When Starting a Mortgage Broker Business…Hope is Not a Strategy!

I have been receiving many inquiries about what it takes to start a mortgage broker business and how to get started.  I recently spoke to a gentleman who thought he wanted to start his own business, but after our lengthy conversation, he came to the conclusion “I just want to originate.”  How much time and money did a conversation possibly save him?

In 1994, I became an originator.  I was being recruited by a local mortgage company that was an accounting client of mine. At lunch I had two glasses of wine!  So…I said “YES!”  After 6 months working there, I was recruited for a wholesale position at World Mortgage, where in my first year I was promoted to District Loan Origination Manager (DLOM), where I managed the CT office.

After three years at World, (which by the way was the absolute best company I have ever worked for), my husband and I started our mortgage broker business.  It was a little scary starting from scratch and giving up the lucrative compensation plan I had a World.  Within 6 years, we grew to have three offices,24 originators, 5 processors, two managers and an underwriter.  We funded over $1 billion dollars in loans; life was good!

At that time our average loan amount was about $195,000. It was a different time economically; loan amounts and real estate values were nowhere near the astronomical levels of today and we faced different challenges.  Computers, cell phones, the internet, social media and other conveniences we now have were non-existent.  Everything was done manually.  One of the first big tech changes I remember was when we could lock a loan by faxing over a form.  That was after we read a raw rate sheet and had to make all the adjustments for risk (LTV, credit, property type, occupancy etc) manually and HOPE we didn’t miss anything.  There were no pricing engines or automatic income calculators.  Everything was done manually. Loan files were about 4 inches thick and had to be Federal Expressed to lenders for underwriting.  We actually had to think about what we were doing! No licenses were required, there were no LO Compensation rules or NMLS.  It was basically a free for all.  Anyone could start a broker business and anyone could originate.

Fast forward to 2024: to say the mortgage brokerage business has changed would be the understatement of the century.

You should know, I have no dog in this fight.  I do not have a mortgage broker business any longer, I am not hiring.  If you stay where you are or venture out on your own, my goal is simply to share 30 years of my knowledge; which got me thinking…what does it take in today’s environment to start a mortgage broker business?

I hope this information will provide a whole lot of food for thought for anyone thinking about starting a mortgage company. My only intent is to help prevent you from getting in over your head if it’s really not for you OR to help you figure out what you need to do, if you decide this is truly your goal.  In doing so, as you read you may come to realize why your current employer (sponsor) makes certain business decisions.

You may read this and decide that you want to continue just to work “in” the business, not “on” the business.  When you start a company, your personal production will suffer unless…you have a qualified, reliable assistant or team to handle your volume.

Working “in” the business keeps you originating, working “on” the business has you wearing many hats, some of which may not fit depending on your knowledge, skill sets and general business acumen. Time for a truthful assessment.

Introduction to Mortgage Brokerage

At some point in the career of a mortgage loan originator, the thought of starting a mortgage broker business becomes a consideration.  It usually is born out of frustration with the current employer.  Frustrations about compensation, marketing, product choices, turn-around time for processing and closing and complaints about underwriters can make an originator think they should just do it themselves.

Channels: Mortgage Broker vs. Mortgage Banker vs BANK!

Mortgage brokers (non-depository) are at the bottom of the hierarchy.  They act in the capacity of an intermediary.  They may not legally underwrite, approve or deny, fund or service loans.  In many states, they can only offer “pre-qualifications” (not pre-approvals) since they are not the creditor and not able to approve loans.  They originate, process and submit loan files to lenders they contract with (wholesale lenders) also known as “third-party originators (TPO). Brokers can only broker loans.

Mortgage bankers (non-depository) can originate, process, underwrite, fund and service loans. Mortgage bankers can either “retain servicing” or “sell servicing.”  When bankers “retain servicing” they collect the mortgage payments and disburse the funds on behalf of the borrower.  They pay the property taxes, insurance premiums and interest to investors who purchase the loans.  When they “sell servicing a different company performs those functions.  Because mortgage bankers have the funds for the transaction and they can approve or deny loans, they can offer “pre-approvals.”

