Mortgage Licensing - Common Pitfalls & How to Avoid Them

ing and today we're going to be talking about mortgage licensing. Navigating mortgage licensing requirements can be complex and even small missteps can lead to costly delays or compliance risks. In this webinar, we'll cover the most common licensing pitfalls from missing renewal deadlines to mismanaging multi-state requirements and provide some practical strategies to avoid them. Our experts will share insights on staying ahead of regulatory changes, leveraging technology for compliance, and building a strong internal licensing process. It's my privilege to welcome Suzanne and Kyle to our virtual gathering. Suzanne Weaver has 10 years of experience as a licensed owner and operator in real estate. she has 12 years as a licensed originator in mortgage compliance and licensing and as an account executive at Cornerstone.

She is a licensing subject matter expert responsible for license determination and agreement execution with a great deal of industry knowledge. Kyle Von Allmen is general counsel for Starark Financial. He lives just outside of Detroit. He's practiced in the financial services space for 30 years now and he specializes in compliance and is licensed to litigate in Michigan and Ohio. given the nature of today's topics, let me give the following disclaimer. this information is not intended to be legal advice and may not be used as legal advice. Legal advice must be tailored to the specific circumstances of each case. Every effort has been made to asssure this information is upto-date.

It is not intended to be a full and exhaustive explanation of the law in any area, however, nor should it be used to replace the advice of your own legal counsel. So, let's start out, Suzanne, if I can pick on you a little bit. Just give us a lay of the land. What are the common requirements between states for mortgage companies as they look at licensing? Even though the states themselves may differ widely in their individual requirements, what can what can a mortgage company expect to see or ask of them as they apply for a license? Yeah, so there are a lot of common requirements between the state applications.

they do vary by state. Every state has their own process and a list of documents that are required. a few of the similarities would include financial statements. policies and procedures, things like having an AMLBSA policy or business plan, a QC policy, any internal staffing policies. shorty bonds are another common requirement. Not all states require them, but it is on a lot of state applications. some states have fidelity bonds. but again, they're all very different, have their own requirements and different application on their checklist. That's true. Can you talk me through for the newbies a little bit about like what an FCR is, what an MCR is, what those financials specifically are going to going to require?

like are we talking audited? Are we talking internal? Talk to me a little bit about that. The financial requirements are going to vary greatly by states. some states will require unodudited financials, some will require audited financials. The net worth requirements are going to vary by state. So it's important to check ahead of time to make sure that your statements will reflect that required net worth net worth that's going to be required for the life of the license. So, the MCR is a mortgage call report and it is required for all residential mortgage companies to file on a quarterly basis within a system called the NMLS.

And that report goes through the volume and units that were collected during the quarter. So, it's not just closed loans, it's applications, anything that was taken during that quarter and then what decision was made at that time. the FCR is the financial condition report. And depending on what type of license you have, either that's going to be a quarterly report or it will be an annual report. And that information really goes into the details of your balance sheet and your income statement. a lot of CPA firms will be able to assist with the preparation of this because you're it is a lot of information, a lot of detailed information that's going to be required to be filed.

Thanks, Suzanne. And just again for those who may not be familiar with it, what is the NMLS and what purpose does it serve? So the NMLS is a platform that's online that helps to manage entities and individuals and also branches of companies that are holding any financial license. It used to be just mortgage and has since moved into a lot of other industries jumping on just for the sake of having a centralized location for companies to put in their ownership structures and upload documentation to have collected in one space for multiple states to be able to review more easily when applying. Thanks Suzanne. I know we get our hands dirty in NMLS quite a bit and it's it can be a little bit of a labyrinth if you don't know what you're looking at.

Kyle, the mortgage space has changed quite a bit since you know the early as obviously there was the fallout in 2008. There was DoddFrank the CFPB was formed. Talk to me a little bit about what has changed in the mortgage licensing landscape since the since the introduction of the CFPB. Like where do we stand now versus where we stood in 2008? Has it gotten easier to get licensed? Has it gotten harder? Tell me a little bit about that. Yeah, I think that the entire kind of topic has changed and it's not so much due to the CFPB. I mean the CFPB has seems to have its pendulum swing with regard to its power and effectiveness with every new administration.

