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Licenses to do Hard Money Lending - California

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Lupe Santiago

Las Vegas, Nevada

Aug 27 '12, 08:31 AM


Hello,

I'm doing some research into starting a hard money lending business in California. The loans would be first trust deeds on non-owner occupied residential property (lending to RE investors) and the business entity would be an LLC. Which licenses would I need to do this? My research leads me to believe it's a California Finance Lender's license and a Dept. of Real Estate Corporations License. Does this kind of business run afoul of the SAFE Act? Would I need to be registered with the NLMS? Again, this is NOT owner-occupied residential loans.

Best Regards and thank you for the responses.



Corey Dutton

Real Estate Lender from Salt Lake City, Utah

Aug 27 '12, 09:16 AM


@Lupe Santiago Yes. In California, if you are lending on residential properties (1-4) units, you fall under the oversight of the SAFE Act. It doesn't matter if its owner occupied or not. You still need to be licensed in the State of California to do trust deed investing on residential properties 1-4 units. If you call the California Division of Real estate today and tell them what you are planning to do, they will concur with this. You can get away with not being licensed as a HML in California. But with so much competition against lenders that are licensed, you risk one of your competitors turning you into the Division. You can face up to a $10,000 fine if the Division can prove you're making loans on Residential properties 1-4 units. It does NOT matter if they are owner occupied. Call the California Division of Real Estate.



Lupe Santiago

Las Vegas, Nevada

Aug 27 '12, 09:29 AM


@Corey Dutton Thanks for your reply, Corey! Would licensing under the SAFE Act / NMLS system preclude me from having to get a California Finance Lender's License? I'm planning to do this only for residential properties, but may venture into commercial hard money lending if the opportunity is appropriate.

Thanks,
L.S.


Edited Aug 27 2012, 09:38 by Lupe Santiago


Brian Burke Verified

Real Estate Investor from Santa Rosa, California

Aug 27 '12, 09:06 PM
3 votes


There are two different licensing authorities in CA. You can get licensed through the CA Dept of Corporations (DOC) or the Dept of Real Estate (DRE). For DRE, you just need a real Estate Brokers license. I'm not sure what the license is called for DOC. In either case, you will need to complete the NMLS requirements and pass the federal and state-specific NMLS tests.

Forget about the LLC if you go DRE, you can only operate as an individual or as a corporation. I think you can only use a corporation with DOC license but I'm not positive about that.

By the way, you can lend your own money directly to borrowers without a license (as long as you comply with all applicable lending laws), but you cannot broker loans between borrowers and other people's capital without a license. I couldn't tell from your post if you are aiming to lend your own capital or broker loans, that's why I mention that.



Medium_praxisBrian Burke, Praxis Capital, LLC
E-Mail: [email protected]
Website: http://www.PraxCap.com
Have you heard my BP Podcasts? biggerpockets.com/show3 & biggerpockets.com/show76


Jeff S

Real Estate Investor from Los Angeles, California

Aug 27 '12, 11:25 PM
1 vote


Your first and obvious step, @Lupe Santiago, should be to talk to a CA licensed attorney who specializes in lending law. Though there is overlap, don’t make the mistake of thinking that this is the same as a real estate attorney.

For your purpose, California loans that exceed 10% APR must be secured by real estate and must be originated by a CA licensed real estate broker. If not, they are usurious.

The CA finance lenders license, described here, will allow you advertise and perform other services you probably don’t care about, but you’ll still need a broker for origination. FYI, most of the larger hard money companies have a broker on staff but it’s not hard to find an independent RE broker who will work for you on a deal-by-deal basis. That is, as @Brian Burke correctly noted, you don’t have to be personally licensed to loan money in the manner it appears you want to in California; you just have to find a licensed real estate broker to originate your loans.

I can’t tell Lupe, but if you’re loaning on non-owner occupied homes (perhaps flips?) to the LLC of those that do this full time for a living, then these are business purpose loans and your broker will not need to file under the NMLS. Practical speaking, you might as well find a broker who is, but it really won’t matter as long as you can establish the business purpose. Good luck.

