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State Licensing for Private Lending · Private Lending Insights

• Rocky Butani (00:00) Welcome to Private Lending Insights. I'm your host, Rocky Butani Our podcast is all about sharing valuable information about private mortgage lending, which is also known as hard money lending, bridge lending. It also includes long-term financing for residential investment properties and for multifamily properties as well. Our podcast primarily offers insights on loan origination. So it's applicable to real estate investors and mortgage brokers that are looking to learn about lending loan programs and particular lenders. However, in this episode, we're providing insights about licensing for brokering and lending in certain states throughout the country. In this episode, I interviewed Jennifer Young, an attorney with Geraci LLP or also known as Geraci Law Firm. Jennifer is an expert on licensing for private mortgage lenders. Many people assume that private mortgage lending doesn't require any licensing anywhere in the country because it's all commercial business purpose lending. However, there are states that do require licensing and there are a few different nuances that you have to be aware of. So I asked Jennifer to explain this to us, and we break down some of the requirements for each of these different states. So I hope you enjoy this episode, and let's get started. Rocky Butani (01:18) All right, Jennifer, thanks for joining us for this episode of Private Lending Insights. Jennifer Young (01:23) Yeah, thanks for having me. It is a little bit confusing, especially for business purpose lending. There's a lot of misconceptions that you don't need any licenses just because you're doing business purpose loans, but that's definitely not true. So happy to get into it. Rocky Butani (01:37) Nice. And yeah, so we are talking about business purpose lending, it's commercial real estate, it's residential investment properties, it's all for investment purposes. So with that, what are the states around the country where a license is absolutely required for any type of mortgage origination business, whether it's business purpose or consumer purpose? Jennifer Young (02:01) Consumer purpose, it's basically all the states, every single state. You definitely need to be licensed. Business purpose lending is a little bit more narrow in the number of states that you need. Depending on the collateral securing the loan, it's, you know, regardless of any collateral securing the loans, there are six states that you definitely need to be licensed in. That's California, Arizona, Nevada, North Dakota, South Dakota, and Vermont. On top of that, if you have a one to four, you also need to be licensed in Utah, Oregon, Idaho, and Minnesota. Rocky Butani (02:41) those four states they don't care if it's right okay Jennifer Young (02:46) five plus or commercial, you're good. But if it's one to fours, yeah, Oregon, Idaho, Utah and Minnesota. Rocky Butani (02:52) So one to four units residential properties, even if it's business purpose, those four states, they still require licensing. OK. And with all of these states that you mentioned, so you've got a total of 10, with all of these states, does it matter whether it's a broker or a direct lender? Jennifer Young (02:54) Right, even if it's business purpose. Yeah, so these are lending, right? As a broker, it's a little bit more nuanced, surprisingly. Certain states that don't require a license to lend do require you to have a broker's license if you want to broker in those states. Off the top of my head, New York, New Jersey, Michigan, I think Pennsylvania require you to have a license to broker, but they don't need you to have a lender's license if you're conducting business purpose loans. Rocky Butani (03:40) But in the first states that you mentioned, so let's go back to the 10 states that require licensing for residential investment properties, you still need a license to broker in those states, right? Jennifer Young (03:43) Mm-hmm. Mm-hmm. Yes, those are pretty much broker, lend and servicing. You need some sort of licensing and depending on your lending activity, you might have to expand it to other states. North Carolina is a weird one where you don't need a license, but you need to register with the secretary of state. If you're going to be brokering or lending, servicing is a whole new different, you know, evaluation that needs to be done. But for the most part in those 10 states that I listed, you do need some sort of license to lend or broker. Rocky Butani (04:27) Okay, well, let's go through a few of them. the Dakotas, you know, it seems like not too many people are that excited about lending in the Dakotas or Vermont. And maybe there's other reasons besides the licensing requirements where there's just not much of a market there. It's not worth it to do any kind of administrative, you know, work with licensing where it's such a small market. But let's go to the West Coast where a lot of people are excited about. Jennifer Young (04:44) Yeah. Yeah. Rocky Butani (04:56) about some of those markets. And let's start with California, the big one. So what are