So it's definitely a politically charged government agency. So it's I don't believe it's going away. and I believe that, you know, the teeth it has, whether or not that's going to continue in the same way with a new director, coming on, is probably not going to be, what it's been. but I expect that at some point in the future, it'll probably be restored to what it's been. So, I think we all in the industry need to keep our eyes on that. But what I've seen in recent years is a real development amongst especially as it pertains to licensing itself [snorts] a development in within the statutory structures of each state to try to apply consumer disclosures consumer type of requirements to the commercial or quai commercial marketplace.

So we're seeing as usually is the trend [snorts] that with regulation it is ramping up and finding new areas to regulate without pulling back on the old areas to regulate. So, I think what we're dealing with here is and we'll get to some of these other topics in more detail, but it's very important for our listeners here to really understand and identify exactly the tasks that they will be undertaking and how that fits into each state's statutory structure because the triggers within those statutes are very important to keep your eye on. You can do business in one way that will trigger a group of licenses.

You can use and outsource and partners to do other tasks that could limit your licensing requirements. or if it makes sense for your business model, you can undertake it all. and you know, we're really talking about something beyond when you say just mortgage requirements. Are you lending? Are you brokering? are you entering into loan modification activity as it's defined by the statute. So I don't want to be I don't want to stay too general on the idea of mortgage licensing because it involves a lot of different subcategories as well. Thanks Kyle. I think that's a great lead into our next kind of deep dive. I'm g I'm going to just make the assumption that everybody listening to this webinar wants to go about licensing the right way, but maybe they have gotten confused with the process.

Maybe they've gotten frustrated with the process. So Suzanne, can you talk a little bit about some of the common licensing pitfalls you see spec specifically with mortgage licensing? like why might some of our listeners today be frustrated wanting to throw some papers up in the air, wanting to bunch their computer screen? What's what are you seeing as the pitfalls that mortgage lenses or applicants face? So, one of the biggest issues that we're seeing come up is someone who's already got an approved license who wants to move into another state. And as you mentioned, NMLS is not quite an easy platform to navigate. but if someone knows how to go in there and click and add a state, the biggest mistake is thinking that's all you have to do is to say, "I want to get licensed in the state and pay the fee."

every state's got a checklist. And so, one of the biggest things is not looking at the checklist and just thinking that paying the fee is going to get you for a review. the other biggest thing is not responding to deficiencies placed on the application. a lot of times states will, you know, throw on a bunch of deficiencies, as part of their initial review and then they go through and review what you've provided, and start clearing those. But if they have questions or if they need clarity or another document that needs to be uploaded or provided to them and you don't respond, then they will assume that your application is abandoned and withdraw that for you.

So if you're not paying attention, you might not even know that your application's been withdrawn for you. So once that application is withdrawn, you're you're having to start again from scratch if you want to resume it. Is that correct? That's correct. You got to start completely from scratch. pay the fee all over again and start from scratch. So that fee doesn't carry over either. That's that's a big one. so if you look at the license types in NMLS, because I have you just for mortgage licensing, not even going into like debt collection or money service businesses, there's a fair amount of variety between, you know, the broker, the lender, the serer, the banker.

Some states combine these into a single license. Some take, you know, maybe lender and serer and then, you know, as a bunch and then have the others separate over here. Some have individual licenses for each. So, how do you I'll let either one of you take this, but how do you navigate all the different types of licenses and how they're parsed out state by state? Well, I mean, I think I'll jump in a little bit because there's a strategy element to this. where your business is today might not be where it is tomorrow in terms of both geography and the evolution of your business. So, we get a lot of, conversation about, well, you know, I've got my broker license in these couple of states, but now I want to originate, or, you know, I've got an opportunity, I'm I'm, lending in this particular way, maybe I'm a private lender, things like that, and I would like to migrate, [snorts] into servicing.

I and, and often this will come out of relationships that you've already got established. So I think it's important to understand the exact activity you're undertaking today what and whether or not that is within the statute defined in the way that you're doing it. And so this is becomes a 50-state question if you're going national or a regional question if you're regional. And when I say that, please understand that we're talking about where the property is located. [snorts] So, if a property is located in a particular state, you're triggering the licensing requirements within that state. it's not just where your business is located, and it's not even just where your debtor might be located.