Jeff



Lupe Santiago

Las Vegas, Nevada

Aug 28 '12, 08:01 AM


@Brian Burke @Jeff S Thank you both for your replies! This is very helpful information. A little more detail on what it is that I plan on doing. I wish to establish an entity to limit my liability as a lender. I cannot do this as an LLC? I have assets under my name that I would like to protect, but two layers of taxation as a corporation simply will not work for me.

As for the business: I plan on using my own capital to originate. I have a fairly healthy amount to work with and will NOT need to use other lenders' money to make the loan. However, I do plan on making loans secured by real property that exceed 10% APR for a period not to exceed 12 months. I will be selling to flippers for business / investment purpose only. Nothing I do will be owner occupied. However, I can imagine a situation that a flipper/rehabber would not be operating under an LLC or other business entity, but rather his own name. Will providing some sort of business-purpose only addendum to the loan agreement substantiate this? I myself plan on getting my broker's license. It seems that the only choice is either a corporation or my individual name. I read that there's an advantage of getting an CA Finance Lender License because it would apply to a business entity as a whole rather than individual licensees. If I obtained a CFLL for my company, would it preclude me from being required to have the broker's license to fall out of usury for my loans exceeding 10% APR? Would I still need to get my broker's license regardless? I see a lot of companies have DRE - Corporation licenses. I need to check if an LLC could obtain a CFLL.

Furthermore, I plan to SELL the loans to the open market once I originate them. Does this add a level of complexity to the licensing regime?

Thanks again for the advice - I know I should consult a lending attorney but this is a great start for me. I appreciate the time and help. It's a bit overwhelming to consider all of this right now.



David C.

Real Estate Lender from Palm Desert

Aug 28 '12, 08:15 AM
1 vote


Originally posted by Brian Burke:
By the way, you can lend your own money directly to borrowers without a license (as long as you comply with all applicable lending laws), but you cannot broker loans between borrowers and other people's capital without a license.

You don't need a license if you stay under the usury limit AND you make less than 8 loans in a calendar year. Section 10131.1(b)(1)(C) of the CA business and professions code says you need a license when:"
"The making of eight or more loans
in a calendar year from the person's own
funds to the public when those loans are
held or resold and are secured directly or
collaterally by a lien on residential real
property consisting of a single dwelling
unit in a condominium or cooperative or
on any parcel containing only residential
buildings if the total number of units on
the parcel is four or less. ..."

David



Jeff S

Real Estate Investor from Los Angeles, California

Aug 28 '12, 11:52 AM
1 vote


Business purpose is defined by intent, @Lupe Santiago. There is no strict definition that I’m aware of. If your grandmother woke up one morning and decided to buy, rehab, and flip her first house under her own name, your loan to her would still have a business purpose. It’s just easier to argue the point when you loan to the LLC of a full time professional flipper, with maybe 10 deals in the works, who signs an affidavit of non-occupancy (as grandma would also have to do). Plus, it’s obviously less risky to loan to someone with experience, but that’s a different issue.

Even though not a real estate meeting goes by that I’m handed business cards from completely unlicensed individuals with the words “Hard Money Lender” on them, the CFLL will legally allow you to call yourself a “Lender” and advertise, but that’s about it as far as your needs are concerned. How does “Lupe’s Lending” sound? (Sorry, couldn’t resist.)

You’ll still need a broker for the origination, unless you follow @David C.’s post above, so if you insist on picking one to become, become a broker. This will also allow you to advertise and broker your notes to others. That is, for your purposes, a broker can pretty much do what a CFLL does but not the other way around, though I’m sure there are many differences that won't apply to you.

Personally, I prefer to spend my time meeting and socializing with borrowers, checking out properties, and creating deals. It’s easy enough to find a broker to do the paperwork and deal with title and escrow for you. You might try this first to test the waters and initially avoid the significant time and expense of obtaining a broker license.

Jeff



Lupe Santiago

Las Vegas, Nevada

Aug 28 '12, 04:16 PM


@Jeff S Lupe's Lending is a strong contender for a business name. Look for it in the future!

