Nationwide Licensing Strategy
An edited version of this article appeared in the March 2000 issue of the Origination News.
By William P. Vestevich, Esq.

So, you’ve hired an Internet guru to design the world’s best lending website for your company. All you need to do is flip on the switch, start making loans from New York to California, and set up a meeting with an investment banker to discuss your $100-million-plus E-FinanceCompany.com IPO, right?

Wrong.

The reason is licensing. In fact, you’ll need to be licensed in just about every state you do business. And not just one license – possibly two or more per state depending on your financial product offerings, and your role in the financing transaction. In addition to licensing, there are many other strategic considerations, including corporate, legal, and regulatory matters, which must be handled prior to launching a nationwide lending campaign. This article provides invaluable strategic planning advice from a nationwide finance industry licensing attorney for those companies exploring the possibility of lending beyond their home state borders.

DANGEROUS MISCONCEPTIONS

To begin, many finance professionals falsely believe that the Internet sprinkles a sort of “magic dust” on the whole licensing issue, essentially eliminating licensing laws in all 50 states with the click of a mouse. Others believe that they can just “co-broker” a loan to a licensee in a given state (illegal in most states). And still others attempt to handle licensing matters on their own, and then quickly find themselves overwhelmed by all the various state laws, the complexity of the licensing process, corporate/business law issues, dealing with multiple state regulators, and the substantial required investment in time. Without a doubt, licensing is a frustrating task for a finance company owner trying to run his/her day-to-day lending business.

LIMIT THE NUMBER OF KEY INDIVIDUALS

The number-one rule of thumb in licensing is to minimize the number of officers, shareholders, and directors in a finance company. Licensing complexity increases exponentially as the number of key individuals in a company increases. For many state license applications, these key individuals will have to fill out, correctly and completely, personal disclosure statements, provide personal financial information, and have their fingerprints taken for state and federal criminal background investigations. The more people involved in the licensing process, the higher the likelihood of a problem arising due to missing, incomplete or misleading information, or from a previously-undisclosed skeleton which is discovered during the licensing process. Practically speaking, coordinating the licensing process can become a logistics nightmare when dealing with numerous individuals and day-to-day business matters that take priority over licensing, vacation schedules, sick days, personal days, and other business deadlines which must be met. The bottom line is this: avoid trying to act like a bank by giving out officer titles to everyone in the company. Ideally, the total number of key individuals would be four or less.

HIDDEN PERSONAL HISTORIES

It is very important to be selective when choosing the officers, directors, and shareholders of a finance company. Personal financial problems, hidden criminal histories, and state regulatory enforcement actions with respect to these individuals will likely delay and/or jeopardize your company’s license approval. It is a good idea to perform background checks on key individuals in advance in order to avoid potential problems before they happen. Be especially wary of ambiguous or vague answers to questions concerning criminal and/or civil litigation matters, financial problems, or regulatory enforcement actions concerning key individuals, as these personal histories will come to light during the investigation phase of the license approval process.

CERTIFIED PUBLIC ACCOUNTS

Many states require CPA-audited or reviewed financial statements as part of the license application process. While this is true more often for lenders than for brokers, it makes good business sense to have an accounting firm in the picture right from the start given the many complex and unique accounting and tax issues affecting finance companies. Make sure your CPA has experience representing finance companies – you don’t want to pay for their learning curve in finance industry accounting. Also, it is a good idea to determine in advance if your accounting firm performs audits – not all CPA’s do this. Do your homework up front so that you can avoid having to pay a second accounting firm to get familiarized with your company’s financial situation. Finally, if you need to get your financials audited, it may make sense to do this as soon as possible after your company is formed. Having an initial audit performed after five years of operations may be an expensive undertaking given the large amount of accounting history that will need to be reviewed. In some instances it may even make sense for you to create a new company, with a clean financial slate, in order to obtain an express audit at low cost.

COMPANY NAME

Choosing the right company name is probably one of the most important steps for any company looking to expand beyond its home state. It is extremely important to choose a UNIQUE corporate name. A common strategic problem in licensing is caused by the fact that many finance companies have very similar names. Many companies are dismayed when they learn that they are prohibited from using their own company name in other states because some other clever finance company has already registered that same name, or a “confusingly similar name”. When this happens, a company will have to adopt an assumed name for use in that state, and possibly other assumed names in other states. So much for uniform national advertising, uniform loan docs, and that neat Dot-Com website. Since lending must be conducted under the name listed on a license, a different website and different advertising campaigns may be required for each licensed name. As can be seen, detailed pre-licensing company name planning is an absolute necessity for companies that intend on becoming licensed in multiple states.

PROTECTING INTELLECTUAL PROPERTY

Every finance company, whether operating in one state or in many states, has intellectual property which should be protected. Examples of intellectual property include: trademarks, servicemarks and copyrights for your company name, slogans, advertising materials, logos and website. If your company utilizes a unique process in some aspect of the lending business, it may even be patentable. A patent lawyer, working in conjunction with your licensing and business lawyers, can be invaluable in protecting your intellectual property rights on a nationwide basis through federal trademark and copyright registrations.

INTERNET ADVERTISING LANDMINES

When advertising on the Internet, it is imperative that a finance company disclose the states in which it is licensed to do business, and to further inform borrowers that the company is only author­ized to conduct business in those states. Finance companies failing to provide this type of disclosure are, in essence, representing to borrowers that they are, in fact, licensed to conduct lending in every state. Surprisingly, many finance companies falsely believe that it is permissible to advertise and solicit potential borrowers across state lines, take applications, and perform just about every task in the loan origination process just short of closing -- without a license. They couldn’t be more wrong. Be warned that these unlicensed activities are illegal in almost all states. Penalties for violations of state licensing laws may range from regulatory sanctions such as civil fines and cease and desist orders, to criminal prosecution. Some state regulators actively check finance company websites to determine if they are in compliance with applicable licensing laws. Finally, it should be noted that many state licensing laws set forth requirements relating to advertising disclosures which must be affirmatively made, statements which may not be made, maintenance of advertising records, and regulator pre-approval requirements concerning advertising content.

REGULATORY COMPLIANCE

In addition to federal lending laws, every state has its own unique licensing/lending/brokering/ servicing laws. Every fnance company must be knowledgeable of these laws. In addition, given differences in laws from state to state, it becomes almost essential for a finance company licensed in numerous states to have computerized loan documentation software -- with individual state modules -- to help ensure that loan documents conform to each state’s unique laws. Any finance company not willing to take appropriate steps to ensure compliance with multiple state lending and licensing laws should not do business outside of its home state. It is important to note that, whether or not a license is required for a finance company’s specific activities in any given state, they must still comply with applicable state and federal lending/brokering/servicing laws.

UNDERSTANDING YOUR POTENTIAL

Unfortunately, nationwide finance company status is not possible for all companies. Licensing requirements relating to net worth, financial statements, bonding, industry experience, brick-and-mortar, testing, and education can all create roadblocks to a nationwide lending plan.

Because of the many business, legal, and regulatory issues which are involved in multi-state licensing, it is important for finance companies and their licensing attorneys to work closely together to develop an individualized and coherent licensing strategy that makes good business sense given the companies' circumstances and goals, while providing maximum return on investment.

© 2000-2008 Vestevich & Associates, P.C.

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William P. Vestevich, Esq. is founder of Vestevich & Associates, P.C., Bloomfield Hills, Mich., a nationwide mortgage and finance licensing law firm. Toll-free: (877) 454-2367.

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