You need to address the statutory requirements in the state that the property is located in. So, most states, as you said, Joel, they are either putting lending and servicing together and brokering separately. That's probably the most common scheme that I see. but sometimes they're all three together and sometimes they're broken apart. and so, the question then becomes, all right, I know I'm doing this, but maybe I've I've previously got a broker license or some other license. Did that create an exemption for me? So, oftentimes, you've got an exemption and you're kind of within the regulatory environment of a particular type of regulator. You would want to check on that.

you'd want to check with your general counsel or your local counsel or engage an attorney to see, all right, maybe I don't need any more licensing because this exempts me from this other activity as well. but again, I want to emphasize that is the answer to these questions. They're different for every state that you're in. So, it's not safe to say just because you have the name of a license, a mortgage lender license in Nevada, just pulling it out of thin air, does not mean that the name of that license is going to translate to the next state you want to move into. You really need to be aware of how those definitions are bundled and how the how the regulation states for that particular state because it's not going to be a onetoone necessarily from state to state.

That's right. And I like how you put that how those requirements are bundled is a really good way to think of it. and that m the way that they are put together by a state bears no resemblance to how they might be put together in another state. It's good. one pitfall I know we see is a lack of timeliness. Maybe that's a kind way to say it with reporting business changes to licensing authorities. why is it so important to report business changes, corporate changes to the licensing authorities? What kinds of changes need to be reported? I can jump in on this one. any kind of change that's happening to your business that affects the structure whether that's an address change or you're changing your qualified individual or a manager director officer or you're changing your ownership structure.

All of those things have to report be reported to the state. there's credit reporting that has to be completed on those individuals. the background checks to make sure that no bad actors with financial history are trying to own and operate a mortgage company. changing your address, they have to make sure that it falls within their state statutes of what is permitted to conduct business. A lot of states don't allow a residence to be a licensed location. You have to be in a commercial property where consumers can come in and out and advertise as such. So, a lot of those things they all require notification to the state and each of those things have their own timelines whether that's 15 days, 60 days, 90 days.

So, it's important to notify them ahead of time even if it's just sending a letter to them saying, "Hey, I've got an ownership change coming up. this is what we think it's going to look like and then you know go through the change application process to notify and provide all the appropriate documentation for that change. What's the typical or not typical what's the shortest window that any of the states will require that you're aware of? Suzanne, 24 hours is the shortest for some states. 24 hours. Some changes. the majority you're looking Yeah. And sometimes that's for like an address change of, you know, starting the next day because a lot of times you don't know that or a branch manager changing.

but the majority of them are between 10 and 15 as the shortest time frames. Okay. Well, when I start my mortgage company, I'm gonna need to know which states have the 24-hour turnaround. Goodness. how do regulators typically handle licensing violations? What are the penalties that you see attached to these lack of reporting your corporate changes in the proper amount of time? From my experience, I've seen monetary fines for not having it completed, having your license go inactive immediately, which means you can't conduct business in that state anymore. I haven't seen anyone's license become terminated from not having an appropriate notification period, but having your license go inactive immediately is just as effective to your business.

Yeah, Joel, you know, I can tell you that I've had clients in the past that have had what they considered a minor change of ownership but it was an issue in some states and not other states. So, if you're talking about a change of something like 5%, let's say, some states don't care about that because it's beneath their threshold, but some states do. And so, I would just say that if you're changing anything from a corporate structure standpoint, officers, ownership, percentages, maybe, you know, businesses create class B shares. that just needs to be explored from a licensing perspective and not just a corporate management perspective.

the other thing that I see quite often is when something unforeseen happens. So let's say you have somebody going out on leave or somebody like something like that a life event that causes a change amongst the people that are involved in your office. The issue with that is, you know, you're most likely thinking about operational concerns. How do we get past this? You're most likely thinking about on a personal level, is this person okay? That type of thing. and the last thing you're thinking about is, wait a second, you know, who's the person I've got to plug in now on NMLS, but what emails are coming to them?

just all of the different things that relate from a licensing perspective and a communication perspective. If you've got a key individual that's leaving, one of the first things you need to think about is licensing and what the impact is. And you know I think that again that probably leads us directly into some of the topics that are coming up in terms of you know building a compliance process and things like that. So we'll talk about that a little bit more, but some of your compliance process can help foresee these events that would otherwise maybe be unforeseen. Yeah, that's great, Kyle. I it so far I feel like we've identified a lot of potholes on the on the road, right?