Anyway, I'm still confused as to why the recommendation of a Broker's license over a CA Finance Lender's License. Does a CFLL not allow you to originate loans for business purpose, secured by real property, at rates greater than 10%? What advantage does getting a broker's license afford you over a CFLL?

The reason why I struggle with this issue is because I want the protection of an LLC (my research indicates that an LLC could obtain a CFL License - please correct me if I'm wrong), yet need to make sure that the license allows me to do what I want to do. The DRE broker's license only applies to individuals and corporations and double taxation is simply out of the question for me. You said that a CFLL would prohibit me from doing some things that a DRE Broker's license would allow me to do. I'm having a hard time finding the answers.

Would I be able to sell my originated loans to the market as a CFLL? Or is that where I need the broker's license?

THANKS AGAIN FOR YOUR HELP!!! It's much appreciated.



Brian Burke Verified

Real Estate Investor from Santa Rosa, California

Aug 28 '12, 07:59 PM
1 vote


I can answer part of this. You say that you want to set up an LLC to "limit your liability as a lender" and you want to avoid double taxation.

Liability: What liability? As a lender, you have very little liability as long as you are following all of the lending laws. Have an attorney make sure you stay in line. Your liability is as an originator. If you follow @Jeff S's suggestion and have a broker do the origination for you, the liability for origination is theirs (make sure they have E&O insurance). If you want to do your own origination, you need to get E&O insurance and if you really want to, you can (and some would suggest that you really should) form a corporation.

Double taxation: If you form an S Corporation, you don't have the double taxation. It is C Corporations that have that. In an S Corporation, income flows through the corporation to the shareholder's personal tax returns. You will have to pay a minimum annual fee to the state of $800 (in CA) plus a small tax (can't remember how much but 1.5% of net income comes to mind). Fees for a corp in CA are lower than fees for an LLC if you are making any real money.

I can't answer whether DOC allows you to operate as an LLC. I know for sure that DRE won't (I made that mistake, when my LLC got rejected for a broker's license I had to switch it to a corp and re-submit). I think people are suggesting DRE because it seems to be more common in the private money brokerage field, and in my opinion the license is easier to obtain. Your mileage may vary.



Medium_praxisBrian Burke, Praxis Capital, LLC
E-Mail: [email protected]
Website: http://www.PraxCap.com
Have you heard my BP Podcasts? biggerpockets.com/show3 & biggerpockets.com/show76


Brian Burke Verified

Real Estate Investor from Santa Rosa, California

Aug 28 '12, 08:12 PM


Just one more point @Lupe Santiago, @Jeff S brings up a very good point about selecting a borrower that has experience. You could avoid almost all of this hassle if you just align yourself with an experienced and active house flipper.

For a first-hand example, I have flipped hundreds of houses and I can't think of any reason why I would want to sue my lender. Those of us active in the business don't bite the hand that feeds us. Furthermore a reputable flipper with a spotless track record is less likely to burn you by not making payments or leave you holding the bag with a half-finished flip.

There are a lot of good operators out there, and a lot of bad ones. Find a good one and establish a relationship and you can probably accomplish your goals with less regulatory hassle, and less idle capital sitting in the bank earning nothing while you wait for your loan broker (or your marketing if you become the broker) to find you the next deal.



Medium_praxisBrian Burke, Praxis Capital, LLC
E-Mail: [email protected]
Website: http://www.PraxCap.com
Have you heard my BP Podcasts? biggerpockets.com/show3 & biggerpockets.com/show76


Jeff S

Real Estate Investor from Los Angeles, California

Aug 28 '12, 09:51 PM
4 votes


@Brian Burke gave a great answer about taxes. Here’s the other part by way of a few examples.

To avoid usury, the loan must be originated by a CA licensed real estate broker (and be secured by real estate). That’s it. Period. Neither a CFL nor anyone else gets a usury exemption. Both a broker and CFL are allowed to advertise. CFL’s do not originate loans as part of their license, but it wouldn't matter since they don't get the usury exemption. If you have a CFLL, you must also use a broker for your originations.

One other difference is that a company can become licensed as a CFL instead of a natural person.