the licensing requirements to broker or to lend with business purpose loans? Jennifer Young (05:08) Yeah, for California and generally for all these licensing states when you're applying for a license across the board, you're going to need background checks, FBI background checks. They most typically want to see a balance sheet. Different states have different balance sheet requirements, company minimum requirement amounts they want to see. Arizona needs to have audited financials. They definitely want to see a business plan. and a surety bond placed. That's kind of generally across all states. California is probably the most difficult state right now to get licensed in. That's CFL license, the California Finance Lenders License. It is taking 10 to 12 months to get approval, but the requirements aren't that difficult. They just want to see a 25,000 minimum on your balance sheet as a company net worth. They require a surety bond, they want to see a business plan, they want background checks, FBI background checks done. Org chart, management chart, all that good stuff. But for the most part, it's not a difficult requirement state for licensing application purposes, but it is very long and very tedious and the DFPI is not our favorite. Rocky Butani (06:28) So the DFP is the regulatory regime for the CFL license. there's a D. Yeah. So now there's a Department of Real Estate, which is a different license, and that's mainly for brokering. Right. Jennifer Young (06:35) Yeah. That's right. In California. Mm-hmm. Yeah. The DPI oversees the CFL license. The Department of Real Estate, the DRE, oversees a California real estate broker's license and a salesperson's license. Those are both licenses that you can get for business purpose lending if needed. Rocky Butani (06:54) Okay. Let's go back to the CFL license. if I'm a direct lender, based in New York. I want to start lending in California. Do I need an office in California? Jennifer Young (07:09) No, California is not one of the states that requires a brick and mortar. You can have your principal place of business in Texas, New York, wherever. Your entity though, the lending entity that's applying for the license, it does need to have or be foreign registered in California. Rocky Butani (07:26) Okay, and then are there any exorbitant fees or taxes that lenders need to be aware of if they want to do business in California? Jennifer Young (07:39) Yeah, so the foreign registration of the entity is required for pretty much every state that you're applying in. They want you to form register in that state and that makes it so that in that state, you probably have to pay the annual SOI filings and keep your entity up to date. So there might be some state filing requirements. Taxes wise, I'm not really sure. Yeah, I'm not a tax attorney. No, that's okay. Rocky Butani (08:03) guess tax is a whole different topic, sorry. Yeah, sorry about that. And in California, it's just notorious for all entities that they have to pay this $800 a year or something to that effect, Jennifer Young (08:17) so that's for, yeah, and that's for forming an entity in California and LLC specifically. but you know, if you're just for registering your entity in California, that's not the case. Rocky Butani (08:31) Okay, all right. That's kind of a minor thing. So let's just say someone wants to make it happen. They want to be lending in California. They just need that CFL license if they're a balance sheet lender. And if they're going to be brokering, they have to have a DRE license, right? Jennifer Young (08:40) Mm-hmm. They do. Well, CFL allows you to broker as well, but it prohibits you from brokering to an unlicensed CFL entity. So if you're going to be brokering using your CFL license, you have to broker to another CFL licensee. Whereas the DRE broker license, they'll allow you to broker to any unlicensed third parties, including CFLs unlicensed. So there's a little bit more flexibility on the DRE broker side for that. Rocky Butani (09:13) So one situation that may come up is, let's say I'm a lender based in Texas. I've got a CFL license. I've got a balance sheet. There's a loan that comes across that I don't really want to fund on my balance sheet, but it seems like a good deal. I want to broker it. I've got a buddy who runs a debt fund in California. So I can broker it to that fund because obviously they have a CFL license and that would be OK. Jennifer Young (09:41) Well, if that fund has its CFL license as well, then yes, you're good. But if the fund does not have a CFL license and you're using your CFL license to broker, you would not be able to do that. CFL licensing prohibits brokering to non-CFL lenders. Rocky Butani (09:56) Okay, great. So just to recap, California, you just have to get that CFL license. It takes about 10 to 12 months. You don't need a local office. Okay, perfect. All right, let's move on to Nevada. This is one state where hardly any private lender operates. I mean, any lenders that are outside of Nevada, lend in Nevada because it's so tough with licensing. So tell us a little bit more about Nevada's licensing requirements. Jennifer Young (10:04) correct. Yeah. Yeah, Nevada is kind