Are You Planning on Buying a Mortgage Company in Another State? What Do You Need to Know About Getting Its License?

There are some mortgage companies that are prospering and growing. They are expanding into new states by buying mortgage companies rather than obtaining their own licenses and establishing new branches.

These expanding mortgage companies must be aware that, by buying an existing license, they do not have an instant entry into a new state. Each state has its own requirements for a “change in ownership” or “change of control.” Each state even has its own definition of “change of control.” If you are contemplating buying an existing mortgage lender or broker, you should be aware that the company that you are buying cannot assign its existing license to you. You must check with each state in which the company that you are buying is licensed to learn what their requirements are and you must comply with each state’s different procedures. Some states require notification before the change and other states require notification immediately after the change.

The state agency has the power to deny the application for a change of ownership or change of control. Accordingly, the new owners or new company cannot go forward with their transaction until they have the approval of the state regulatory agency. In just about every state that I work with, the state imposes a moratorium on new originations until the regulatory agency has approved the new owners. Therefore, if you are planning to buy an existing mortgage company, you must factor in weeks or months (depending on the state) for the state to approve the change in ownership or change of control in your expansion plans. Any loans that are already in the pipeline of the company that is being acquired are allowed to be closed, so as to not inconvenience consumers.

The approval process usually includes submitting information about the new owners, including their background in the mortgage industry, financial stability, criminal background checks, and credit status. If the new owners could not qualify for a license on their own in any particular state, they will not be in a better position by buying an existing licensee.

The mortgage company who buys an existing company does not do so to get an instant license. It usually buys the company to get its existing assets (loan originators, customers, and lease). If you are planning on buying an existing company, you must prepare for the licensing process or all of your plans could be for nothing.

Will Your Mortgage Loan Originator's Criminal Record Prevent Him From Getting Licensed?

The SAFE Act requires all mortgage loan originators (MLOs), also known as loan officers, to create a record that will become part of the Nationwide Mortgage Licensing System (NMLS) registry. Part of the record deals with disclosures about an MLO’s criminal background. To verify the information that the MLO is providing in his NMLS record, the SAFE Act requires criminal background checks for all loan officers.

The questions asked in the NMLS MU4 record concern criminal convictions for a felony, pleading no contest to a felony, pleading guilty or no contest to a misdemeanor involving a financial-services crime, fraud, theft, perjury, forgery, or having control over an organization that pleaded guilty or no contest to these dishonesty crimes.

Questions come to me from loan officers who have been pleaded guilty to drunk driving, to issues when they were stockbrokers, to juvenile crimes that have or have not been expunged from the record. These loan officers ask me what to do and whether these past issues are now a current problem.

I cannot counsel anyone who is not my client so I will not give specific answers in this blog. My general advice is, when in doubt, disclose and explain. Many times criminal convictions that should have been expunged will somehow show up in a criminal database. If you decide not to disclose and the conviction or no contest plea shows up, you look like you are trying to hide something. I always fall on the side of honesty and disclosure.

When you disclose your conviction or no contest plea, the licensing reviewer may have some discretion to still approve your license application, depending on the type of crime and when the conviction or no contest plea happened. The SAFE Act has explicit disqualifiers for license approvals. The SAFE Act prohibits the licensing of an MLO if the applicant has ever been convicted of a felony involving an act of fraud, dishonesty, breach of trust, or money laundering, or convicted of any felony in the seven year period before filing an application for a license. If you are outside of the seven year period, you should be fine.

Contact Robin Gronsky at Robin@Mortgagelicensesolutions.com if you need help with your licensing (company or MLO). I’ll keep what you tell me confidential but I cannot give you any specific legal advice until you become a client of the firm. This is done by written agreement only.

If You Make These Advertising Mistakes, It Could Cost You Plenty

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. All states require NMLS unique identification numbers in advertising. This one is easy to comply with. You have to add your company and mortgage loan originator NMLS unique identification number to all of your advertising materials, including websites and business cards. In addition, some states require company addresses and specific language that must be used on all advertising materials. You must check with each state in which you are licensed to find out the specific requirements and you must fully comply with all such requirements.

