Most state mortgage finance, consumer credit, collection agency, sale finance, and money service business licensing laws have a provision that dictates what needs to be done or what needs to be filed in connection with the change in control of a licensee, such as when a licensed entity is going to be acquired by a new owner, when an investor looks to acquire a licensed entity, or when the ownership of a licensee is restructured. All too often the state filing obligations that arise in connection with the change in control of a licensee are not considered until the purchaser and seller are well on their way to the closing, or until the restructuring of the existing ownership is nearly completed. If the parties are too far along in the acquisition or the restructuring, it may be too late to meet the timing considerations built into a state’s change in control provisions. Under most state mortgage finance licensing laws, there are significant consequences if the statute’s change in control filing obligations have not been followed in deciding how to go forward with the acquisition of a licensee or the restructuring of the existing ownership of a licensee. The state filing and approval processes for the acquisition of a licensed entity, or its restructuring, can be intensive and overwhelming if the parties are not prepared for the task at hand - making the applicable the state filings in a timely manner. State statutes generally provide penalties, including fines or a prohibition on licensed activities, for failure to obtain state approval of the change in control of a licensed entity. So, don’t short- change, state change in control filings. Many state licensing laws are not clear on the filing obligations for a change in control of a licensee, and the Nationwide Mortgage Licensing System and Registry (the “NMLSR”) does not provide sufficient guidance. To make the task less daunting, below is an overview of the change in control process for the mortgage finance licensing laws1 that will shed some light to guide you through the darkness.
I. STATE CHANGE IN CONTROL FILING OBLIGATIONS TAKE ONE OF THREE FORMS
The mortgage finance licensing laws of each state and the District of Columbia (herein the “states”) have certain provisions that dictate the change in control filing obligations. Fifty-one different forms of state change in control filing obligations, however, do not exist. The state mortgage finance change in control filing obligations fall into one of three categories, as the filing obligation is either one that requires: (i) prior approval, (ii) relicensing, or (iii) only notice. The mortgage financing licensing statutes that have a prior approval filing obligation require the licensee or the acquiring entity to obtain the state’s approval before the acquisition of the licensee is completed. A few states require the licensee to be re-licensed in connection with the change of ownership, but in those states, to date, the licensee is permitted to continue with its licensable mortgage finance activities while its application for a new license is being processed. The notice filing obligation, as aptly named, is only a written explanation of the change in the ownership of the licensee. Depending on the state, the timing of this notice filing obligation may be either pre-closing or post-closing. There are a few states where the mortgage finance licensing laws do not require any filing for the change in control of a licensee, but these requirements may be amended, as state mortgage finance licensing laws are becoming more stringent.
II. RESTRUCTURING THE LICENSEE’S OWNERSHIP MAY RAISE CHANGE IN CONTROL FILING OBLIGATIONS
The acquisition of the direct or indirect ownership of a licensee by a third party investor is not the only change that requires change in control filings. In many states, restructuring the existing ownership may trigger change in control filing obligations. For example, if the indirect ownership of a licensee is changed by adding a newly created holding company between the licensee and the existing senior indirect owner of the licensee, change in control filings may be required. In addition, transferring ownership of the licensee to another company in the same family of companies, owned by the same senior owner that indirectly owns the licensee, may also trigger change in control filings. However, the filings may differ for restructuring the licensee’s ownership, as compared to those required for a third party acquisition of the licensee.
III. THE FIRST STEP FOR STATE CHANGE IN CONTROL FILINGS IS AN ADVANCE CHANGE NOTICE FILED IN THE NMLSR, OR A LETTER TO THE APPLICABLE STATES
Regardless of whether a state requires prior approval, relicensing, or a pre-closing or post-closing notice filing of the change in control of a licensee, the process begins with the timely filing to state regulators. For licenses held through the NMLSR, such a notice is provided through the filing of an Advance Change Notice (“ACN”) in the NMLSR. The ACN is a narrative statement that explains the facts surrounding the acquisition of a licensee or proposed restructuring of the licensee’s ownership. Pursuant to the ACN filing in the NMLSR, the licensee’s NMLSR Account Record is updated “automatically” to take effect on the date the ownership changes. If a license is not held through the NMLSR, a letter will need to be sent to the applicable state regulator advising of the change in the ownership of the licensee. The information that must be conveyed to state regulators is largely the same as the information set forth in the ACN. Further, it also is important to articulate in the ACN filing or the letter to the state regulator certain key information about the licensee that is not changing.
The purpose of filing of the ACN or letter is to: (i) alert the prior approval states of the change in ownership of the licensee, and that other filings will be forthcoming, (ii) provide the relicensing state(s) with sufficient information about the acquisition or the restructuring to determine if the entity must be re-licensed, and (iii) satisfy the notice filing obligation for those states that only require notice as the change in control filing. The ACN filing also updates the licensee’s NMLSR Account Record for the states that do not require any filing regarding the new or restructured ownership, and may provide sufficient information to forgo further inquiry by the regulators in these states. In the event a transaction does not close, or move forward as planned, a revised ACN should be uploaded in the NMLSR, or an updated letter should be sent to state regulators as soon as possible to appropriately advise them of the “busted deal” or that the transaction has changed.