And now let's kind of venture forward into like now that we see where they are and there's a lot of them. How do you structure your company to be able to avoid these? Because it like just you guys have talked about a lot of different things that can have major impact on the operations of a mortgage company. How do you structure your compliance department to be able to effectively avoid them and not have to spend all your time just thinking about compliance? Well, I mean, there are people involved in your business that probably do have to spend all their time thinking about compliance and thinking about licensing.

And if you're going to do business on a national level, truthfully, it's it's probably a full-time job or a job that you need to share with a vendor to help you get through it. the beautiful thing is, I mean, I will say, you know, maintaining your licensing, dealing with audits, dealing with the renewal process, which to me it's almost like a mini audit because there's always loan data and things like that you have to supply. that becomes something that will fortunately or unfortunately it'll drive itself. What I mean by that is if you're large enough and you're doing business on a national level, you will almost always have an audit in play.

You will almost always have a renewal coming up because they don't all renew at the same moment. And so when that happens, those things are going to reveal for you in your organization items that probably need to be addressed. So, what I mean by that is if you are having trouble pulling your loan data or pulling the call information or dealing with any of the various requests that could come from a state, then that's probably identifying a compliance risk within your organization that needs to be addressed. maybe that sounds like a simple thing, but you know, I you I've dealt with audits and renewals in the past, and a lot of times what happens within an organization is you get past it and you put that one out of your mind and you move on to the next one.

And so, the remediation of some of the things that are revealed, it's very easy, to kind of move on from that and not take care of it. But you know there are folks out there and I know we'll get to this but you know you guys at Cornerstone do a great job of helping people with their renewals and keeping them on task but at a certain point it falls within the responsibility of the organization and the managers within that company to do it themselves or to make sure that it's done. they're just some proprietary information that your vendor your helpers are not going to have.

Thanks, Kyle. And talk to me specifically towards the companies that may be like newly formed, just starting out, maybe don't have the resources of some of the bigger guys that have, you know, huge, you know, compliance departments, internal counsel, all that. How would you how would you advise them to structure their hirings so that the so that the decision makers can focus on the bigger picture and not always have to be in the weeds of compliance. Yeah. So, I mean honestly I think that if you're starting out you should have a partner, an exterior partner that's helping you do this. Now, as I said, the process, the renewal process, the items that you are going to need to provide to the various state regulatory agencies, they're going to drive that themselves because they're going to ask.

But if you don't have a partner or if you're in a situation where you don't have the bandwidth to just assign it to your compliance department, then you need a partner to help you run those things. you know much in the much in the category of you know the renewal the renewal process that Cornerstone assists in. there are attorneys out there that can help people that do work on an hourly basis. that's not a problem to find through various industry groups. So and I know that you know we're going to probably have some contact points of contact here and we can probably point people in those directions as well.

It's great. Thanks, Kyle. Suzanne, talk to me a little bit about the role of training and education in compliance because there's a difference between the compulsory sort of CE stuff that's required by states and then there's optional training in education that people may want to just get involved in to better themselves in their roles. talk to me a little bit about kind of both of those if you can split those up. So the majority of the education and training that's required is going to be for the individuals that are doing the originations. So not necessarily your corporate structure of officers, directors, owners. of course it's always better to have knowledge of what your business is and having additional training on that.

but becoming a licensed originator, you have to go through a 20-hour course, take a test, get fingerprinted, go through [snorts] that whole process just to apply for the license, and then annually you're required to take eight hours of continuing education every year. some states will have additional hours specific to their state law that they want, individuals to have completed. but the majority of states want to see that employees are doing more than just that required continuing education. They want to see that you've got an internal compliance program that offers compliance training to all employees about seeing red flags or privacy. just you know keeping the consumer at the forefront is what they want most of what the states are going to want to see.

and having a detailed compliance training program as part of your policies and procedures is always a good idea. there are platforms out there education providers that you can go and learn about AML anti-moneyaundering so that you can have a clearer idea of what that even means and how to implement privacy and protection into your daily activities as a mortgage company. It's great, Suzanne. And you've got some pretty extensive experience as we touched on in your bio. Like I just I want to pick on you a little bit just from your experience. Like why is it that you have stayed in this particular type of industry and licensing for so long?