of a larger hurdle when it comes to licensing. You'd be surprised though, activity has really picked up this year. Everybody has been, you know, trying to get licensed in Nevada, but the hurdle is that Nevada requires a brick and mortar office, right? So you have to have a physical office located in Nevada. On top of that, you need a qualified employee to reside in Nevada that oversees that Nevada office. The qualified employee requirement is also kind of a hurdle. They have to be a Nevada MLO and show the requisite experience. I think it's three years over the past five years of MLO licensed experience. So it's been kind of a hurdle. Aside from the office location, Nevada doesn't require anything specific on your balance sheet. or a minimum company net worth. It's really just that office and the qualified employee that's been a hurdle for a lot of our clients. Rocky Butani (11:29) That is challenging because essentially if you want to set up shop in Nevada, you know, and you're a lender in some other state, fine, you've got a budget, you can set up a local office, but to go find some individual who's been a licensed mortgage loan originator in the state of Nevada for three plus years, I mean, that's something where you just have to be around there to recruit and really find someone who's qualified. Jennifer Young (11:34) Mm-hmm. Yeah, and it's a little bit difficult in our space because a lot of the licensing states don't require you to have your MLO. And so, you know, finding somebody with that two or three years of experience, active experience as a licensed MLO has been a little bit difficult. Rocky Butani (12:12) And just to clarify, the MLO is an NMLS license, Endorsement. Yeah. Got it. Okay. All right. So, Nevada, let's say there's a population of whatever it is, a little over 3 million. You know, you've got to weigh the cost and the effort to set up a local shop, go find someone who's willing to be your employee in that state. Jennifer Young (12:16) It's an MLS, yeah, designation mortgage, yeah, endorsement. That's right. Rocky Butani (12:41) But it can be done. Does it take a long time to get licensed once you have everything else in place? Jennifer Young (12:45) Yeah. Yeah. mean, finding that person, finding the office space is not that hard, right? But it's finding that person who has that requisite experience to show and having them be the designated qualified employee. It's a small process. It's not too difficult, but definitely finding that person has been a little bit of a challenge. I have some clients who have their Nevada license kind of on hold for six months, almost a year until they found that person. And then we move forward. But it's doable, it's doable. Rocky Butani (13:14) But aside from finding the person, if you just want to apply for a license, how long does that typically take? Are we talking a month, two months less? sure. Jennifer Young (13:26) Yeah, yeah, I mean, I think recently in the past at least three, five months, we've been getting Nevada approved once everything, know, all the qualifications and requirements are met. It's taken about two months or so to get that license. Yeah. Yeah. Rocky Butani (13:43) Okay, not bad. All right, let's move on to Arizona. Tell us about like, if I want to lend in Arizona, what does it take? Jennifer Young (13:48) Yeah. So Arizona is just like Nevada where it requires a brick and mortar. They are a little bit easier though because they don't have to have that qualified employee be unique to your company. So you can have, you can hire essentially somebody who has that license who can act as a responsible individual and sponsor them through your company while they are sponsored at the same time for other companies as well. And we do have a couple of referrals that we usually connect our clients with. They provide both the brick and mortar office space. So essentially they put together kind of a lease for the company to use as the Arizona office. And then they act as the responsible individual on that Arizona license. Rocky Butani (14:37) Interesting. So contrary to Nevada where it has to be an exclusive employee just for your company in Arizona, it's essentially some broker who's allowing multiple lenders to use their license and being responsible for those origination deals. Jennifer Young (14:41) Unique. Right. Right. Mm-hmm. Yeah, so it's a lot easier on that front, but Arizona does require audited financials and they want to see $100,000 as a company minimum net worth on those audited financials. Rocky Butani (15:06) Okay. Another thing I didn't clarify earlier with California, Nevada, and now Arizona, I'm assuming it's similar in all states, but if let's say someone wanted a broker a loan for, secured by a property that's located in one of these states, it sounds like they're not able to actually get paid because you have to be licensed in these states. Is that correct? Jennifer Young (15:33) You do. Anytime you are conducting any type of brokering activity and you want to get paid a fee for it, you definitely need to consider licensing because brokering, talking to the borrowers, collecting an application, negotiating loan terms, and then putting