The Out-of-State Lender and Arkansas Licensing
You are a compliance analyst for an online mortgage lender based in Texas. The company wants to expand its operations to Arkansas. It plans to offer mortgage loans to Arkansas residents through its website and telemarketing. The company has no physical presence in Arkansas. It has a Texas mortgage lender license and is licensed in several other states. The company's CEO believes that because it is an online lender and all loan processing occurs in Texas, it does not need an Arkansas license. The company has already received applications from 10 Arkansas residents and has closed 3 loans. The Arkansas Securities Department has not contacted the company. The company's legal counsel is unsure about the licensing requirements and has asked you to research. What do you advise?
1. Does the company need an Arkansas mortgage lender license? Explain your reasoning based on Arkansas law and federal law.
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Yes, the company likely needs an Arkansas mortgage lender license. Under the Arkansas Mortgage Loan Company Act (Ark. Code Ann. § 23-39-501 et seq.), any person or entity that engages in the business of making mortgage loans secured by real property in Arkansas must be licensed by the Arkansas Securities Department. The Act defines 'mortgage loan company' broadly to include entities that originate, sell, or service mortgage loans. There is no exception for out-of-state lenders or online transactions. The company is conducting business in Arkansas by soliciting and accepting applications from Arkansas residents and securing loans with Arkansas property. The fact that processing occurs in Texas does not exempt it. Furthermore, the federal SAFE Act requires mortgage loan originators to be licensed in the states where they conduct business. The company's MLOs would need Arkansas licenses. The company's Texas license does not provide reciprocity. Therefore, the company is operating without a license, which is a violation of Arkansas law and could result in fines, cease-and-desist orders, and civil penalties.
2. What are the potential consequences of the company's unlicensed activity, and what steps should it take to remedy the situation?
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Potential consequences:
- Regulatory enforcement: The Arkansas Securities Department can issue a cease-and-desist order, impose fines (up to $10,000 per violation under Ark. Code Ann. § 23-39-514), and require restitution to borrowers.
- Civil liability: Borrowers may have legal claims, and the company may be unable to enforce the loans or may face lawsuits.
- Criminal penalties: Willful unlicensed activity can be a misdemeanor.
- Reputational damage: Loss of trust and difficulty obtaining future licenses.
- Federal issues: The company may also be in violation of the SAFE Act if its MLOs are not licensed in Arkansas.
Remedy steps:
- Immediately cease soliciting Arkansas residents until licensed.
- Apply for an Arkansas mortgage lender license through the NMLS. The company must meet net worth, surety bond, and other requirements.
- Ensure MLOs obtain Arkansas licenses through the NMLS, including passing the Arkansas-specific test component.
- Self-report to the Arkansas Securities Department and cooperate fully. Voluntary disclosure may mitigate penalties.
- Review and remediate existing loans: Work with legal counsel to determine if loans can be cured or if borrowers need to be compensated.
- Implement compliance controls to prevent future unlicensed activity, including a licensing matrix for all states.
The CEO's belief is incorrect and risky. The company should not rely on assumptions; it must verify licensing requirements in every state where it does business.