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.
Monday, August 6, 2007
Monday, July 30, 2007
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.
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.
Monday, July 23, 2007
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.
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.
Tuesday, June 26, 2007
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.
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.
Friday, June 22, 2007
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?
Monday, June 11, 2007
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.
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.
Tuesday, May 22, 2007
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.
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.
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