When venturing into the lending industry, it is crucial to understand the state variations that may apply to your loan. The biggest barrier to entry in many states is making sure the lending company is properly licensed in that state. States also have different approaches with regards to usury, prepayment penalties, and many other facets of a loan, but these can all typically be addressed by rewriting your loan terms. If a license is needed to lend, a hard stop is in place before a lender can proceed with making a loan in a particular state.
If you are looking to venture into a new market, reach out to your attorney first to make sure you do not need a license in that state. And if you do, here are some helpful considerations to make as you proceed with the application process.
Licensing Considerations for Lenders
Choosing the Right Entity for Licensing: When managing funds or multiple entities, determining which entity should apply for the lending license is crucial. In states like California, where balance sheet lending is required, it’s generally advisable for the fund or the lending entity itself to hold the license. This ensures that the loan proceeds are coming directly from the lending entity/lender of record, avoiding complications that might arise if the fund manager or other entity were to close a loan in their name without being the lender of record.
Types of Licenses Required: Varying state requirements may necessitate additional broker licenses alongside lender licenses, highlighting the need for comprehensive understanding and compliance in multi-state operations.
Navigating the Licensing Application Process
- General Requirements: The licensing application process can be daunting due to its variability across states. Common requirements include:
- Foreign Registration: Most states require entities to be registered as foreign corporations within the state.
- Surety Bond: A surety bond must be in place as part of the licensing requirements.
- Background and Credit Checks: Control persons must undergo FBI background checks, typically through a fingerprinting process, as well as credit checks for certain states.
- Specific State Considerations: Certain states impose varying net worth requirements and office/employee mandates. States like California also have extremely lengthy processing times,
Financial Documentation
While audited financials are not required for every state, they are necessary for states like Arizona and Florida, where they must be submitted annually as part of ongoing compliance. This highlights the importance of maintaining robust financial records and ensuring they meet the specific requirements of each state where you hold a license.
Examples of State-Specific Licensing Nuances
- North Carolina: While not requiring a traditional license, North Carolina mandates a broker filing or registration for lenders who have not made loans exceeding a total of one million dollars in the previous year. This involves submitting a disclosure questionnaire, a recent financial statement, and posting a $10,000 surety bond.
- Utah: Utah’s requirements include having an individual with a Utah Principal Lending Manager license, which necessitates passing a state-specific test and meeting educational requirements. This person must be sponsored by the company applying for the license.
- Arizona and Nevada: Both Arizona and Nevada require a brick-and-mortar office located in the state, as well as a qualified individual who resides in the state that meets certain experience requirements.
Annual Compliance and Renewal
State License Renewal: Aside from CFLs, licenses typically need to be renewed annually with the state, with the process varying state by state. This may involve updating organizational, ownership, and management structures, ensuring all information on the Nationwide Multistate Licensing System & Registry (NMLS) is current, and paying the necessary fees. CFLs require an annual report due on March 15th of every year. There are also annual NMLS renewal fees applicable to all companies maintaining any licenses on NMLS, among other state specific requirements.
Importance of Compliance: Maintaining compliance is not just about adhering to the initial licensing requirements but also about staying updated with any changes in the law or requirements in each state. Annual compliance checks and updates are essential to ensure that your lending practices remain within legal boundaries and to avoid potential fines or legal issues.
Conclusion
Navigating the complexities of state-specific licensing requirements is a daunting but a necessary part of expanding lending operations across state lines. Each state has its unique demands, from the need for physical offices and specific personnel to detailed financial reporting and ongoing compliance obligations. Understanding these nuances is crucial for any lender looking to operate efficiently and legally in multiple states.
By preparing adequately for these requirements and staying informed about changes in legislation and state-specific demands, lenders can mitigate risks and focus on growth and service delivery. Consulting with compliance experts at Geraci LLP regarding specific inquiries about state licensing requirements and utilizing resources like Geraci’s comprehensive 50-state licensing survey can provide invaluable guidance and clarity. We’re here to help you navigate the complex landscape of lending licenses and ensure that your operations are set up for success in any state you choose to operate.