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. This could also impact your premiums with your surety bond underwriter.

Extensions to the July 31st Deadline – Are You in One of These States?

July 31st was supposed to have been the deadline for completing the licensing requirements in certain states. Some states have decided to extend these deadlines to allow their reviewers additional time to review all of the transition applications. If you are a licensee in New Jersey, Maryland, or South Carolina, you have been granted the right to originate loans until September 30, 2010 (Maryland), October 1, 2010 (New Jersey), or October 31, 2010 (South Carolina Board of Financial Institutions) even if your application is still pending. You should make sure that you have completed all of your licensing requirements as soon as possible to ensure that you are unable to close your loans when this extended deadline passes. The reviewers are finding that many applications are incomplete and rather than denying these companies and loan originators the right to originate, they have given you more time. You should be checking your task lists on the NMLS to see what requirements you still need to comply with. When your application has been approved, the designation on your MU-4 record is usually “approved – conditional.” This is because the required credit check has not been reviewed yet (and won’t be until starting October 1, 2010).

If you missed the July 31, 2010 deadline, you are not covered by an extension. You need to submit a new application (not a transition application) and you cannot originate loans until your application has been approved.
Contact Robin Gronsky at Robin@Mortgagelicensesolutions.com if you want to explore expanding into new states or need help with your licensing applications (company or loan originator). I’ll keep what you tell me confidential but I cannot give you any specific legal advice until you become a client of the firm. This is done by written agreement only.

What Does It Cost To Get a Mortgage Broker/Banker License?

If you are thinking of starting your own mortgage broker or banker company or expanding your existing business into a new state, you need to put together your budget. One of your start-up or expansion costs is the cost of licensing. How do you calculate that? The costs vary by state but there are similar requirements in most states.

The calculation starts with whether you are creating a new corporation or limited liability corporation (LLC). There are fees to incorporate or register your LLC in your home state. If you are expanding into a new state, you must file a document that authorizes your to conduct business outside of your home state (usually called a Certificate of Authority to Transact Business). Once you are incorporated or have authority to do business, you apply for the mortgage broker or banker license. In just about every state that means starting with the Nationwide Mortgage Licensing System (NMLS). You complete an application called an MU1 about the company, an MU2 about the owners, and an MU4 for each mortgage loan originator. There is an administrative fee just to get your company onto the NMLS plus the license fee that each state charges. Each state has its own additional requirements that may require you to spend more to get your license. Those requirements may be a surety bond (so you pay an insurance premium), a financial statement prepared by an accountant (add in an accountant’s fee), credit reports for the owners and officers of the company, background checks and fingerprint cards, and required licensing of one of the owners who is responsible for day-to-day operations. There are also still some states that require a physical presence in their state so you need to rent an office.

When you add up all the fees, you could be looking at anything from $2,000 to
$4,000. That does not include the costs for getting your loan officers licensed (and you must have at least one person licensed as a loan originator, even in a one-man shop). If you are getting a new license as part of an expansion, you must do a cost benefit analysis to evaluate whether the costs of getting the license are less than the revenues that you expect to earn in that state.

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!

Do You Need a License?

I periodically get calls and emails, asking me if a certain person needs a license for the activities he is doing. Maybe it’s mortgage loan lead generation, sometimes it’s hard money lending or commercial mortgage brokering. My answer is always to read the statutes in your state (or any state in which you wwant to do business)regarding residential mortgage licensing to see if the activity that you are proposing to do fit within the description of a mortgage broker or mortgage lender. Also read the exemptions from licensing. If your activities fit within the definition of “mortgage broker” or “mortgage lender” and you don’t fit within any of the exemptions, you need a license. If your activity is not residential mortgages, also check the statutes for commercial mortgages to see if any such statute exists, whether your activity falls within the definition of mortgage broker or lender and whether you fall within the exemptions. It’s that simple. If you don't understand the language in the statutes, you need to hire someone like me who can explain the statutes to you.

