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Legal Update

Lessons Learned From Change in Control Filings

19 January 2017
Mayer Brown Legal Update

When licensed consumer financial service firms are undergoing a change in ownership, they typically must submit change in control filings to the state agencies that issued their licenses. Failure to comply with the requirements could delay the closing of a transaction or result in fines and penalties. Since 2008, licensed mortgage finance companies have made such filings largely though the Nationwide Mortgage Licensing System (“NMLS”). As states continue to transition more of their financial service licenses to the NMLS, money transmitters, collection agencies, sales finance companies, and consumer and commercial finance licensees will increasingly need to know how to meet their change in control obligations.

In assisting clients with these change in control filings, we have learned a number of lessons over the past 25 years that may serve you well. Our 10 tips below should help all businesses licensed through the NMLS navigate between the NMLS and the state laws under which they are licensed.

  1. NMLS and State Filings Are Required. In any change in control transaction, a licensee may need to satisfy two sets of filing obligations: (i) the NMLS filing requirements for entities licensed through the NMLS and (ii) the statutory change in control requirements of each state law under which the entities are licensed. Do not be surprised if the two are not consistent. The underlying state law determines when a change in control filing is triggered and the type of filing that will need to be made.
  2. Multiple Changes Can Be Filed Together. If a licensee is contemplating a change in ownership and a change in the form of its legal organization, both can be undertaken to take effect on the same date. Although undertaking such state filings together may be more cumbersome than making two separate filings, doing both together may take less time overall, reduce expenses and save staff resources.
  3. An ACN Starts the Process. The filing of an Advance Change Notice (“ACN”) through the NMLS starts state regulatory review of a licensee’s change in control or change in the form of legal organization. With many states, the filing of the ACN satisfies the statutory requirement to provide notice to state regulators of the acquisition of a licensee, without the need to send a separate letter to each state in which the entity is licensed. Be mindful of the timing requirements for filing an ACN in advance of the expected date of closing of the acquisition transaction or for effecting the change in the form of legal organization. In any event, as the ACN is filed in the NMLS and therefore submitted at the same time to each state in which the entity is licensed, licensees must adhere to the longest notification period required by the state regulators for each type of license held. Although the ACN filing starts the review process, the ACN provides scant information to state regulators. A carefully crafted narrative statement that anticipates the regulatory questions that may arise, supplemented by limited organization charts, can provide guidance to state regulators and expedite processing. Regulators in some states require the licensee to submit additional documentation, which may be either uploaded in the NMLS, emailed, or sent by overnight delivery services.
  4. There Are Four Categories of Filings. State change in control filings for a mortgage finance licensee fall into one of four categories: (i) Prior Approval, where state regulators must approve the acquisition of a licensee before the closing of the transaction; (ii) Relicensing, where the licensee must file for and obtain a new license under the new ownership; (iii) Prior Notice, where the licensee must notify state regulators of its acquisition a certain minimum number of days in advance of the closing of the transaction; and (iv) Notice, where mere notice of the change in control must be provided within a specific timeframe after the closing of the transaction.
  5. Approval Is Not Always Required. Despite what is set forth in the NMLS, the acquisition of a licensee before the closing of the transaction does not need to be approved by each state. Giving notice sufficiently in advance of the closing will satisfy the statutory change in control filing obligations in many states. Although state regulators may not need to approve the acquisition of a licensee if only notice is required, state regulators may still seek information on the new owners prior to and after the closing of the transaction. Allow time for state regulators to vet new control persons who would assume their positions with the closing of the acquisition transaction. Monitor the NMLS deficiency items, as well as the ACN section of the NMLS, for any requests from state regulators.
  6. Relicensing Should Not Disrupt a Licensee’s Authority. In some of the states where relicensing of a mortgage finance licensee is required in connection with a change in control, the relicensing takes place on and within the day of closing and may entail the surrender of the existing license and submission of an application for a new license through the NMLS. In a couple of other states where relicensing of a mortgage finance licensee is required, as long as the application for a new license is submitted sufficiently in advance of closing, the licensee may continue to conduct business under its existing license while the application for a new license is processed after closing. Coordination with state regulators is vital to ensure there is no lapse in license authority.
  7. The Acquiring Entity May Be Required to Make the Filing. Some state mortgage finance licensing statutes require the acquiring entity to make the change in control filing, which largely entails filing much of the information required of a de novo license application. Therefore, certain of the officers and/or directors, managers or partners of the acquiring entity will need to be fingerprinted and submit personal disclosures, among other filings, to regulators in certain states. As the acquiring entity is obligated to file an application for the acquisition of a licensee in these states, the acquiring entity could be subject to fines and penalties for closing the acquisition transaction before approval of a state regulator is received.
  8. Direct and Indirect Changes in Ownership Require Filings. Change in control filings are required for both direct and indirect changes in ownership of a licensee. However, in a few states where prior approval is required of a direct change in ownership of a licensee, an indirect change in ownership may require only notice. Contribution of an ownership interest in a licensee directly to a family trust, or where the trust holds its interest at an indirect level, will be considered a change in control of the licensee in some states and will require the trustees to make certain filings in the NMLS under certain circumstances.
  9. Restructuring of the Ownership May Require Filings. Redistribution of the ownership of a licensee among existing owners, with no new direct or indirect investors, may still trigger change in control filings under the consumer finance licensing statutes of some states despite the ultimate equitable owner of the licensee staying the same. Although there is no change in the parties that ultimately control the licensee, some state regulators will insist that certain filings be made and fees be paid because the ownership of the licensee changes from that reported in the NMLS. Although a licensee might be able to challenge the state’s position, in our experience licensees generally comply with the fee and modest filing requests of such restructurings.
  10. Notice May Suffice in Lieu of Approval. Approval of the acquisition of a licensee before the transaction closes may not be required in some states where prior approval is generally required, provided the licensee is being acquired directly or indirectly by another entity holding the same license. In these states, a notice filing may satisfy the change in control filing obligation.

We trust you will find these tips useful. If your transaction presents some unique issues not covered above, we may have the answers.

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