Starting a mortgage company is a complex undertaking that requires a deep understanding of the legal and regulatory framework, as well as a solid business strategy.
This guide, brought to you by corporate attorneys at Sequoia Legal, will walk you through the key steps involved in launching your own mortgage company. From obtaining the necessary licenses and permits to establishing sound operational procedures, we'll cover the essential aspects you need to know to successfully enter the mortgage industry.
What Is a Mortgage Company?
A mortgage company is a financial institution that works with borrowers who are attempting to obtain home loans. Some mortgage companies originate and service loans for borrowers. Other companies play a crucial role by connecting borrowers with lenders and facilitating home purchases or refinance loans.
Here's a breakdown of the key functions of mortgage companies:
Loan Origination
Mortgage company employees work directly with borrowers to evaluate loan applications, gather necessary documentation, and assess their financial qualifications. Employees help borrowers choose the right mortgage product based on their individual needs and financial situation.
Underwriting
Underwriters evaluate the borrower's creditworthiness and the property's value to determine the loan's risk level. This involves verifying income, employment, assets, and debts, as well as ordering appraisals and title searches.
Funding
Some mortgage companies fund loans using their own capital, while others act as intermediaries between borrowers and other financial institutions that provide the funds.
Loan Servicing
After a loan is closed, many mortgage companies continue to service the loan by collecting payments, managing escrow accounts, and handling customer inquiries.
Types of Mortgage Companies
If you're considering starting a mortgage company, it's important to understand your options and the regulatory requirements involved in each. Sequoia Legal can provide legal guidance to help you comply with applicable laws and regulations.
Mortgage Bankers
These companies originate, underwrite, and fund loans using their own capital or lines of credit. They often sell loans to investors on the secondary market to replenish their funds.
Mortgage Brokers
Brokers act as intermediaries between borrowers and lenders, helping borrowers find the best loan options and submitting applications on their behalf. They do not fund loans themselves.
Direct Lenders
These companies, often online lenders, work directly with borrowers throughout the entire loan process, from application to closing.
8 Steps for Starting a Mortgage Company
Starting a mortgage business is a complex process with numerous steps.
Here's a simplified overview of the eight key stages, emphasizing the legal and regulatory aspects where Sequoia Legal can provide guidance:
1. Develop a Comprehensive Business Plan
- Market analysis: Identify your target market, competition, and potential for growth.
- Financial projections: Estimate startup costs, operating expenses, and potential revenue.
- Choose a business entity: Decide on a business structure (LLC, corporation, etc.) that will best suit your needs in terms of liability protection and tax advantages.
- Register your business: Register your business with your state and obtain an Employer Identification Number (EIN) from the IRS.
2. Secure Funding
- Capital requirements: Determine the amount of capital needed to launch and sustain your operations.
- Funding sources: Explore options like personal savings, investors, or small business loans.
3. Obtain Licenses and Permits
- NMLS registration: Register your company and key individuals with the Nationwide Multistate Licensing System (NMLS).
- State licenses: Secure the necessary licenses in the states where you intend to operate.
4. Establish Operational Infrastructure
- Office space: Find a suitable location for your business operations.
- Technology systems: Implement loan origination software (LOS), customer relationship management (CRM) tools, and other essential technology.
- Staffing: Hire qualified loan officers, underwriters, processors, and administrative personnel.
5. Develop Compliance Policies and Procedures
- SAFE Act compliance: Establish policies and procedures to comply with the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act.
- Consumer protection laws: Ensure adherence to federal and state consumer protection laws, such as the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA).
6. Build Relationships with Lenders and Investors
- Wholesale lenders: Establish relationships with wholesale lenders who will fund your loans.
- Secondary market investors: If you plan to sell loans on the secondary market, connect with potential investors.
- Contract negotiation: Sequoia Legal can assist you in negotiating contracts with lenders and investors.
7. Market Your Business
- Develop a marketing strategy: Create a plan to reach your target audience and promote your services.
- Online presence: Build a professional website and establish a strong social media presence.
- Networking: Attend industry events and build relationships with real estate agents and other referral sources.
8. Maintain Ongoing Compliance
- Regulatory changes: Stay informed about changes in mortgage laws and regulations.
- Compliance audits: Conduct regular internal audits to ensure compliance with all applicable rules.
