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Is it Crazy to Start a Net Branch Business in 2010?

Some may say Yes and some may say No. Becoming a Mortgage Net Branch Partner serves a useful purpose in society by assisting consumers with obtaining a mortgage loan to purchase a new home or to achieve some other financial goal. Becoming a Net Branch also provides you with a vehicle to enter the mortgage business more quickly without waiting for your own company's mortgage broker licenses. It is a good temporary stepping stone to becoming your own independent mortgage entity.

What is the Definition of a Mortgage Net Branch?

A mortgage net branch is typically a division of a large lender company that hires loan professionals to originate loans on a high volume level at a branch location. This relationship is often referred to as a "net" branch because in most cases, the branch operator is provided the "net profits" of the branch. This means that the branch originates loans and receives the entire income from such loans less the lender's corporation's administrative fees.

Which Net Branch Companies are still in business?

We bave found that many of the net branch providers have closed their doors but several are still out there. There are still some companies out there that are signing up new net branch partners, and some are even offering FHA net branches but read my comments below about FHA restrictions on net branching.

What are the benefits of becoming a net branch?

The branch operator can manage his own mortgage business without the hassle and expense of the typical operations of a mortgage company. For example, the branch operator, in most cases, does not incur the expenses of mortgage licensing, fidelity bonds and other necessary insurance policies. Rather, the net branch operates under the name of the lender company and uses that company's licensing and investor relations to originate loans.

How much can I earn?

In some cases, the lender company retains a small administrative fee per loan and provides the remainder of all commissions earned to the branch operator. In other cases, commissions are split on a percentage basis with the branch operator receiving 70 to 80% of the commission and the lender company retaining 20 to 30% of the commissions.

Can anyone become a net branch branch operator?

Recently, over the last few years, branching has become more competitive with more lenders entering the branch partnering arena. Typically, any originator who has a minimum of at least one years experience originating mortgage loans can become a branch operator. The level of experience required will vary by the requirements of the lender company.

Who is a good candidate for a mortgage net branch?

The net branch partnership concept works best for a loan originator who has proven that he or she can generate his or her own leads for mortgage loans. However, some companies provide leads and training for the branch operators. A good entrepreneur can be quite successful at operating a branch for a solid lender company.

What are the downsides?

There is a myriad of regulations and licensing statutes facing lender companies that are offering the netbranch concept. In some cases, netbranch partnering may be a violation of the state's licensing laws. Typically, branch licensing violations and lack of supervision of originators are areas where the lender company gets itself in trouble. These risks are primarily on the lender company since the loans are originated or brokered in the name of the lender company.

What questions should I ask?

We recommend that you obtain information from at least five different netbranch partner lender companies. Questions to ask include what kind of split is offered, how soon after the loan funds do I get paid, what are my indemnification requirements (in what cases can I be sued for something that goes wrong with the loan, i.e. where the lender company suffers a loss and wants the branch operator to pay for such loss).

Do any of the states prohibit "net branching"

Some states have strict rules restricting "net branching" arrangements. The main concern of the states is that the net branch operator (the lender) is not just renting out its license to a third party without any supervision of the activities of the branch. These states have specific rule requiring the lender to have controls over each of its branches and concerning any attempt to shift costs and liabilities of hte branch to a third party that is not related to the state's registered licensee (the licensed lender).

For example, consider the following two states as examples of states that have provided guidance on the restrictions posed on net branching in these states:

Massachusetts:

Massachusetts has proposed for comment revisions to its Regulatory Bulletin 5.1-101. These revisions have still not been finalized as of 1-3-07. The revisions if approved will address impermissible "net branching" arrangements.

Arizona:

Arizona Department of Financial Institutions put out a Regulatory Bulletin on February 8, 2006. This bulletin places prohibitions on the "transfer or assignment of your mortgage banker or broker license.

The Bulletin uses very definite examples regarding what types of activities are prohibited in Arizona:

