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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