them together with the lender, that's brokering activities across all states and you definitely need to be licensed to collect a broker fee. Rocky Butani (15:56) So if I'm a broker out in Florida, I've got a good deal that I come across in Arizona or even Nevada, and I just want to broker it to some lender that's licensed there, essentially I can't get paid, right? Yeah. OK. All right. Got it. Jennifer Young (16:04) for you. Yeah, that's right. Right. Yeah. If it's an Arizona deal and you're not an Arizona broker, you can't get that Arizona fee broker for you. Rocky Butani (16:15) Okay. And, and as California, the same, they're, just as strict, right? Okay. Yeah. So you can only get paid as a broker if you have a department of real estate license in California. Jennifer Young (16:19) Same. Yep. They're very strict about that. Yeah. Right, or a CFL license and you're brokering into another CFL licensee. Rocky Butani (16:32) Okay, awesome. All right. So, so Arizona, let's say I didn't want to use this person who's working with other with other lenders. I want to have my own broker. I essentially have to set up a brick and mortar shop, right? You need a physical office there. And then you need a Jennifer Young (16:51) Yeah, yeah. So if you don't, if you don't want to use, you know, the referrals that we have available, you do have to set up your own office. I believe for Arizona, a residential address is okay. Not for Nevada. Nevada requires a commercial address. Arizona, think a residential address is okay. But you do have to have, you know, a responsible individual who meets all those requirements to act as that person on the Arizona license overseeing that Arizona address. Rocky Butani (17:20) Got it. All right, let's move on. We just have a few more states. And let's move on to the next state up north, which is going to be Oregon. What's the licensing requirements if I want to lend in Oregon? Jennifer Young (17:29) Okay. Yeah, I love Oregon. Oregon is fast. It's a very easy application and you only need the Oregon license if you are making loans secured by one to fours. So five plus commercial property, you're good to go in Oregon. There's an exemption for licensing in Oregon where if you have a licensed broker to broker or arrange that deal, you don't need your Oregon license. But overall, Oregon is really easy. The application process is fast, it's pretty simple. Not a lot of back and forths with the regulators and their requirements. It's a very short and easy list. Rocky Butani (18:11) So if I'm a lender located, let's say, in Colorado, I want to do a deal in Oregon, it was brought to me by a broker who's licensed in Oregon, then I don't need to worry about any licensing. Jennifer Young (18:16) No. Yeah, if they've arranged that loan for you and they're licensed in Oregon, then you can fund that loan. Rocky Butani (18:33) So it's only if I wanted to do a deal directly with a real estate investor, with a borrower, where there's no broker involved, then... essentially they want one person to be licensed. Jennifer Young (18:40) Yes, then you need to. Yeah, then you need to be licensed, that's right. Rocky Butani (18:47) And what is the licensing regime? Is it NMLS or does Oregon have their own separate licensing board? Jennifer Young (18:53) The Oregon, yeah, the Oregon, it's a mortgage entity license and that is actually regulated by the Department of Real Estate surprisingly under Oregon. Yeah. Rocky Butani (19:03) Okay, got it. All right. So just to recap, residential investment properties, someone has to be licensed, either the broker representing or the broker who's bringing the deal or a direct lender who's going to work directly with the borrower. Okay. Jennifer Young (19:22) That's right. And that license allows you to broker and lend. So once you get that license, you can do both. Rocky Butani (19:29) OK, got it. OK, so I can broker to another lender if it's a deal that I don't want to do on my own balance sheet. OK, all right. Jennifer Young (19:35) Yeah, right, yeah. Once you have that license, can broker to an unlicensed entity to lend if you don't want to make that deal. Rocky Butani (19:42) Okay, excellent. All right, moving on, let's go to Idaho. What are the requirements for licensing in Idaho? Jennifer Young (19:50) Idaho has not been very difficult either. Idaho and Oregon have been pretty easy. Aside from background checks and surety bonds, it's a pretty easy process. The requirements are pretty minimal standard. They want to know who the owners and the managers are, background checks for those people. But aside from that, it's a pretty straightforward process as well. Rocky Butani (20:11) And is it similar to Oregon where it could be a broker or the lender that has a license or do both? If there's a deal where a broker is representing the borrower do they have to be licensed in Idaho as well? Jennifer Young (20:28) Yeah, so Idaho also has the kind of a similar exemption as Oregon, where if it is a licensed broker who arranges or brokers that loan, can fund that loan without being licensed in Idaho. Rocky Butani (20:42) Okay. But, but brokering, I forgot to ask you about this for Oregon as well. I'm