Item 1A. Risk Factors
Item 1A.
RISK FACTORS
The business, financial condition and operating results of the Company can be affected by a number of risks, whether currently known or unknown, including but not limited to those detailed in Part I, Item 1A of the 2021 Annual Report under the heading “Risk Factors”. Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations in future periods. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price. Except as set forth below, there have been no material changes to the Company’s risk factors since the 2021 Annual Report.
Risks Related to our Business and Operations
SUCCESS Lending is in a nascent state and is an unproven business model with regulatory, compliance, consumer trends and macroeconomic risks, many of which are beyond our control.
The SUCCESS Lending business has a limited operating history and has encountered and will continue to encounter risks, uncertainties, difficulties, and expenses, including, without limitation, ongoing compliance with a complex and evolving regulatory environment, increasing its number of clients and loans, obtaining additional funding and service relationships on favorable terms as the company scales, and navigating an evolving macroeconomic landscape. If we are not able to timely and effectively respond to these requirements, or if risks arise outside our reasonable ability to respond effectively, our business may be harmed. Generally, the residential mortgage lending market involves a high degree of business and financial risk, which can result in substantial losses that could adversely affect our financial condition.
Additionally, SUCCESS Lending is reliant on a third-party relationship with (i) Texas Capital Bank and (ii) Flagstar Bank FSB which each provide a consumer warehouse credit facility to SUCCESS Lending. If SUCCESS Lending is unable to maintain its relationship with either Texas Capital Bank or Flagstar Bank FSB, we would need to implement a substantially similar arrangement with another
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issuing bank or curtail SUCCESS Lending’s operations. We could in the future have disagreements or disputes with either Texas Capital Bank or Flagstar Bank FSB, which could negatively impact or threaten our relationship.
Additionally, SUCCESS Lending relies on third-party sources, including credit bureaus, for credit, identification, employment and other relevant information in order to review and select qualified borrowers. If this information becomes unavailable, becomes more expensive to access or is incorrect, our business may be harmed.
SUCCESS Lending requires substantial liquidity made available through warehouse credit facilities in order to fund mortgage loans, which debt obligations are guaranteed and may need to be repaid by eXp.
SUCCESS Lending funds substantially all of the mortgage loans it closes through borrowings under its revolving warehouse credit facilities and funds generated by its operations. As of the date hereof, SUCCESS Lending has a warehouse credit facility with Flagstar Bank FSB and Texas Capital Bank which together provide SUCCESS Lending with an aggregate maximum principal amount with up to $50 million in loan origination credit (the “Credit Facilities”). It is customary for mortgage businesses like SUCCESS Lending to obtain warehouse credit lines in order to enable them to close and fund residential mortgage loans for subsequent sale to investors. SUCCESS Lending will use the borrowing capacity under the Credit Facilities exclusively for such purposes and borrowings will generally be repaid with the proceeds received from the sale of mortgage loans.
In connection with the Credit Facilities, the Company has entered into Capital Maintenance Agreements with each of Flagstar Bank FSB and Texas Capital Bank whereby the Company agrees to provide certain funds necessary to ensure that SUCCESS Lending is at all times in compliance with its financial covenants under the Credit Facilities. The Company’s capital commitment liability under the Capital Maintenance Agreement with Flagstar Bank FSB is limited to $2.0 million. The Company’s capital commitment liability under the Capital Maintenance Agreement with Texas Capital Bank is limited to $1.25 million. The Credit Agreements represent off-balance sheet arrangements for the Company.
We do not have sole control of SUCCESS Lending and losses and liabilities of SUCCESS Lending may require us to contribute additional capital and result in losses that could adversely affect our financial condition.
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