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!

Maryland Revises its Licensing Law

Maryland has revised its licensing statute to conform to the federal SAFE Act. The new law requires new license applicants to use the NMLS to apply, starting in early May, 2009. Existing licensees who need to renew their licenses until July 1, 2009 will use the Maryland online system to renew. Existing licensees who do not need to renew their licenses until after July 1, 2009 will be required to transition to the NMLS starting in July, 2009 and will have up to 18 months to transition. If you need to renew your license during the transition period, you will renew on the NMLS. New licenses will be for up to a 1-year period and will expire on December 31st, like all other licenses obtained through the NMLS.

The new law also requires mortgage loan originators to be individually licensed, which requires the applicant to take 20 hours of pre-licensing education, to pass an exam in order to get licensed, pass a criminal background check and a regulatory background check. A mortgage loan originator will not be approved for a license if he has had a license from another state revoked or if during the prior 7-year period pleaded guilty, nolo contendere or been convicted of a felony. If the felony was for an act involving fraud, dishonesty, breach of trust, or money laundering, the application will be denied no matter how far in the past the conviction or nolo contendere plea was. After licensing is approved, the mortgage loan originator will be required to complete 8 hours of continuing education annually.

Mortgage loan originators who are not employed by a licensee can place their license in a “nonactive” status until re-employed by a different licensee.

Do You Need to be Licensed?

I have been getting a number of telephone calls lately with the question essentially being do I need to get a license? Some of these calls are from companies that do mortgage servicing, some do commercial mortgages and some do a variation of what can be called “lead generation.”

The short answer to every question of whether someone needs a license in a particular state is “what does the statute say?” Every state has a law that creates the requirement that some persons doing certain activities must be licensed. Part of every licensing statute is the definitions section. The definitions section will describe what activities constitute “mortgage lending,” or “mortgage brokering” or “mortgage servicing.” If the activities that your company does fall within the description provided in the statute, you need a license. Sometimes, it’s not so clear whether your activity falls within the definition. If you are not sure whether your activity requires a license, my recommendation is to get the license anyway. It’s more costly to be wrong about your guessing about the need for a license. Yes, you may go about your business for several years without the license with no troubles, but the first complaint that alerts the banking department to your existence may find that you did need a license and your ignorance of that fact is no defense. Unlicensed activity invokes a heavy fine and you will be stopped from continuing your lucrative business.

The other short answer is that most states do not regulate commercial brokering and it varies by state whether mortgage servicers need to be licensed. Again, go back to the licensing statute to be sure.

Working with the Nationwide Mortgage Liensing System

I represent a number of clients on an ongoing basis, keeping them in compliance with the states in which they are licensed. Because the Nationwide Mortgage Licensing System (NMLS) has been up since January 2, 2008, I’ve been on the system quite a bit.

My experience is that it is somewhat time-consuming to work with the NMLS. I actually have that same opinion about all computer-based systems (i.e. annual reports and renewals that must be done online). If the entry isn’t done in the exact format that they require, the computer kicks it back. If I don’t have the answer to a question for a client, I need to go back to the client and get the answer; otherwise the system will not let me get further through the questions. This is true even with questions that seem to be irrelevant as to whether a mortgage originator or owner is honest and experienced in the industry. Questions about 10 years of residential history, providing month and year for each residence, do not make sense to me. Ten years of employment history, even if it is not mortgage related, seems excessive. When you have a paper-based system, the reviewer seems to have the leeway to allow a small piece of information to be omitted. And the format of the response does not stop you from moving from question to question.

I have not yet had the pleasure of adding a new state to be licensed for a client already in the system. I hope that it will just require a few minutes of input for the new state (each state still has its own requirements for what it requires for licensure) and the application will be submitted. I still need to know each state’s requirements, but the added work of re-typing each state’s application form will eventually disappear. That will make the NMLS a pleasure.