assuming it's similar where if you're a broker located in another state, you really can't get paid if you're, if you're brokering a deal in one of these states. Jennifer Young (20:56) Yeah, you can't collect that broker fee unless you have that broker's license. Rocky Butani (20:59) Okay, got it. right, and Oregon, I forgot to ask you, but I'll ask you with Idaho and let's assume it's similar. You don't need a physical office, right? So out of all these states... Jennifer Young (21:12) Correct. Yeah, it's only Arizona and Nevada that need the brick and mortar office. Rocky Butani (21:17) Okay, got it. All right, let's move on then to Utah. You said Utah is also another state where this only applies to residential investment properties up to four units, right? Okay, so what are the licensing requirements for Utah? Jennifer Young (21:21) Okay. one to fours. That's right. Utah has a little bit of a twist, right? They do require an individual. So these are all company licenses. When you apply for the license, it's for your company, for your entity. Utah does require an individual who is an employee of the company that has a, principal lending manager license. So you have to have a lending manager license and it's an individual license that the individual has to kind of sit for, take the test, know, do the hours, the requisite hours. And then once they get licensed, you sponsor that individual as your Utah lending manager, and then you get the license for the company. But it is a requisite requirement for the company license. Yeah. It's not bad. I mean, you don't have to have an office in Utah. The person that's sitting for that exam or getting that license doesn't need to be located in Utah. They just have to show the requisite experience and pass the test. Rocky Butani (22:11) Okay, all right, that sounds a bit painful. Okay, nice. All right, and then the last state that you mentioned that this only applies to residential investment properties is Minnesota. So tell us more about the state of Minnesota. Jennifer Young (22:39) Mm-hmm. yeah. Minnesota used to require a licensed MLO, even if you're doing business purpose loans. But, Geraci my team, a couple years ago, we fought with the regulators, pushed back, and now they do not require a licensed MLO if you're doing business purpose loans. So, part of the application process for Minnesota, the license, you know, they want to make it very, very clear that you are only making business purpose loans. And once that's cleared, then they won't require you to attach an MLO individual to that license before approving it. They'll approve it without one. Rocky Butani (23:17) but you still need the company to have a license within the state. Jennifer Young (23:19) The company still needs a license. Yeah, this is for the company license. Rocky Butani (23:23) Okay, is there anything else to note about it? Is it fairly simple? Jennifer Young (23:28) No, it's pretty simple. Yeah, all of the Oregon, Idaho, Utah, Minnesota, they're pretty, they're fairly straightforward. Aside from Utah's lending manager license requirement. These are pretty easy states and they move pretty fast. Rocky Butani (23:31) Okay. Okay, yeah, that doesn't sound so bad, at least for Minnesota. All right, great. All right, and just to finish off, why don't we just, for the few people out there who might want to lend in the Dakotas and Vermont, why don't we cover those states? Let's start with Vermont and then we'll come back to the Dakotas to finish it. Jennifer Young (23:54) Yeah, Vermont is a little bit more of a tedious state. They do require, they want to see a lot of your company internal policies and documents. But aside from that, it's pretty much like all the other licensing states, bonds, fingerprints and background checks, org chart, management chart. Rocky Butani (24:23) Okay, so you register the company in Vermont and then this is, it doesn't matter whether it's residential or commercial properties, they just want any lender that's doing business in Vermont to be licensed there. Jennifer Young (24:37) Right, it's regardless of the property type, that's right. Rocky Butani (24:41) Okay, got it. how about let's start with North Dakota first. Jennifer Young (24:46) North Dakota and South Dakota, pretty similar. They're fast, but like Vermont, they do want to see lot of internal policies and procedures, a lot of written policies to be submitted along with the application. They haven't been too difficult. We've done both of those, and they've moved pretty fast. It's kind of on the client to make sure that you have your internal documents together and be able to put a written policy for the topics that they want to see covered. Rocky Butani (25:16) Great. So with all of these states, whenever you handle licensing, is there a lot to do as far as renewals go? Jennifer Young (25:25) yeah, so renewals kind of vary by state, California is pretty easy. They annually just require you to complete a CFL annual report. That's due every year in March 15th. But all the other states, and just kind of across the board for NMLS, if you have an NMLS account and you have a license in any of the states, October through December, the