Starting a loan company for people with bad credit opens a niche of consumers who want credit for various reasons but might not be eligible under traditional lending programs. Bad credit is relative and varies across lenders and across loan industries. For example, it is easier for someone to get a car loan with a FICO score of 480 than to get a mortgage. To open a loan company, you need to define the types of loans you want to offer and obtain the correct licensing for them.
Choose a Niche
While you can establish a broad loan business for personal, auto and home loans, it is wise to establish one niche first. Focus on getting the correct licensing and build a client base as you expand into other areas.
Your niche determines where you start your licensing and compliance education. Personal private loans don't require a license but are limited by state usury laws. Auto loans are regulated by the Consumer Financial Protection Bureau. Mortgages are regulated by the National Mortgage Licensing System.
Find Financing for Your Business
If you plan to lend money, you'll need a fair amount of capital when you start your business. Your business plan should address where you plan to obtain this capital: You'll also need the business plan to attract investors and lenders who can help you and your business get started.
Because you will be lending money to a high-risk group of people, you will need to be able to convince your investors that you will be able to recoup your loans. Review case studies of other lenders and learn what they did to collect payments and remain profitable. Establish effective methods as policy, document these policies in your business plan and assure potential lenders and investors that you are prepared to do due diligence on potential customers.
Register the Business
Lending is a highly regulated industry. Start off by properly registering your business with the state. Your business entity, whether a limited liability company or a corporation, is registered with the secretary of state.
Pay the registration fees, which vary from state to state, and then get a tax identification number from the IRS website using Form SS-4. These two are basic items in registering any business legally and are necessary for licensing, local permits, establishing bank accounts and attaining business credit.
Obtain the Correct Licensing
The National Mortgage Licensing System is the licensing and regulatory body for all mortgage lenders. It doesn't matter if you provide loans to people with perfect credit or poor credit. Complete all prelicensing classes and take the NMLS exam. After you pass the exam, you are able to write loans. As a business, complete Form MU1 on the NMLS website to establish your business as a lender.
Anyone in the mortgage industry, business and personal, must meet all background and credit verifications. Fingerprinting is required as well. If you plan to do more than just broker loans out, you need to become a Mortgage Loan Originator in your state. Follow the checklist provided by the NMLS for your area.
Understanding Regulatory Bodies
The primary programs that mortgage lenders offer to those with bad credit include the federally insured loan programs such as Federal Housing Administration loans with cutoffs of FICO 500. You can also provide subprime loans that have higher risk and higher interest rates for those with a FICO score below 500.
The Consumer Financial Protection Bureau maintains the examination for auto loans and leasing programs. Auto financing companies can broker loans for banks and credit unions or provide financing independently. Gap insurance and extended warranties are other items that can be added to loans during financing.
This is not a typical test the lender goes through, rather it is a review of underwriting, disclosure and advertising guidelines and procedures. The CFPB reviews deal and originator contracts and back-end systems, ensuring privacy and fair lending practices.
Research Usary Laws
Usury limits for private lending vary from state to state with some states limiting the number of loans and the total allowable interest rate. For example, Arizona cannot charge more than 10 percent, while Delaware is limited to five percent above the Federal Discount Rate.
Establish Your Lending Guidelines and Financing
Starting your own loan company doesn't necessarily mean you need to have all the money yourself. Establish relationships with banks, credit unions, car dealers and investors. Having more than one area to shop a bad credit loan helps you find the right product for a client.
After you have your financing in place, establish your lending guidelines. For example, if you are lending for FHA loans, the guidelines should adhere to the FHA rules. If you are providing bad credit auto loans, establish your parameters for FICO score, debt and income requirements, and thresholds that adjust rates and origination costs. Write all guidelines out to ensure you are treating every applicant fairly.
Good Business Practices
Regardless of the type of loans you offer, any advertising and loan terms must meet rules and regulations. Protect your clients' personal and private data. Allow the underwriting – not personal relationships – to make lending determinations to avoid discriminatory practices.
Read and understand the basics of the Fair Credit Reporting Act, Truth in Lending Act, Equal Credit Opportunity Act and the Risk-Based Pricing Rule. Following these rules and regulations helps keep you in line with all regulatory needs.