What is it about it that you that you like? Because I mean, I've been on calls with you where like I just see you perk up whenever you get to talk about this particular type of licensing. like what is it that makes you so good at it, so engaged with it, and why do you enjoy like working with clients on this so much? Yeah, I really do love talking about mortgage licensing. I've been doing it for a very long time. a lot of it has to do with the line of the business of how being appropriately licensed, helping loan officers to get licensed that, you know, that's their livelihood.

that's how they make a living and provide for their families. But also even further down the line where these loan officers are helping people to fulfill their dreams of home ownership and that's not an easy task in general. And so just to see down the line of where starting a company to do mortgage lending goes down the line to help fulfill the American dream just makes me really happy to help people get there even though I'm not talking to those borrowers and those buyers, but helping those loan officers get to the place that they need to be in order to help fulfill that those dreams just gets me really excited.

And of course, the structure and organization of every state and their application requirements. I just I love organization. That's why we love you, Suzanne. so you actually read my mind because I wanted to talk a little bit just not we would be here for the next week if we were to talk about all 50 states, but talk to me a little bit about some of the I'll let you pick which state you want to dive into, but some of the states that are the most difficult in terms of the licensing process, like maybe somebody's got a particular state that they're excited about and you want to maybe give them a little bit of like, okay, buckle up.

Like what state would you do you want to talk about? I'll leave that up to you. And Kyle, you can actually jump in on this, too. maybe you can take a different one than Suzanne. Well, California is always a very popular state in multiple industries to get licensed in. A lot of people live there. A lot of people want to buy homes there. California has a pretty difficult license application. it's several pages long with multiple requirements, high net worth. it's definitely one of those states that everybody wants to get into and that's probably why the process is on the more difficult end because there is a lot going on in that state with their regulations and their requirements.

New York, New Jersey, couple more states that a lot of people get interested in that are on the higher end of long application process. Lots of documentation required, lots of diving into ownership and all those background checks that I mentioned earlier. Yeah, I think that Suzanne really hit the major ones and it's definitely her end of the process that deals with the working through the difficulties of pushing the applications through. But I will say this that there are some hurdles that I think hit different people in different places. So, one of the things that for startups and new newer businesses, especially if somebody decides, okay, I've got an opportunity to leave my old employer.

I want to do something on my own. I'm going to go out on my own. there are certain states out there that'll [clears throat] require you to have audited financials. And that is a difficulty. And one thing that people probably don't realize, number one, that it's required in some states. And number two, you need to have a certain level of financial history even to get that if you wanted to spend the money on it. So it's also not an inexpensive process to go through. So those things are difficult and sometimes I've seen people find a licensed partner that they can work with in a state that requires that and other times you just have to wait until you build the history to be able to provide that.

and [clears throat] the states that I've seen that require it are surprisingly inflexible about a workaround. So, I don't know what to say about that other than they will just say, "No, this is this is the box we have to check." So, I think that's one thing that I've I've seen people run into and felt a little bit bad for them really because there's not a whole lot you can do other than, you know, do business in another state and build your financial history until you can get the audited financial financials. Kyle, that's a great point and that actually made me think of something that comes up a decent bit on calls that we have, which is what are there any examples of reciprocity with licenses, with bonds, with, you know, I've got this license, so shouldn't I just be able to do business in this other state based on the license I have?

Are there any examples of that or has that completely gone away? Yeah, I'm not really aware of any examples within the mortgage space that's possible. There are some other licensing categories on a very limited basis, but for the most part, that's gone away. I don't think anybody should go into a licensing project thinking, okay, well, I'm licensed in Colorado, therefore 25 licenses go away. I mean, it's just not how it works, unfortunately. Thanks. And then just for a general road map, I would imagine there's people listening to this who they're they've got a successful business. They're they're in their home state and they're saying like I think it's time to expand.