Training Your Loan Officers

A couple of months ago, I blogged about the best practices for hiring new loan officers. Now, it’s time to review the procedures to use to ensure that your loan officers stay compliant with all laws.

If your company is large enough, it should have a manual of company policies and procedures (prepared or reviewed by a lawyer who is very familiar with employment law). When a new loan officer starts his/her job with your company, the new loan officer should be given a copy of the company manual, should read the manual and should be required to sign an acknowledgement that the manual was read. If you don’t have a company manual, you need to meet with each new loan officer and explain what the company’s policies are regarding vacation and sick days, dress codes, email and use of the company computers, confidentiality of company information and client privacy information, all statutes and regulations that apply to your company and its business, etc.

Each job should have a job description so that everyone knows what he/her responsibilities are. Review each job description and make sure that all employees are complying with their job duties.

If your loan officers do not have experience in originating or processing loans of any state in which you are licensed, you must give some training to new loan officers in compliance with state laws and regulations. You can hire a trainer to give this training. If you are outsourcing this function, make sure that your trainer is entirely familiar with the subject matter in which he/she is giving training. You should monitor training sessions so that you know what is being taught to your employees. If anything is said that seems to contradict what you know about your state’s requirements, check with the state banking department to clear up all discrepancies. If there is a contradiction between the trainer and the banking department answers, go with the banking department answers.

Each employee should have training on how to deal with customers and potential borrowers. Loan officers should know what they can and cannot say to customers. You may want to hire a professional to teach sales development techniques and marketing skills. All loan officers should be familiar with investor requirements and the different loan programs that you offer to customers. They should be able to explain each program in detail so that it is easily understandable to borrowers.

Training should be ongoing and refresher courses should be given at least annually. Loan officers who need continuing education to maintain their licenses must keep a schedule of when they completed their required hours and employers should require that they receive a copy of that schedule.

Finally, model the type of behavior and standards that you want others to follow. Loan officers that do not follow state and federal law as well as your company’s procedures will get you into trouble. The loan officer may be long gone by the time the problem comes to light. But you will be left with the consequences.

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.

New York Now Requires Mortgage Loan Originator Registration

New York now requires all loan officers, which they call mortgage loan originators (MLOs), to be registered. This state is one of the first to become part of the Nationwide Mortgage Licensing System (NMLS). In addition to the detailed online application through the NMLS, loan officers are required to submit supplementary documents directly to the New York Banking Department, including fingerprints, credit history, and documentation related to financial and criminal disclosures. Loan officers who work for banks, thrifts and credit unions do not have to register. Loan processors would need to register if they discuss loan products or terms with customers.

Sole proprietors and company officers, directors, members and shareholders who also engage in soliciting customers for New York loans must register as MLOs.

Each loan officer will need to set up his/her own account on the NMLS, creating a personal user name and password. He/she will need to complete the MU4 form and pay a registration fee.

Each loan officer will be required to get his/her fingerprints taken, getting the fingerprint cards either through the Banking Department or through the employer. Even company officers, directors, members and shareholders who were previously fingerprinted for the company license must be fingerprinted again if they are required to register as an MLO.

Additionally, a recent (within 30 days of registration on the NMLS) credit report for each registered MLO must be submitted with the fingerprint cards. If the MLO answered “yes” to any of the questions regarding criminal charges and convictions, bankruptcy filings, civil litigation, regulatory problems with any state or federal agency, and whether he/she was ever fired from a previous job, back-up documentation must be submitted along with the fingerprint cards and credit report. All MLO applications must be approved by the Banking Department or that loan officer cannot solicit any business in New York.

The registrations are good only for one calendar year and expire on December 31st. MLOs can work for only one company. If the MLO switches companies, the Banking Department must be notified of the change.

If your company was licensed in New York before January 1, 2008, your existing MLOs must submit applications through the NMLS for registration before July 1, 2008. If your company is licensed after January 1, 2008, the MLOs should immediately submit their applications as they have only until April 1, 2008 to receive notification from the Banking Department that their application has been received to be allowed to solicit New York business.

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.

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.

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.