The Complexities and Nuances of Commercial Lending

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Private lending continues to be very profitable in the world of real estate investing, but with the continued growth of real estate investing comes the need for more and better funding.

To keep up with this growing trend, private lending companies who make business purpose mortgage loans are now obtaining multiple state licenses to lend in several states throughout the US, not just limiting their activities to one or two states anymore. While it may seem easy to apply for a specific lending license and pay the associated fee, think again. Mortgage lender licensing laws and requirements are complex and highly varied among the states. As a result, private lenders are increasingly overwhelmed and confused by the research and preparation needed to become properly licensed in each of the states. The process is confusing, tedious, and time-consuming.

At least eighteen states have some form of restriction on business purpose mortgage lending.  Currently, the most popular (and most restrictive) states that require a license to originate business purpose loans are Arizona, California, Nevada, North Dakota, South Dakota, Utah, and Vermont (if the loan is less than $1 million). Due to the complexity of each state’s lender licensing requirements, most lenders do not understand the licensing application and have trouble navigating the licensing requirements for each state.

How to Navigate Mortgage Lender License Applications

State-Specific Eligibility Requirements

Many states have unique eligibility requirements. For example, California requires the lending company’s net worth to be at least $25,000, while Arizona requires $100,000. In Arizona and Nevada, it is mandatory to have a brick-and-mortar office location and a qualified Individual residing in the state. And although all states generally require a surety bond, the minimum bond amount varies from state to state.  

Series of Applications

Any applications for state licenses as well as documentation or other required forms for licensing are filed through the Nationwide Mortgage Licensing System and Registry (NMLS). NMLS is a web-based platform that many lenders find to be complicated and not very user-friendly. Managing the requirements to maintain a license on NMLS can be time consuming and extremely stressful.

Each license application includes at least 2 separate NMLS applications: (i) the lending company’s application (MU1), (ii) an individual application for each control person of the company (MU2s), and (iii) potentially a branch application for each additional office location; and all applications and records need to be linked in NMLS.

For states that require electronic surety bonds, bond companies must also link the bond to company account.

But that is not all. Document uploads require specific file names (which vary by state) and must be uploaded under different locations within the NMLS.

Financial Statements and Other Documents

As mentioned above, most states require you to submit your company’s financial statements, but the specific requirements of the financial statement varies between the states.  For example, California requires an unaudited financial statement prepared in accordance with GAAP, Arizona requires the most current CPA audited financial statement, and Minnesota does not require a financial statement to be uploaded.

Business Plans

Most states require a formal business plan outlining the company’s products and marketing strategies. Depending on the state, there are additional state-specific business plan documents required, and certain states like California and Nevada each have their own business plan forms and requirements.

Organizational Structure and Management Charts

Companies will need to provide its organizational structure and management charts, which is where most of the headache and confusion arises.

Organizational structure charts generally need to include the ownership percentages of direct owners, indirect owners, and depending on the state, any other individuals who own a certain percentage of “voting shares” of the company.  Management charts need to show all managers, officers, and directors of the company, including any other individuals who have control and authority over the company’s lending activities.

Getting this part right is crucial as it has a trickle-down effect on the rest of the application.  Depending on the state, the individuals ultimately listed in these charts may be required to submit to an FBI or criminal background check, fingerprints processing, and credit checks. For example, background checks are generally required for each executive officer or control person of the company, but California additionally requires a background check for any individual who directly or indirectly owns 10% or more of the company and has authority over the company’s lending activities. Arizona requires background checks for all individuals who hold 20% or more of the company’s voting shares, and Nevada requires this for holders of 10% or more of voting shares in the company. A careful analysis of a company’s organizational and management structure is critical in accurately completing any state lender license application.   

Complications and Nuances

Timing for the entire application process depends on various factors, including the time needed to compile and prepare all necessary state-specific information and documents, obtaining foreign state registrations needed, completing the MU2s, sponsorship approval of MLOs as needed, and of course, getting the correct bond in place.

Once the licensing application is submitted, the waiting time for a state to review the application may take more than six weeks. This is especially true because of the COVID-19 backlog states have been experiencing. There may also be multiple rounds of follow-up items from state regulators before you get final approval of any state license.

How We Can Help

We have extensive experience and expertise in navigating the commercial mortgage lender licensing process in the US. We are experts in the industry and can guide your company through the specific licenses required.  We can also evaluate whether any potential exemptions are applicable to your company.

We streamline and simplify the commercial licensing application for your business by determining the type of license you need, and we correspond with state regulators on your behalf during the crucial purgatory stage -between application submission and license approval.

Questions about this article? Reach out to our team below.