Mortgage bankers (also known as correspondent lenders) can lend their own funds or borrow funds borrowed from a warehouse (credit) line.  They can also broker loans to wholesale lenders.

Banks (depository) have the most flexibility.  They can originate, process, underwrite, fund and service loans. They can also sell servicing rights. They can use their own bank deposits to fund mortgage loans or broker loans to wholesale lenders.

Legal Requirements and Licensing

Banks can be nationally, or state chartered to operate, and their mortgage loan originators must be “Registered” with the Nationwide Multistate Licensing System and Registry (NMLS).

Mortgage bankers, mortgage brokers and mortgage loan originators are required to obtain a state license for each state they wish to originate loans in and the state requirements can vary widely.  Brokers may have net worth or years of experience requirements. For example, one state may have a $62,000 net worth requirement for a broker and a $25,000 net worth requirement for while some states require a “responsible party” that will oversee the business operations.

All state-licensed companies and individuals must comply with all laws and regulations of the state they are licensed in.  Mortgage loan originators may only originate under the supervision of a “sponsoring” entity.

In addition to initial licensing requirements, company licenses must be renewed annually and must continue to meet the requirements of initial licensing.

All sponsoring companies are responsible for the behavior of all employees. 

Setting up the Business: Structure and Planning

Business structure determines how the business is legally set up.

LLC stands for Limited Liability Company, which is a non-incorporated business structure that combines aspects of both corporations and partnerships. LLCs offer several benefits, including:

• Personal liability protection: LLCs protect members from personal liability. Personal assets are not at risk if the LLC is sued or goes bankrupt.
• Pass-through taxation: LLC profits and losses are passed through to members’ personal tax returns, so they are not subject to corporate taxes.
• Flexibility: LLCs can be structured to meet the specific needs of their investors.

LLCs are created by state statute and must be registered with the relevant state entity. The LLC’s structure and management is outlined in an operating agreement.

The IRS may treat an LLC as a corporation, partnership, or as part of the owner’s tax return, depending on the LLC’s elections and the number of members. For example, a domestic LLC with at least two members is usually classified as a partnership for federal income tax purposes.

For example, an individual may be the only employee of the company, may form a Limited Liability Company (LLC) and report their mortgage business income on Schedule “C” of their personal tax return (IRS Form 1040) and be taxed at the individual tax rate for the filing year.

Tax brackets are based on filing status:

• single,
• married filing jointly or qualifying surviving spouse,
• married filing separately or
• head of household.

One or more individuals starting a business may choose to form a Partnership or a Corporation. 

The revenues and expenses which create income or a loss for the Partnership are reported on IRS Form “1065.”  Since there is no “partnership” tax rate, partnership income or losses are moved from the business on IRS Form K-1 to the partners and is then taxed at the individual tax rate for the filing year.

The revenues and expenses which create either income or a loss for a “C” Corporation is reported on IRS Form “1120.” “C” Corporation income is taxed at the US Corporation tax rate for the filing year.

If owners of a “C” Corporation do not feel the corporate tax rate is advantageous based on their business revenue and expenses, they can request to Elect “S” status, which then moves the income from the corporation to the individual owners via IRS Form K-1 and is taxed at the individual rate.  The income or loss for an “S” Corporation is reported on IRS Form “1120 S.”

The choice of business structure considers the tax rate that will apply to the income.  

In 2015, the federal corporate tax rates were tiered:

• 15% on income up to $50,000
• 25% on income between $50,001 and $75,000
• 34% on income between $75,001 and $10 million
• 35% on income over $10 million

The Tax Cuts and Jobs Act (TCJA) of 2017 simplified the corporate tax rate to a flat 21% beginning in 2018. When corporate tax rates are reduced, it’s a signal the government supports businesses to keep employment stable.