How to Become NMLS-Licensed in Denver
The first step in starting a mortgage lending or brokerage firm is obtaining an NMLS license, which includes the following steps:
- Application
- Background check
- Pre-licensing and tests
- Continuing education
Once you receive your license, you may begin working as a mortgage broker.
Step 1: Request Your Personal NMLS Account and ID Number
You must start your path to becoming licensed by creating the appropriate accounts.
Each state issues its own license for mortgage loan officers. In Colorado, you must apply both to the state E-license database and the NMLS.
The individual NMLS application process can be completed online with a few quick steps:
- Request an NMLS account on the NMLS online registration website
- Select “Individual”
- Complete a security captcha and click “Next”
- Fill out the required information on the form and click “Submit”
Once you have an NMLS account, you can fill out the Colorado Mortgage Loan Originator (MLO) initial online application. You’re well on your way to learning how to become a mortgage broker in Colorado.
Step 2: Complete Your Colorado NMLS Pre-License Education
Colorado requires applicants to complete 20 hours of pre-licensing training conducted by an organization approved by the NMLS.
The training consists of the following:
- Three hours covering federal regulations for mortgage lenders
- Two hours covering nontraditional mortgage products
- Three hours on mortgage ethics
- Twelve hours of electives
Colorado also requires applicants to complete two hours of state-specific training, although you may choose this option as an elective course.
Classes may be taken individually or all at once, depending on your schedule and timeline for completing your licensing education. However, you must complete your training within three years of your application submission.
The NMLS has approved dozens of educational institutions throughout the U.S., many of which offer online courses.
Step 3: Pass the NMLS Mortgage Licensing Exam
Passing the NMLS mortgage exam is a requirement for starting a mortgage company. Once you finish the training programs, you’ll take the S.A.F.E. Mortgage Loan Originator licensing exam, a two-part test proctored by the NMLS.
You will be tested on the following:
- State and federal mortgage loan origination laws
- The roles of regulatory agencies
- Regulations that all mortgage brokers must adhere to
- Disciplinary measures for non-compliant brokers
You must prove that you have completed the required training in order to register for the tests. Then, you must pass each of the exams with a 75% score or higher. If you don't pass, you may be permitted to retake the test after 30 days.
Step 4: Complete Background Checks and Pay All Fees
Before becoming a licensed MLO in Colorado, you’ll have to show that you have good credit and a background free of criminal activity.
This may involve the following steps:
- Create a Fieldprint and have your prints registered
- Pass a criminal background check, which can be done through your NMLS account
- Authorize a credit check, also available through your NMLS account
Additionally, you’ll pay multiple fees to process your applications and complete your background checks.
These fees may include the following:
- FBI criminal background check
- State criminal background check
- Credit report
- NMLS initial setup
- Colorado State Licensing Agency application
This process can take three to six weeks.
Step 5: Apply for Your NMLS License
Once all the pre-licensing education and testing are complete, it's time to apply for your NMLS license. You may use your account on the NMLS website.
The federal government has outlined the individual application process as follows:
- Log into your NMLS account
- Select the “Filing” tab at the top of the screen
- Select the sub-menu titled “Individual”
- Click the button labeled “Request New/Update”
Then, you will be directed to select your state. Choose “Colorado” and follow the prompts. If the information is correct, you may click “Finish” and finalize your mortgage loan originator license application. Applications can take up to 10 days from receipt to process.
Mortgage Lender and Broker Compliance and Regulations
One goal of the mortgage loan originator exam and NMLS licensing is to keep mortgage lenders and brokers informed about compliance requirements.
Federal laws and industry regulations cover topics like marketing and advertising, origination, recordkeeping, licensing, and compensation. To succeed, your firm must stay compliant with federal laws and the Colorado Division of Real Estate requirements for mortgage loan officers and lenders.
Here is a high-level overview of the relevant regulations and requirements involved in Colorado mortgage compliance.
Marketing and Advertising
Digital marketing and advertising are some of the most effective ways to reach potential clients. However, digital media come with specific regulatory requirements. If the content is designed to advertise your Colorado mortgage loan officer services, then your company's NMLS identifier must be included in all advertising.
Moreover, Colorado has additional requirements. You can consult a business attorney at Sequoia Legal for advice on adhering to these complicated rules.
Origination
As a mortgage loan officer, you are responsible for originating loans for your clients. This requires ensuring that you are making the disclosures required for the type of loan you are processing at both the state and federal levels.