Here’s a one business structure:
1. Lupe’s Lending is a California S-Corp that is licensed as a CFL.
(Note: @Lupe Santiago is not licensed. Her S-Corp, for which she is the president, is licensed)

2. Because it is licensed as a CFL, Lupe’s Lending can now advertise that they are in the lending business.

3. Lupe hires Bart Broke, a CA licensed real estate broker. Bart originates all the loans for Lupe’s Lending and receives $500 per origination paid by the borrower at the close of escrow. All notes and DOT’s are written in the name of “Lupe’s Lending.” These were previously reviewed or obtain thru a licensed CA attorney with a specialty in lending.

As loans are paid off, Lupe pays herself a salary and a dividend. She will pay payroll tax on her salary but none on her dividends. Plus she will make tax deferred contributions to her 401k plan that also lends money in its name, originated by Bart.

Alternately:
1) Lupe Santiago is completely unlicensed and does business in Santa Rosa, CA under the name “Lupe Santiago, a California S-Corporation”

2) She meets Sam Saint, a CA Licensed Real estate Broker at a REI club.

3) Lupe also meets Brian Burke, a local and very experienced flipper, who always needs reliable money for his flips and who operates “Brian Burke, a California LLC”.

4) Lupe checks Brian out backward and forward, likes and trusts him, and views a few of his properties under contract. She agrees to loan “Brian Burke, a California LLC” money on one of these and they agree to the terms.

5) Lupe either purchases her documents from a well-regarded lending attorney, or has the attorney review Sam’s documents.

6) Sam contacts escrow and originates the loan in the name of “Sam Saint” using money that Lupe wired to title. Part of Sam’s paperwork is an assignment agreement that transfers the Note and DOT to “Lupe Santiago, a California S-Corporation” at the close of escrow. This document gets recorded.

7) Sam receives a flat fee of $500 for the origination, paid by Brian at the close of escrow. Brian now owns the house and Lupe’s corporation has been assigned a Note and DOT secured by Brian’s property.

8) If she wanted, Lupe could sell her note or use it as the collateral against a personal loan. She could then loan that money out and repeat the process over and over and over.

As loans are paid off, Lupe pays herself a salary and … (same as above).

Notice, in the second example you need only a broker and you don’t have to advertise because you met your borrower at an REI club. You could still obtain the CFLL for your S-Corp and advertise if you wanted. Frankly, unless you have an enormous amount of your personal money, you don’t need too many active flippers.

Also, to answer Brian’s question, the Dept. of Corporations recognizes everything (individuals, LLC’s, and corporations). The CA DRE only recognizes individuals and corporations. No one I know understands why?

This is not legal advice Lupe, so if you end up in the slammer because of it, the only thing I’ll promise is to send you a cake with a hacksaw baked in ;-).

Hope it helps. If not, feel free to PM me and I’ll send you my phone number so we can chat. This really took a long time to write.

Jeff



Lupe Santiago

Las Vegas, Nevada

Aug 29 '12, 07:34 AM


@Brian Burke and @Jeff S - WOW! Thank you both for the great advice. Your responses were so thorough and helpful. I will take this information to heart and proceed accordingly. Brian - the thought of S Corps for DRE Brokerage licenses completely escaped my consideration - thanks for this. And Jeff - great and very clear examples. This helps so much for my understanding. I really appreciate the time everyone took to help a novice get started! Best of luck with your businesses and see you around on the forums.



Bill Gulley

Real Estate Investor from Springfield, Missouri

Aug 29 '12, 10:31 AM
1 vote


Not sure how many mortgage operations folks here have set up, but there are some problems....check closely at a real estate broker "making" a loan vs brokering a loan, RE Brokers may use their own money, when the originate for others they become a mortgage broker. While not familiar with CA laws, most states have made this exception due to the fact that they often take care of seller financed transactions and many times they will carry back commissions and loans are generated for payment. RE Brokers are absolutely not mortgage brokers.

Lending can have liabilities, a borrower will usually only consider suing you when they are failing to meet the obligations or end up broke. Too many "lenders" make requirements that may well limit a borrower to operate or which may be viewed as preditory and such issues can backfire on you. Lending liability is a big deal, see an attorney who represents banks and other lenders......