For example, if a business is set up as a “C” Corporation and the income was left in the business (not distributed) and taxed at the corporate rate of 21%, the investors may pay less taxes than if the income was distributed to the investors and taxes at a higher individual rate. It all needs analysis.

The corporate tax rate applies to the taxable net income of “C” Corporations. Businesses may also be subject to state corporate taxes, which vary by state.

For this reason, business owners should consult with a business attorney, a CPA and a mortgage compliance attorney/firm before jumping into a business. When more than one person owns a company, philosophical differences, differences in business purpose, mission, expectations for profits and income, how to manage employees and other issues can create conflict which can disrupt the business and end to a termination. How would these conflicts be resolved without totally disrupting the business?

In addition to business structure and tax considerations there are other areas business owners need to decide upon.

Below is just a brief list of other considerations often not discussed when a company is being set up.

• Office Setup and Operations
  • Rent or buy office space
  • Employees work remotely or on premises
  • Managing the office – hours, staff, customers
  • Managing office expenses
• Marketing and Client Acquisition
  • Does the company or originators pay for marketing
  • Who approves marketing and advertising
  • Who maintains compliance for ads and social media
• Mortgage Products
  • What products will be offered
  • What products will not be offered
  • Who will train originators to mitigate potential violations
• Lender Relationships
  • What wholesale lenders is the mortgage broker signed up with
  • What investors and lenders are buying loans from mortgage lenders
  • Do lenders offer competitive rates, costs and services
• Loan Process and Compliance
  • What processes and policies dictate how the company operates
  • What software systems are used
  • Who manages the security and compliance of business operations
  • Is there a “Designated Compliance Officer” (required by Bank Secrecy Act/Anti Money Laundering
• Financial Management and Accounting
  • How are owners compensated
  • Who keeps the books
  • Who submits Mortgage Call Reports
  • Who manages the revenue and expenses to remain profitable
  • Who files licensing applications, renewals, tax returns, payroll
• Client Relationship Management (CRM)
  • Who owns the customer
  • What system is used and who has access to data
  • Who protects the customer data
  • What cybersecurity protections are in place
• Continuing Education and Staying Current
  • Who provides on-going training
  • What systems are in place to ensure regulatory compliance
  • Who monitors employees for meeting CE and other mandatory education requirements
• Risk Management and Ethics
  • What does the company do to ensure honest and ethical conduct from ALL employees
  • How does the company protect itself from legal, regulatory or reputational damage
  • What message comes from the top down
  • What happens if a catastrophic event occurs
• Scaling and Growing the Business
  • Stay small or grow
  • Recruiting policies and practices
  • Affiliated businesses (real estate, insurance, title)
  • Vetting new employees to match ethics and culture
  • Hiring and human resources
  • One office or branches
  • How to build value
• Exit Strategy
  • When to retire
  • When to sell and how to value the business
  • Close the business
  • When to notify employees
  • How to notify employees

In addition to these considerations, setting up a mortgage company can require a significant amount of capital.

So, before you jump into it, I ask you to consider that your current employer must deal with all of the above and more.  When you think they are taking a portion of your income, think about what they are paying for.  Think about what liability they may have just for employing you. Consider that MLOs rely on their sponsors to operate, making the relationship much more than just a place to “hang a license.” It’s a commitment to an employer that offers stability and the potential for a long-term career, ideally leading to retirement if the company remains profitable. This partnership alleviates concerns, allowing you to focus on your career growth.

Having said that, having your own company can be very rewarding.  You create your vision, make your own decisions and if the business is set up properly for success, you won’t have to worry about being terminated or about your company closing when things get tough!

It’s up to you…do you have what it takes? We will be offering an online course for anyone who wants to pursue their own mortgage broker business.

If you’re interested, email me at deb@cloes.online and tell me a little about yourself and your goals or call me at 866-256-3766.

I can’t help everyone, but I would love to have a conversation with you.

#cloes.online #mortgagebroker #mortgagecompany #loanoriginator #originator #broker #NMLS #killiancanhelp