IV. RECOGNIZE THE TIMING CONSIDERATION FOR CHANGE IN CONTROL FILINGS
Except for a few states, an ACN filing in the NMLSR or a letter to state regulators 60 days in advance of the closing of the acquisition or the restructuring of a licensee, will meet the timing requirement for a change in control the filing. In some states, however, the ACN must be filed more than 60 days in advance of the closing, with New York requiring the ACN filing for a mortgage banker licensee or mortgage broker or servicer registrant 90 days in advance. The NMLSR provides a guide for the timing of the ACN filing, but to assure compliance with the specific timing requirements, and because the ACN is received by state on the NMLSR at the same time, a licensee should comply with the timing requirement of the state with the longest lead time. From our experience, state regulators will not take issue with a licensee if the ACN or letter is filed earlier than required, but some states could fine or cause the closing to be delayed if the filing is not timely.
V. STATE CHANGE IN CONTROL FILING OBLIGATIONS ARE DISTINGUISED BY THE PERCENTAGE OF THE ACQUISITION
Obviously, if 100 % of the ownership of a licensee is being acquired, the obligation to make a change in control filing in each state will arise. However, this obligation may vary if less than 100 % of the ownership of a licensee is being acquired. A few states do not require a change in control filing unless the percentage of ownership being acquired is at least 50%, whereas, the threshold in many states is a change in 25% or more, or as little as 10% or more, of the change in the ownership of as licensee. In any case, it is imperative to review the state law to determine when a change in control filing obligation arises based on the percentage of ownership in a licensee being acquired, and note this information in a spreadsheet or chart covering the state change in control filings.
VI. STATE CHANGE IN CONTROL FILINGS ARE ALSO DISTINGUISHED ON THE BASIS OF A DIRECT OR INDIRECT ACQUISITION OF THE LICENSEE
If the direct ownership of a licensee is being acquired, a change in control filing obligation will arise based on the percentage of ownership of the licensee being acquired. If the ownership of a licensee is being acquired by the direct acquisition of the parent company of the license, a change in control filing obligation may not arise because it is an indirect acquisition of a licensee. Such distinctions in the change in control filing requirements for a direct or indirect acquisition of a licensee, may not be apparent from the state licensing law, and may necessitate an inquiry of state regulators, which should be noted in the spreadsheet or chart covering the state change in control filings.
VII. DETERMINE IF THERE ARE ANY EXEMPTIONS FROM THE STATE CHANGE IN CONTROL FILING OBLIGATIONS
Under the mortgage finance licensing laws of some states, there are exemptions from the change in control filing requirement. For example, in Virginia, one of the more difficult states for obtaining regulatory approval of the change in control of a licensee, the prior approval change in control filing obligations “shall not apply to (i) the acquisition of an interest in a licensee directly or indirectly including an acquisition by merger or consolidation by or with another licensee or a person exempt from the [Virginia Mortgage Lenders Act], [or] (ii) the acquisition of an interest in a licensee directly or indirectly including an acquisition by merger or consolidation by or with a person affiliated through common ownership with the licensee. Under the “Virginia Mortgage Lenders Act,” if these or another exemption applies, the prior approval filing obligation for the change in control of a licensee becomes a simple notice filing. Review the change in control filing obligations of the laws under which a license is held to determine if here are any applicable exemptions.
VIII. DETERMINE IF THE LICENSED ENTITY WILL BECOME EXEMPT FROM LICENSING UPON ACQUISITION
A number of states still provide an exemption from the mortgage financing licensing statute for a subsidiary of a national or state bank or a saving and loan association. If such a chartered bank or saving and loan association acquires a licensed entity, the licensee would go from being state licensed to being exempt from licensing under certain state laws. A change in control filing may still be needed, but because the state licensed entity would become exempt from licensing, the form of that filing obligation may change, and the license would be surrendered once the transaction was completed.
IX. A NON-LICENSEE CANNOT SUCCEED TO THE LICENSE HELD BY A STATE-LICENSED COMPANY
It is a common misconception that a non-licensee can acquire a state license mortgage lender, have the licensee merge into and with the non-licensee, and then have the non-licensee emerge from the merger as the holder of the license. As a general rule, state mortgage finance licenses cannot be transferred or assigned to non-licensees. This is a common provision found under many state mortgage finance licensing laws. If a licensee merges into a non-licensed entity, the license typically expires or is no longer in effect.
X. PREPARE A CHART OR SPREADSHEET THAT SETS OUT EACH STATE’S CHANGE IN CONTROL FILING OBLIGATION
Although the state change in control filing obligations take one of three forms, each state is different. Certain states require similar documents, while some states may require the filing of unique documents, all in accordance with that state’s specific timing requirement. Thus, managing the preparation and delivery of the necessary documents to each state takes some degree of coordination. Moreover, tracking the filing dates enable the parties to be better prepared to manage the expectations of state regulators. We have found that preparing a chart or a spreadsheet that includes the relevant change in control information per state, enables the parties to better track the documents required, assemble outstanding information, record each notice filing, date the approvals obtained, and accurately reply to regulatory or transaction related questions.
We trust this Client Alert provides valued guidance for the mortgage finance licensee that may be acquired or for investors looking to acquire state-licensed mortgage lenders, brokers or servicers. This guidance highlights many of the typical issues that may arise in the state change in control filing process to help you make the appropriate state filings and obtain the necessary state approvals. Should you need any further guidance in any state, we welcome the opportunity to assist you.
1 Other state licensing laws have their own state change in control filing obligations. These filings generally are consistent with the filings that need to be made under the mortgage finance statutes, but there may be certain unique requirements depending on the state licensing statute involved. We encourage you to examine the change in control filing obligation of the statute under which a license is held.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
[View source.]
