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.

Continuing education

About half of the states require continuing education for loan officers, branch managers and company principals after you get your license. The number of hours varies by state. The type of education also is dictated by each state's regulations.

Most of the states permit online coursework. This is very convenient for those who need the continuing education hours for a state outside their home state. You sign up, take the coursework, and then pass a test to show that you paid attention to the coursework. You must make sure you get your certificate from the continuing education provider to show that you completed the courses.

A few of the states require that you attend in-classroom education which means you need to travel if this is not your home state. Other states require that you use only approved providers.

The important thing to remember about the continuing education requirement is to complete it in a timely manner. Some states require that it be completed during a calendar year and other states permit you to take your continuing education anytime before you need to renew a license or to submit an annual report. For mortgage brokers who are licensed in many states this means being very organized about when to take the continuing education for each state.

If you don't take the continuing education, you might not get your license renewed - a very expensive lesson in compliance.

Need a mortgage license solution?

I've been writing about topics that come up frequently in my practice as an attorney to mortgage brokers and lenders. But I'd love some ideas from my readers. If anyone has a topic they would like to see addressed in my blog or has a question that they need an answer to, please send me an email to Robin@mortgagelicensesolutions.com and I can write about it here.

Timing and Your License Application

One of my clients just received his Pennsylvania licenses last week. He has separate licenses for 1st and 2nd mortgages and a main Pennsylvania office and a branch office in another state where his company is headquartered. This week, he received the paperwork for his renewal licenses. He asked me if he needed to bother with a renewal since he just had received his licenses. Unfortunately, I had to tell him that his licenses would expire on June 30th and if he didn't renew, he would not have any Pennsylvania licenses when they expired.

No one has any control over how long it will take the banking departments to review and approve a license application. Sometimes, you get lucky and your new license is approved just after all the renewals were processed. So your license is good for the maximum number of months. Or you've applied in one of the states, like California or Virginia, where the licenses never expire. But, in most states, you can only hope that the approval will be given long before the license period runs out before you have to renew.

I also caution my clients not to submit license applications during renewal season (which varies by state). When it is renewal season, most of the reviewers are concentrating on the renewal applications and the new applications sit unnoticed. I urge them to wait a few weeks so that the application and license fees are still in their bank accounts, not in the Banking Department accounts, just gathering interest for someone else.

Check with a licensing expert before you make a timing mistake.

Hoard Your Cash

I'm hearing from a few clients that their phones are so quiet that they are going into crisis mode. They have asked me what the effects of breaking vendor contracts and leases would be or if they should file for bankruptcy to get out of their contracts.

While bankruptcy may be an acceptable option in other industries, in the mortgage industry, it is a huge problem. After all, if you cannot manage your own finances, how can you advise a borrower which is the best mortgage for him? If you cannot make the rent, what will stop you from dipping into fees that you receive in advance from borrowers?

This is why every license application contains a question as to whether the company or any of its principals have ever filed for bankruptcy. If you file for bankruptcy after you receive your license, you must immediately notify the banking department. The banking departments want to make sure that a licensee has enough financial smarts to know how to weather the tough times, such as we are experiencing right now.

I have been in the mortgage industry for over 15 years. I have seen real estate booms and real estate busts. I have always advised my clients to enjoy the good times but to also set aside savings for the difficult years. I also tell them to watch the overhead. Do not set up multiple branch offices with rent, utilities, and equipment to pay for unless you can sustain these expenses when the applications dry up.

So hoard your cash. And negotiate with your contract vendors, don't break your contracts and open yourself up to lawsuits and bad credit ratings.

Staying in Compliance

I recently had a conversation with one of the state banking department regulators about ongoing compliance with that state's rules. This particular state had a minimum net worth requirement.

I have many clients who ask me about how to comply with a minimum net worth requirement when they first get their license. For example, New Jersey has a $50,000 minimum net worth requirement for first mortgage brokers. The minimum net worth is $150,000 for first and second mortgage brokers. This is a very high hurdle for many companies. Potential clients ask me all the time "do I need to keep that amount in the company name all the time?" They figure that they can put the money in when they apply for the license and immediately pull it out after the license is granted. Unfortunately, that isn't allowed. The rules usually state "must maintain a minimum net worth of $_______" or "shall register all loan orginators."

How do the state regulators find out that a company hasn't been following the rules after the license is granted? It is carelessness that trips up many companies. Many times that carelessness is uncovered when an examination is conducted by the banking department. Mortgage companies hand the examiner a balance sheet with a negative net worth or a file that has a 1003 signed by a loan officer who is not registered. Or a branch office has not been licensed.

The penalties can be huge. That state regulator that I was talking to mentioned that a company that had not maintained the minimum net worth had their license revoked. Other infractions have cost other brokers and lenders thousands of dollars in fines.

Can you afford to pay large fines or lose a license just because you think you won't get caught breaking the rules? The state regulators don't go after just the big fish. They will go after any licensee, no matter how small or large.

Why You Should Have More Than One License

Have you ever turned away business because you didn’t have a license to do business in another state? How could that possibly happen?

It happens when a relative calls who lives in another state and asks whether you can originate or broker a loan for him. Or your loan officers tell you about their friends who live in another who would give you their business. Or perhaps you are on the border with another state and your advertising pulls in from your neighboring state. There are many scenarios where you are thinking that you wished you had a license to broker/lend in another state or states.

With each new state, you add thousands to millions of new prospective borrowers to whom you can advertise and market your business. You are not limited to just your home state. And let’s face it, the phones aren’t ringing off the hook in many offices. It’s not like the good old days from a year ago. You don’t want to have to turn away any business.