You may use notes as collateral, but you'll only borrow a lesser amount, never the par value, so your leverage will decrease. You can also pledge the loans made to increase the initial loan amount you receive on that first loan, but having notes collateralized will reduce your ability to meet financial requirements for insurance, bonding, servicing and other debt coverage issues as well.

What makes you thing you can originate a "HML" and sell it over PAR, at a premium? If you sell them for less, you're going broke!

It's more than apparent that you have little lending experience which is why I suggested you get with a mortgage broker and through them. The "profits" the MB will be making will be less than what it costs you to open the doors for a legal lending operation, paing attorneys and accountants if you can't do loan reviews and underwriting.

You might consider buying a mortgage company from an owner if you're swimming in cash, let the employees teach you while you manage the financial end.

A degree in finance will be helpful, but it does not prepare you for lending. And, again, selling your loans is another ball game.



Lupe Santiago

Las Vegas, Nevada

Aug 29 '12, 10:56 AM


@Bill Gulley Hi - thanks for your reply and help! I believe CA doesn't distinguish between mortgage brokers and real estate brokers. The RE broker's license covers both worlds.

Not sure what you mean by using notes as collateral - I don't plan on doing such a thing so forgive me if I wasn't clear in my description. I'm using the RE as the collateral for the hard money loans I originate then selling it to investors who want a well-secured, high interest bearing short term note at par value. No premiums or discounts involved. Just good old high interest rates.

I'm not really interested in buying a mortgage company because I don't plan on originating mortgages in the traditional sense (it will be non-owner occupied, to LLCs, business-purpose only). I spoke with CA Dept of RE this morning and they said that the need for a Mortgage Originating License in CA is determined by the use of the loan, and not the underlying collateral. So if I only lend to flippers and non-end users, there shouldn't be a problem in the foreseeable future with having only a broker's license.

Luckily, I have a law degree from a good school and will soon be a member of the CA bar so I should be able to obtain the broker's license fairly quickly. Sorting out all the licensing requirements is a pain though! I know I come off as ignorant to the world of lending, but I am quite familiar with the business of distressed real estate. It's tough to get started, but the community here is certainly a big help in sorting these issues out. Thanks everyone!

@Jeff S, @Brian Burke, @Corey Dutton, @David C.



Bill Gulley

Real Estate Investor from Springfield, Missouri

Aug 29 '12, 11:39 AM


LOL, Attorney's are exempt from origination under the SAFE Act and usually at the state level for real estate agent/brokerage requirements. You'll be able to identify the liability issues then. As to other mortals, a Realtor/Broker may not be in the clear at the federal level. RE brokers are usually only covered when acting in RE brokerage capacties, in transactions they are involved with, not arguing at all, but that's my understanding and they can't run around doing mortgage originations as a free lancing mortgage broker. Commercial is pretty open. With your license, I'd suggest you get into underwriting seller financed deals, guarantee the deal, have them sub-serviced or later on service the loan with a clerk eventually and take them out with a new loan when due or in default obtain the deed or foreclosure . If interested, PM me, very good way to pick up properties from the original seller at a loan payoff, sometimes less.
:)

Oh, obtaining a loan by using the note you made as collateral. Portfolio financing...


Edited Aug 29 2012, 11:47 by Bill Gulley


David C.

Real Estate Lender from Palm Desert

Aug 29 '12, 11:40 AM


Lupe,

You might give the DOC a call as well. If all you want to do is lend your own money, and not resell to other than another CFL, the CFL would work and is easier to get...not that the Real Estate Broker's license is all that much more difficult.

As you mentioned, you don't need the NMLS endorsement on the REB license if only doing business purpose loans, but (i think) you do need the endorsement with the CFL license regardless of loan purpose.

Good luck.

David



Jeffrey Palmer

Los Angeles, California

Feb 20 '13, 10:16 PM


I assume that if you just want to make loans with your own money to business associates, you do not need a license if it is negotiated through a real estate brokers. Is that correct?