I think it's time to, you know, take this nationwide. What's a good road map in the context of licensing to go from I'm operating in my home state to I want to take this thing nationwide? Well, from my standpoint, it's different for everyone based on their access to business and the resources that they have. It's going to take pretty significant investment to go from one or two states from a licensing standpoint into a national footprint. So, I think that matters. and it's going to be a very individualized answer for each business. But what I find more often than not is people wanting to move from one state to three to five to seven.

And you know, unless you're somebody who has you know, venture capital or private equity money to say, "Look, tackle this licensing thing and let's do this all at once because it's going to be painful. So, let's just take the pain everywhere all at once." if you're not there, then there's certainly nothing wrong with saying, "Look, you know, I'm in a particular state. I'm near the border. I'm in New Jersey and I've got an opportunity to do business in Pennsylvania." and so I think that's common and that's probably a really reasonable plan to put into place. Thanks, Kyle. Suzanne, anything you want to add to that in terms of going maybe going regional versus going nationwide?

So, I always get a little chuckle when someone says that they want to get licensed nationwide as a mortgage broker. because it's it's really, as Kyle said, it's it's a difficult process. definitely easier to go regional first because there are a lot of individual licensing requirements in order for the company to get licensed in the state. So that qualified individual that I mentioned earlier a lot of states have that requirement where an individual has to have experience in the industry for so many years in order to fulfill the QI requirement that's as part of the company application process. So that's always something to look at as you're selecting states.

other than you know if that's where your business is driving you to it's it's wise to look at those individual requirements as part of the company process. That's great. That's super helpful. Well, as we're as we're winding down, I'd like to just generally ask the both of you like the cue like what has not been said that needs to be said for our listeners today as they consider as they consider their licensing, as they're considering growing, as they're considering analyzing their existing compliance program, like what are what are your parting thoughts? What are the most important things that our listeners need to walk away with today?

So, I want to go back something [clears throat] that's kind of basic and talk about the nature of the property that is the collateral. So, a couple different things that we have conversations about all the time. people coming in and saying, "Hey, I've got this business. It's a lending business, but because it's related to this group of homeowners, I'm going to put a UCCc1 lean on the property." So, number one, that's not mortgage lending because they're not taking a mortgage on the property. So if anybody's listening and thinking about that, that can really be an important answer to a question for you. the other thing is the nature of the property matters.

If you are and we get a lot of overlap in our conversations about hey I'm I'm lending on or the activity I want to undertake is based on residential property. The definition of residential property can be different in different states. So let's not just assume that it could be a one to four family dwelling which is the most common but it might be some other kind of anomaly or different type of definition. other states don't really care about the nature of the property. They care about the purpose of the loan. So if it's a loan to an individual for you know kind of an owner occupied situation then that's going to fall under for personal or household use.

But if you are making a loan, I know, you know, we sometimes get people talking about lending short-term money on a property for a commercial purpose, but on a residential property, that may or may not qualify as activity that's triggered under the statute. It needs a state-by-state kind of evaluation. So, I know that is maybe a segue into a whole another topic, but if that touches on any of our listeners here today, then you should just be aware those are some of the issues that you'll need to address in that process. And Suzanne, I'll let you Yeah, you made my point for me. if you're thinking of anything outside of your consumer, residential 1 to4, mortgage lending, broking, or servicing, like get help.

you need to have someone to talk out what your business details are to determine what type of license is needed because as you mentioned maybe it's on residential property but it's to an entity or an LLC and that can trigger a different license other than just your standard mortgage company license. So that you really drove home the point for me of talk to somebody. reach out to your local council legal, you know, any legal counsel that can help direct you to make sure that you're applying for the right license. because you really don't want to apply for the wrong licenses. Tremendous. Thank you both for that.

that is going to wrap up our webinar today. I once again would like to thank both Kyle and Suzanne for their time, their expertise, their knowledge, and being willing to share. I hope this has been helpful and educational. you know, we're here at Cornerstone Licensing to assist with anything that we possibly can. I know that Kyle would love to connect with anybody as well if he can be of any assistance on the on the legal front. But we appreciate everybody listening today and