Your loan origination software will be instrumental here, as it will provide templates for documents such as disclosures. In lieu of software, your company also has the option of hiring a third-party compliance specialist who will verify that you have met all federal and state-specific origination disclosure requirements.
Recordkeeping
The next requirement is ensuring that your company has a record retention policy. Keeping clear records will help to make auditing efforts straightforward for all parties involved.
As a mortgage loan officer, you are required to maintain your client and business records for three years. Other rules might modify this time frame. For this reason, it is very important to maintain thorough and accurate documentation of the life cycle of each mortgage transaction.
Licensing
Each mortgage loan officer is responsible for obtaining a Colorado license to conduct business. These licenses must also be renewed annually. A loan officer might have to start the process over if they fail to renew their license in a timely manner.
Consider consulting a business attorney with experience working with mortgage companies. Your attorney can work with you, reviewing your personnel records to determine whether each staff member has the appropriate licenses.
Compensation
To build a successful mortgage business, you will want to develop a compensation plan that attracts the top talent in the field. The Loan Originator Compensation Requirements issued by the Consumer Financial Protection Bureau are a good place to start in terms of figuring out an appropriate, compliant compensation plan.
This resource describes various requirements established under the Truth in Lending Act Regulation Z, including qualifications of loan originators, compliance procedures for depository institutions, and loan originator compensation. For help determining how these requirements apply to you, consider speaking with our business law team at Sequoia Legal.
Laws and Regulations That Mortgage Company Founders Should Know About
As a strategic partner, Sequoia Legal is well-equipped to help your company meet mortgage lender and broker compliance requirements, including communicating and working with the Colorado Division of Real Estate.
If you’re familiar with the laws and regulations below, your compliance process may be easier and more streamlined.
TRID Disclosure Audits
Regulations that will affect your mortgage company include TILA-RESPA Integrated Disclosure (TRID) rules. These rules govern the information you must provide to consumers during the mortgage process, including when borrowers apply for the mortgage and at closing. You must keep thorough records of such disclosures in order to be ready for audits.
HOPEA and High-Cost Mortgages
The Home Ownership and Equity Protection Act (HOPEA) requires mortgagees to share more detailed information with buyers who are purchasing homes with high-cost mortgages. The act applies mainly to mortgages with interest rates that are significantly higher than the prime rate.
For these loans, HOPEA includes additional regulations regarding disclosures, pre-mortgage counseling, and loan terms.
State Consumer Credit and Fee Restrictions
States often pass additional laws forbidding predatory lending in the form of consumer credit laws. Typically, these laws contain restrictions on fee amounts in addition to controlling licensing and regulating lending activities. The Colorado Division of Real Estate has its own requirements, which we can help you fulfill.
RESPA Disclosures
RESPA revised the Good Faith Estimate Rules that mortgage brokers must provide to borrowers at settlement. With the new rules, brokers must provide a good faith estimate of the total cost of a real estate transaction within three days of receiving the loan application.
The total cost may comprise document preparation, legal fees, title searches, title insurance, taxes, pest and house inspections, and notary services.
HMDA Filings and Data Analysis
The Home Mortgage Disclosure Act (HMDA) requires brokers to report to regulators data that shows whether they provide credit in the communities in which their offices are located. This information guides the government's decision as to where, geographically, investment dollars should be directed.
Covered financial institutions, including mortgage companies, must report data on applications and originations for covered loans in addition to information about purchased covered loans. As you’re deciding where to set up your mortgage company, we can explain how HMDA regulations might affect you.
Flood Zone Determination
The Flood Insurance Reform Act of 1994 created disincentives for building in flood-prone areas, particularly raising insurance rates where there is a higher risk of flooding. The act also requires that buyers located in flood zones buy flood insurance.
Due Diligence and Audits
Mortgage loan originators must conduct themselves as if they were banks; you should never let go of your focus on compliance and due diligence efforts. Included in these efforts should be procedures for identifying risks for fraud or identity theft. In addition, mortgage companies must comply with anti-money laundering laws and, when necessary, file Suspicious Activity Reports (SARs).
Ready to Get Started?
At Sequoia Legal, we have experience with the burdensome requirements and ever-changing regulations involved in creating and operating a mortgage firm. We are here to help you establish and operate your mortgage company with a clear focus on compliance.
For more information, contact our legal team today.