Section 10131.1(b)(1)(C) of the CA business and professions code

(C) The making of eight or more loans in a calendar year from the
person's own funds to the public when those loans are held or resold
and are secured directly or collaterally by a lien on residential
real property consisting of a single dwelling unit in a condominium
or cooperative or on any parcel containing only residential buildings
if the total number of units on the parcel is four or less. However,
no transaction negotiated through a real estate broker who meets the
criteria of subdivision (a) or (b) of Section 10232 shall be
considered in determining whether a person is a real estate broker
within the meaning of this section.



Bill Gulley

Real Estate Investor from Springfield, Missouri

Feb 21 '13, 08:17 AM


I just don't buy it that a Real Estate Broker can be a loan originator and operate in mortgage brokerage operations in ANY transaction where that RE Broker is not acting in an agency capacity to a real estate sale transaction. I think if you dig deeper you'll find that even the law makers in Cali did not intend to make a RE Broker a Mortgage Originator to the public.

No RE Broker is required to know diddly about mortgage originations ebyond the scope of a real estate sale transaction, there is no training at all, yet the law makers require someone who does the same thing outside any sale transction have a MO license.....think about that, that makes no sence at all.

I think you're getting some bad info here. I also think some read the regs as to what they want to understand and once they are satisfied, they stop investigating.

There is a much better way for you to avoid all of these issues and never be concerned with any loan origination issue.

Form an LLC as a flipper RE investing entity, not as a lender.
Since you say all of your business will be from other flippers you are not targeting the general public but a small slice of RE Investors.

Approach your customer/client and most will be in an LLC. You can provide all the documents necessary for thier LLC to join your LLC or yours, thiers, forming a temporary partnership. Now you are an inside money partner. Do the deal. You can charge interest and have any equity arrangement you can negotiate. When the deals is done, you or they exit the company....DONE! If they are going to be ongoing clients, you can stay as an insider.

Get liability insurance. The insurance and the doc filings will be less than paying any mortgage originator.

BTW, it's easy to say get E&O coverage and liabilty insurance, but as a lender, good luck with that. No insurance company is going to give you, someone without a license and no experience E&O coverage or liabilty coverage for lending activities, and if you do find some nut agent who will, it will cost you very dearly, but I doubt you can get it anyway. Try getting bonded without a license!

Partner and liability as a "lender" goes away entirely.

Liability as a member is limited to members, your LLC is the member, not you, that's another firewall, top that with liability coverage. You only fund your LLC as needed, othewise it's empty!

The risks are about the same, if your fliiper flips out and fails, you as a lender must foreclose, if as an insider, you simply have an event of withdrawl from your fliped out partner and you have the whole deal, much better position.

In short, you do not need to be a "Lender" to loan money or provide funds, earn interest, manage deals, sell notes or do anything you are thinking of doing. I assume, since the OP never got back on his attorney status, he is not an attorney, even with a good understanding of contract law, you should be able to address this simplified appraoch to fund partnerships as a business. You're a capital entity, not a lender. :)


Edited Feb 21 2013, 08:24 by Bill Gulley


Brian Burke Verified

Real Estate Investor from Santa Rosa, California

Feb 21 '13, 08:32 PM


@Jeffrey Palmer, what you describe sounds like a principal-to-principal lending transaction and would not require a license unless you fall under the frequency outlined in the civil code. Double check with your legal counsel before proceeding, however.

@Bill Gulley, good suggestion on the structure you outlined. I do have a watered-down rebuttal regarding CA licensure law, however. Until a couple of years ago, any licensed real estate broker could originate mortgage loans in CA. Nowadays (since the advent of NMLS), this is still true, except the broker must now also have a Mortgage Loan Originator endorsement on their license. Existing brokers could use their previous training (or lack thereof, as the case may be but it doesn't matter) to satisfy the pre-endorsement education requirement, and could simply take the test. New brokers must now take some special classes in addition to those required for the brokers license prior to taking the MLO endorsement test.



Medium_praxisBrian Burke, Praxis Capital, LLC
E-Mail: [email protected]
Website: http://www.PraxCap.com
Have you heard my BP Podcasts? biggerpockets.com/show3 & biggerpockets.com/show76


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