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.
Thursday, October 4, 2007
Wednesday, September 26, 2007
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).
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).
Thursday, September 20, 2007
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.
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.
Wednesday, September 12, 2007
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.
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.
Thursday, September 6, 2007
Watch out for net branching
Many mortgage brokers consider the benefits of net branching when licensing and compliance issues arise. A net branch is an office at which a lender or mortgage broker allows a separate company that does not hold a valid lender or broker license in a particular state to originate loans under the lender’s or mortgage broker’s license. The net branch arrangement usually is set up so that a branch office rents its own space, hires its own employees, contracts with its own vendors and gets a part of the profits from that branch office. It uses the licensee’s name so that it has the appearance of being a branch but is typically a separate company.
The Federal Housing Administration prohibits net branching. The states that specifically prohibit this practice include Arizona, New York, Rhode Island, Georgia, and Florida. But remember all states prohibit unlicensed entities from brokering or lending. If your branch payments for closed loans are made to your corporation or limited liability company you have just violated the law.
Penalties for violating the laws against net branching or unlicensed lending or brokering can include fines, license suspension or revocation for the licensee and fines and possible criminal charges filed against the unlicensed entity. Even if you are not discovered by a state’s banking department or FHA, mortgage brokers can be left without their promised payments from the licensee if the licensee closes its doors or files bankruptcy before your company has been paid. There are also many licensees that are slow to pay even if they are still open for business.
The Federal Housing Administration prohibits net branching. The states that specifically prohibit this practice include Arizona, New York, Rhode Island, Georgia, and Florida. But remember all states prohibit unlicensed entities from brokering or lending. If your branch payments for closed loans are made to your corporation or limited liability company you have just violated the law.
Penalties for violating the laws against net branching or unlicensed lending or brokering can include fines, license suspension or revocation for the licensee and fines and possible criminal charges filed against the unlicensed entity. Even if you are not discovered by a state’s banking department or FHA, mortgage brokers can be left without their promised payments from the licensee if the licensee closes its doors or files bankruptcy before your company has been paid. There are also many licensees that are slow to pay even if they are still open for business.
Wednesday, August 29, 2007
Changes to Texas Mortgage Broker Licensing Law
Texas has a new licensing statute that takes effect for applications received on and after September 1, 2007. One of the changes is higher fees to license loan officers: the application fee is $275, $20 is for the recovery fund fee, and $39 is for the background check, for a total of $334.
A mortgage broker company principal will need to have 36 months of origination experience and 90 hours of classroom education taken within the last 2 years if the principal was not previously licensed as a broker or loan officer or 30 hours of classroom education if the principal was licensed as a loan broker. Loan officers must have 18 months of loan origination experience and 30 hours of classroom education taken within the past 2 years or 60 hours of classroom education if the loan officer does not have any origination experience.
Starting January 1, 2008, mortgage broker companies will have to be licensed (unless the company is a sole proprietorship) as well as having the loan officers licensed. The company will have to designate a principal as the company representative and that principal must be a licensed mortgage broker. The company will have to pay a $175 fee for the company license. There are no forms for the company license application created yet.
Additional parts of the changes to the law will take effect on November 1, 2007, however, the regulations to implement those parts have not been finalized.
A mortgage broker company principal will need to have 36 months of origination experience and 90 hours of classroom education taken within the last 2 years if the principal was not previously licensed as a broker or loan officer or 30 hours of classroom education if the principal was licensed as a loan broker. Loan officers must have 18 months of loan origination experience and 30 hours of classroom education taken within the past 2 years or 60 hours of classroom education if the loan officer does not have any origination experience.
Starting January 1, 2008, mortgage broker companies will have to be licensed (unless the company is a sole proprietorship) as well as having the loan officers licensed. The company will have to designate a principal as the company representative and that principal must be a licensed mortgage broker. The company will have to pay a $175 fee for the company license. There are no forms for the company license application created yet.
Additional parts of the changes to the law will take effect on November 1, 2007, however, the regulations to implement those parts have not been finalized.
Wednesday, August 22, 2007
You Really Need a Shareholder/Operating Agreement
If you are an owner in a corporation or limited liability company with at least one other person, you should have a shareholder (for corporations)/operating (for LLCs) agreement.
Why do you need one? Do you want to spend thousands of dollars in legal fees if one of the owners wants to get out and sell his/her interest in the business or disagrees with your ideas of how to run the company? Litigation is always more expensive than drawing up an agreement before the fighting starts. The ideal time to draw up a shareholder/operating agreement is before the company is formed. But even if you have been in business for a number of years, it is never too late to put everything in writing in advance of problems occurring.
A basic agreement should include sections about how to distribute profits and losses (this may not be done evenly depending on each owner’s contributions and time spent in the business), how to bring in new owners, how each owner will be allowed to sell his interest in the business, what happens in case of the death of an owner, how to resolve business disagreements, how much of a commitment to the business is required, and what could trigger a dissolution of the business.
It is imperative that you consult a business lawyer who has drafted these types of agreements before to help you with your agreement. You may also need to consult with your accountant and an insurance agent (typically a company buys life insurance to cover the buyout of a deceased owner). In discussing the different points of the agreement, you will discover that your partners may have very different views than you do. If relations are still friendly between you and the other owners, coming to an understanding about how the company will proceed in the future is more likely than if all of the owners are hostile.
A shareholder/operating agreement can be changed after it is drafted and signed but at least it serves as a starting point for how to decide questions that are very likely to arise in the life of a company. Business is like a marriage in some ways but most participants do not expect it to be for life. At some point, you will want to get out. If you do not have a shareholder/operating agreement, you could wind up in court, like a divorce action. And we all know that divorce isn’t pretty or cheap.
Why do you need one? Do you want to spend thousands of dollars in legal fees if one of the owners wants to get out and sell his/her interest in the business or disagrees with your ideas of how to run the company? Litigation is always more expensive than drawing up an agreement before the fighting starts. The ideal time to draw up a shareholder/operating agreement is before the company is formed. But even if you have been in business for a number of years, it is never too late to put everything in writing in advance of problems occurring.
A basic agreement should include sections about how to distribute profits and losses (this may not be done evenly depending on each owner’s contributions and time spent in the business), how to bring in new owners, how each owner will be allowed to sell his interest in the business, what happens in case of the death of an owner, how to resolve business disagreements, how much of a commitment to the business is required, and what could trigger a dissolution of the business.
It is imperative that you consult a business lawyer who has drafted these types of agreements before to help you with your agreement. You may also need to consult with your accountant and an insurance agent (typically a company buys life insurance to cover the buyout of a deceased owner). In discussing the different points of the agreement, you will discover that your partners may have very different views than you do. If relations are still friendly between you and the other owners, coming to an understanding about how the company will proceed in the future is more likely than if all of the owners are hostile.
A shareholder/operating agreement can be changed after it is drafted and signed but at least it serves as a starting point for how to decide questions that are very likely to arise in the life of a company. Business is like a marriage in some ways but most participants do not expect it to be for life. At some point, you will want to get out. If you do not have a shareholder/operating agreement, you could wind up in court, like a divorce action. And we all know that divorce isn’t pretty or cheap.
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