth (I’m hearing numbers in excess of $1,000,000).
Regardless of whether a state requires a minimum net worth, at least at the very beginning of your company's existence, you should put in and keep as much money in the business as you can to show the licensing departments that you are serious about being a successful company that intends to be an upstanding member of the community.
Please feel free to forward this blog post to your colleagues, listserv members or favorite bloggers. Or if you would like to run it (in whole or in part) in any publication or quote from it, simply include my name and URL: http://www.mortgagelicensesolutions.com. No prior permission needed. To inquire about joining my list to receive my blog posts or my availability to speak to your group or write an article for your publication, please email me at Robin@Mortgagelicensesolutions.com. Thank you!
If you are a mortgage broker, many states have a required minimum net worth of $25,000. New Jersey even requires a minimum net worth of $50,000. What is net worth? It is your company’s assets minus liabilities. For a new company, assets usually consist of cash (in your company's checking account), computer equipment and furniture. It does not include your car, unless title is in the company's name. Existing companies might also have accounts receivable and prepaid expenses. Liabilities are the amount of money a company owes. New companies usually do not have any liabilities.
Even if the state that you are interested in does not have a minimum net worth requirement, the licensing department might want to see a company's financial statement. They are looking to make sure that you can pay any claim that may arise after you are licensed. In order to get approval for a license, you must demonstrate to the banking department that you are serious about your financial responsibilities. Many states require an audited financial statement. This requires a very thorough review of your records by a CPA. Many accountants do not even prepare audited financial statements anymore. The accountants that do this type of work charge thousands of dollars to prepare the audited financials. If your state does not require a CPA-audited financial statement, it requires the president (or other officer) to swear that the financial statement is true and accurate.
The more assets you can show, the better. For existing companies, I counsel my clients not to distribute all of the profits to the shareholders of a corporation or members of a limited liability company. That lowers the net worth of a company. If the company shows that profits are retained to maintain operations or grow the business, the licensing department looks favorably at the company's application. Obviously if you are a start-up, you may have a limited amount of assets, but if you are adding new states, the licensing departments want to see how you have done in the past few years, when times have been more challenging.
The requirements for a mortgage lender license are even higher, typically $100,000 to $250,000. And most states do have a net worth requirement for lenders. If a mortgage lender needs a warehouse line of credit in order to fund its loans, the warehouse line creditor now requires a much higher net worth (I’m hearing numbers in excess of $1,000,000).
Regardless of whether a state requires a minimum net worth, at least at the very beginning of your company's existence, you should put in and keep as much money in the business as you can to show the licensing departments that you are serious about being a successful company that intends to be an upstanding member of the community.
Please feel free to forward this blog post to your colleagues, listserv members or favorite bloggers. Or if you would like to run it (in whole or in part) in any publication or quote from it, simply include my name and URL: http://www.mortgagelicensesolutions.com. No prior permission needed. To inquire about joining my list to receive my blog posts or my availability to speak to your group or write an article for your publication, please email me at Robin@Mortgagelicensesolutions.com. Thank you!
Tuesday, March 24, 2009
Audited Financial Statements and the NMLS
I find the NMLS to be an exasperating system to use at times. However, one function they have instituted has been very helpful to me and others who maintain compliance for mortgage lenders and brokers who operate in more than one state.
Many states have a requirement that you send them a copy of an audited financial statement every year. This involves keeping track of which states have this requirement and when the statements are due. Then you have the manual task of sending the same statement to each of those states.
Those states on the NMLS have revised their deadlines to all coincide on March 31st. Your audited financial statement must be in PDF form in order to be uploaded through the NMLS. And you are required to input the assets, liabilities, and shareholder/member capital even though those figures are in the financial statement. However, you upload one financial statement and it is distributed to all the states on the NMLS who require you to submit financials. That is one less task that your compliance department (which may be the owner of the company) must do more than once.
Many states have a requirement that you send them a copy of an audited financial statement every year. This involves keeping track of which states have this requirement and when the statements are due. Then you have the manual task of sending the same statement to each of those states.
Those states on the NMLS have revised their deadlines to all coincide on March 31st. Your audited financial statement must be in PDF form in order to be uploaded through the NMLS. And you are required to input the assets, liabilities, and shareholder/member capital even though those figures are in the financial statement. However, you upload one financial statement and it is distributed to all the states on the NMLS who require you to submit financials. That is one less task that your compliance department (which may be the owner of the company) must do more than once.
Tuesday, March 11, 2008
Audited financial statements
An audited financial statement is one that is prepared by a certified public accountant and certified by that accountant that it has been prepared in accordance with generally accepted accounting principles.
It is typically needed when a state or the FHA requires a minimum net worth in order to get and keep a license. Accountants who are willing to prepare audited financials are getting scarce and they are not cheap. I've heard of start-up companies being charged $5,000 and existing companies being charged twice that amount.
Why so expensive? Accountants can be sued when the company for whom they prepared audited financials lose a lot of money or go out of business, leaving unhappy investors and creditors. To compensate accountants for the risk of a lawsuit, many charge very high fees. Some accountants feel they don't want the risk and will not prepare audited financial statements at all.
I have been asked what to do if a mortgage company cannot find an accountant who will prepare an audited financial statement. My recommendation is to ask your family and friends, every accountant that you know, and every accountant all of those accountants know. Your accountant does not have to be local. One client of mine has his accountant in New Jersey, even though he is located in Maryland. Another client is located in Colorado, his accountant is in Florida. So, if your brother, best friend, or wife's cousin has a great accountant in another state, find out if that accountant does audited financials or knows of an accountant that does. In addition to finding an accountant that you can work with, you might find that he/she charges less than your local accountant does. Go with someone who is recommended and who you feel comfortable with. You will be working with that someone for many years.
It is typically needed when a state or the FHA requires a minimum net worth in order to get and keep a license. Accountants who are willing to prepare audited financials are getting scarce and they are not cheap. I've heard of start-up companies being charged $5,000 and existing companies being charged twice that amount.
Why so expensive? Accountants can be sued when the company for whom they prepared audited financials lose a lot of money or go out of business, leaving unhappy investors and creditors. To compensate accountants for the risk of a lawsuit, many charge very high fees. Some accountants feel they don't want the risk and will not prepare audited financial statements at all.
I have been asked what to do if a mortgage company cannot find an accountant who will prepare an audited financial statement. My recommendation is to ask your family and friends, every accountant that you know, and every accountant all of those accountants know. Your accountant does not have to be local. One client of mine has his accountant in New Jersey, even though he is located in Maryland. Another client is located in Colorado, his accountant is in Florida. So, if your brother, best friend, or wife's cousin has a great accountant in another state, find out if that accountant does audited financials or knows of an accountant that does. In addition to finding an accountant that you can work with, you might find that he/she charges less than your local accountant does. Go with someone who is recommended and who you feel comfortable with. You will be working with that someone for many years.
Friday, January 26, 2007
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.
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.
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