• DON'T transfer or assign your mortgage broker or banker license to "branch managers" or "owners."
• DON'T require branch managers to pay for branch start up costs, including, but not
limited to, the cost of branch office licenses, bank account deposits, background checks, accounting fees, HUD license fees, security deposits, training, payroll fees, and loan software fees.
• DON'T require branch managers to sign agreements to pay monthly fees for using your license.
• DON'T fail to assume responsibility and liability for branch office leases that are rightfully your responsibility. You or your designated officers should sign rent and equipment leases, not branch managers.
• DON'T fail to assume the responsibility and liability for branch office equipment leases that are rightfully your responsibility. Branch managers should not sign these leases.
• DON'T fail to assume the responsibility and liability for utilities, office supplies and equipment, appraisals, alarm equipment, and any other bills incurred by branches. Bills, utilities, and invoices should be in licensee's name.
• DON'T inform the Better Business Bureau that your branches are independent.
• DON'T fail to account for all branch income and expenses on tax returns and on financial statements.
• DON'T fail to maintain physical access to your branches at all times.
• DON'T fail to maintain control over the payment of your branch expenses.
• DON'T fail to maintain a uniform settlement service fee structure among all of your branch offices. Borrowers should be able to pay the same fees at any office. You should not allow branch managers to set their own fee structure.
• DON'T pay W-2 income to companies owned by branch managers in an attempt to evade taxes.
• DON'T fail to employ practices and procedures consistent with all HUD guidelines.
• DON'T fail to maintain control over branch bank accounts or allow branch managers to write payroll checks and reimburse themselves for expenses.

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US Department of Housing and Urban Development

Position on Net Branching

For more information, please access www.hudclips.org and click on "Access HUD Letters and Notices from past years" to read, among other things, Mortgagee Letter 00-15, which addresses "Prohibited Branch Arrangements."

As part of on-site mortgagee monitoring reviews, the Department has obtained "employment" agreements executed by HUD/FHA approved mortgagees and their "net branches." A number of the provisions in these agreements violate Departmental branch requirements. For example, there are provisions that:

• require al contractual relationships with vendors such as leases, telephones, utilities, and advertising to be in the name of the "employee" (branch) and not in the name of the HUD/FHA approved mortgagee.
• require the "employee" (branch) to indemnify the HUD/FHA approved mortgagee if it incurs damages from any apparent, express, or implied agency representation by or through the "employee's" (branch's) actions.
• require the "employee" (branch) to issue a personal check to cover operating expenses if funds are not available from an operating account.

These provisions violate Paragraphs 1-2, 2-13, 2-17, and 3-2B of the Mortgagee Approval Handbook 4060.1 Rev-1. Taken as a whole, such provisions seem designed to maintain a clear separation between the HUD/FHA approved mortgagees and their so- called "branches," which is inconsistent with the close supervisory control over all employees mandated by the handbook.

The Department believes that the origination of insured mortgages by lenders that have not received HUD/FHA approval increases the risk to the FHA insurance funds and to the public. Accordingly, mortgagees found to be in violation may be subject to the full range of HUD sanctions.

Remember that these state restrictions are more the Lender's problem than your problem as a Net Branch. We did however want you to be aware of some of these rules and to know that these state restrictions are out there but vary by state.

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What kind of terms might I see from companies that offer net branching?

Here's some sample terms that do apply at one company:

• Flat $495.00 fee
• Broker and Banker (you can bank option arms, 40 year terms available)
• Licensed in many key states including AZ, AK, CA, CO, FL, HI, NV, TX, UT and WA. With 4-5 state to follow in next 3 months
• 24 hour pay-out on commissions - GUARANTEED!
• Access to wholesale lenders with every program available!
• 1099 commission pay-out for most states.
• Work from home or commercial office.
• No minimum volume requirement!
• The best customer service available -direct access to the principal management team.

The above might features might help you add questions to your list when interviewing with a branch partner lender. You want to be able to spend your time originating and closing loans with an easy to work with lender where you are timely paid for closed loans and who has the best loan programs. You should ask a lot of questions before you choose any one lender to work with.

Where can I find more information?

Check your mortgage industry newspapers or magazines for more information and advertisements for branch partnering. Another good resource paid by advertisers is www.mortgagemag.com which has a net branch section of the website. This website allows the user to register yourself as a candidate to join a lender company. There are also several companies listed who offer branch opportunities.

The Getting Started in The Mortgage Business - Licensing and Entity Setup Guide

You have that burning desire to start that new business BUT you just don’t know where to begin. You’ve heard about all the dollars being made in the mortgage loan business but you’re unsure of exactly what steps to take to be successful. Let us help you. Our team has more than twenty years experience with making and brokering mortgage loans in all fifty states across the nation.

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How Do I Get Started?

Get started right now by Ordering the Getting Started in the Mortgage Business - Mortgage Licensing and Entity Startup Guide. For more information, please contact our Information Desk for assistance.

Sincerely, KJ Block, Mortgage Professional and www.www-becomeamortgagebroker.com

KJ Block is a mortgage professional and attorney at law who has extensive experience in counseling companies in the consumer lending industry regarding compliance with state and federal licensing and consumer protection laws. In recent years, Mr. Block has prepared Training Guides to help lending companies manage the risks involved with traditional, internet, and e-commerce marketing of its financial products.

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