last three months of the year, They do kind of go through NMLS renewal periods where you're renewing and paying some NMLS fees for having them house all of your information, all of your documents. And then certain states will have certain assessment fees or they want to see audited financials every year for Arizona, for example. So it kind of depends on the state, but there are kind of minimal compliance requirements that are due every year for each license. Rocky Butani (26:19) Okay, and as far as these audits, this is something I forgot to touch on earlier. I've heard that in Nevada they typically do annual audits. Is that something that's always done regardless every year or is that kind of random? Jennifer Young (26:36) Yeah, it's kind of random. It is a little bit more prevalent for Nevada, but it's not every single year without any, you know, with no questions. It does kind of vary. And it's hard to say. Like the regulators are always hard to predict. Nevada is difficult. Arizona is a little bit difficult and California is very difficult. Rocky Butani (27:00) Okay, so audits are randomized. How about the other states that only require licensing for residential properties? Do you ever see audits from those states? Jennifer Young (27:11) I have not seen any audits outside of Arizona, Nevada, and California. The other states, as long as you, know, every year you pay your NMLS fees, certain licensing fees, if they're due and on time, they usually kind of leave you alone. Rocky Butani (27:28) Okay, excellent. All right, I think that takes care of it. So other than these 10 states that you mentioned, everywhere else in the United States, whether you're brokering or you're lending for business purpose loans, residential or commercial properties, you don't need any licensing. Yeah. Jennifer Young (27:46) Yeah, so let's be careful there because there are certain nuances there, right? So North Carolina, as I mentioned, it's not a license, it's a registration. Florida, you don't need a license if you're doing a one to four, but in the instance that you're doing commercial or five plus and the borrower is an individual, you do need a license. There's other states, owner occupied or... It's just a lot of exceptions but nuances as well. Geraci does provide these 50 states surveys. We have two versions. One is a kind of straightforward, yes or no, which license, what type of lending activity, and do you need a license for that. And then a more nuanced survey where they kind of go through the statutes and then the evaluation of that statute to help you kind of determine whether or not you need to be licensed. If you want to kind of just like think about it quick and dirty, it's those 10 states and North Carolina for any type of licensing, lending, brokering activities. Rocky Butani (28:51) OK, and then so other states maybe will have people reach out to you to find out whether they can lend to an individual or it has to be an entity. And I'm sure there's a bunch of other states that have these little nuances. OK, all right, well, we can cover that. Jennifer Young (28:57) Yeah. Mm-hmm. Mm-hmm. Yeah, bar type, property type, yeah. And lending activity, If you're only brokering, if you're thinking about servicing, servicing your own loans or servicing third-party loans, these are all things that you have to consider and evaluate. So happy to help you guys talk to your clients and figure out which licensing states to do. Rocky Butani (29:26) Sure, and servicing is a whole other topic, so why don't we save that for another episode. But this was lot of great information you provided, just high level of which states everyone has to watch out for if they're brokering or lending with any sort of private lending and business purpose loans secured by real estate. Jennifer Young (29:40) Yeah. Yeah, and there are certain exemptions and exceptions to licensing, so happy to chat if you have a specific scenario or fact pattern and I can talk you through that. Rocky Butani (29:55) Excellent. Well, thanks for your time, Jennifer. And we'll have everyone reach out to you if they need help with licensing. All right. Thanks for your time. Take care. Jennifer Young (30:02) Sounds good. Thanks, Rocky. Take care. Rocky Butani (30:07) So to quickly recap, the states that require licensing are California, Arizona, Nevada, North Dakota, South Dakota, Vermont. These six states require a license regardless of whether it's residential property or commercial property. Now there's four states that require a license if it's residential investment property, and those states are Oregon, Idaho, Utah, and Minnesota. Rocky Butani (30:35) Mortgage licensing can be complicated. So use an expert, reach out to Jennifer Young. We'll put her contact information in the description. Rocky Butani (30:43) This episode is sponsored by Geraci LLP, a law firm focused on private mortgage lending in the United States. Reach out to Geraci for all of your legal needs, including licensing, litigation, securities, loan docs, and a lot more. Visit GeraciLLP.com to learn more. Reach out to them and tell them you heard about them from Lender Link's podcast, Private Lending Insights.