Those looking to start an installment loan, payday loan or mortgage company can earn favorable returns. However, would-be lenders must observe specific government regulations and lending standards if they’re going to succeed over the long run. These laws are in place to protect the public interest, while making it easier to regulate the industry.
File State Application
Most states have specific applications for lending institutions that include background checks and personal history statements. Founders may be required to submit their personal financial statements and answer questionnaires regarding their professional backgrounds. Those with a criminal background may be excluded from starting a loan company, and the nature of past offenses plays a major role in the decision-making process. All of this information is designed to help the state protect the integrity of the lending industry.
Create Accounts & Deposit Funds
Lending institutions need capital to provide consumers loans, making it necessary to deposit funds into a designated bank account at the beginning of operations. Capital can come from crowd-funding sites, angel investors, private equity firms and other sources of capital investment. Depositing funds can only be done after a business has received its state and city licenses. This is because banks require business licenses, fictitious name statements and other entity-specific documentation to open a checking or savings account. Banks normally require the signatures of company owners or those that will be authorized to draw on the accounts.
Develop Lending Criteria
Lending standards are a critical component to the success of loan companies, and there are a number of factors that must be considered before consumers are approved for financing. Income, FICO scores and the debt-to-income ratio are among the variables that can be used as lending criteria. Most lenders check borrowers' credit reports with reputable credit agencies before offering them financing. The terms offered are based on how risky consumers are considered to be. Interest rates are benchmarked against other companies in the lending industry and are influenced by market conditions and a company's desired rate of return. New lending companies often offer low interest rates to grow their clientele quickly.
Draw Up Contracts
Would-be lenders also need to meet with a lawyer to develop contracts and truth-in-lending documents to offer to customers. The types of documents needed depend on the financial instruments being offered to the public. Having contracts in place is key to getting a loan business off the ground, but it's also important for borrowers to provide information, such as copies of W-2s and pay stubs, that can be kept with lenders' customer files. Otherwise, lenders may run afoul of the law and face penalties or fines from government agencies.