Licence For Promissory Notes?

Question

I've been loaning businesses rehab funds for their projects and was wondering if my business activity requires a licence in Oregon state. I'm in Washington and so is the business I loan to however the projects are in Oregon. Looking at the two dozen business licence types it is not clear where my activity would fit in. I might just contact the department directly to see what they think.

https://mortgage.nationwidelicensingsystem.org/slr/Pages/DynamicLicenses.aspx?StateID=OR

Account Closed · Answer

@Jay Hinrichs

Wanted to share what I received from the Senior Policy Analyst for Oregon Department of Consumer and Business Services.

"Good morning Joe –

The first question is whether the property securing the loan is “residential real estate” as that term is defined in Oregon Revised Statutes (ORS) chapter 86A, The mortgage lender licensing requirements contained in ORS chapter 86A are triggered by the character of the property rather than the nature of the loan (i.e., the real estate transaction involves "a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest . . . upon which four or fewer residential dwelling units are planned or situated, including but not limited to individual units or condominiums and cooperatives. As used in this subsection, ‘residential dwelling unit’ means an improvement designed for residential occupancy.").

You may be eligible for the “private money lender” exemption. If the investor is an individual (i.e., natural person) as opposed to a corporation or limited liability company, then the individual may be exempt from the licensing requirements contained in ORS 86A. Oregon Administrative Rule (OAR) provides that: "An individual is not engaged in the business of making loans secured by an interest in real estate as used in ORS 86A (3)(a)(C) and (5)(a)(F) if the individual is making a loan from their own funds and does not make more than 10 loans secured by an interest in residential real estate during any consecutive twelve month period if they do not advertise or otherwise hold themselves out as being in the business of making mortgage loans." Please note that the correct references for the statutory exemptions are: ORS 86A (3)(b)(C) and 86A (5)(b)(F). You should also note that the statutory references contained in the rule will be fixed in a future rulemaking governing technical corrections. Even if you are eligible for the exemption, you will need to obtain the services of an Oregon licensed mortgage loan originator unless the loan is for construction or rehabilitation of the property.

A "private money lender" who is eligible for the licensing exemption contained in OAR does not need to obtain the services of a licensed mortgage loan originator to document a transaction under OAR. Specifically, it states:

(1) An individual need not obtain a mortgage loan originator license under ORS 86A.200 to 86A.239 to make a residential mortgage loan in which the borrower will use the funds to construct, alter, move, enlarge, replace, repair, or develop land for one to four dwelling units designed or suitable for residential occupancy subject to the following conditions:

(a) The borrower does not intend to reside in the completed dwelling;

(b) The lender verifies that the borrower is licensed by the Construction Contractors Board as a contractor and holds an endorsement as a:

(A) Residential general contractor;

(B) Residential specialty contractor;

(C) Residential limited contractor; or

(D) Residential developer.

(c) The lender determines that the loan is not for personal, family, or household purposes. In making this determination, the lender shall consider:

(A) The borrower's relationship between her primary occupation and the acquisition;

(B) The degree to which the borrower will personally manage the acquisition;

(C) The ratio of income from the acquisition to the total income of borrower;

(D) The size of the transaction;

(E) The borrower's stated purpose of the loan; and

(F) Other relevant factors that would indicate the loan is for commercial purposes.

(d) The lender does not collect a consumer's financial information that would require the lender to provide a loan estimate under 12 C.F.R. § 1026.19(e);

(e) The lender does not advertise that, or otherwise suggest by statements or conduct that, the limited liability company engages in the business of making residential mortgage loans;

(f) Neither the borrower nor the lender structures a transaction as to evade licensing requirements for mortgage bankers, mortgage brokers, or mortgage loan originators;

(g) The lender does not engage in prohibited conduct or activities under ORS 86A;

(h) The individual does not engage in prohibited conduct or activities under ORS 86A;

(i) The lender maintains records documenting its compliance with all conditions under this exemption and makes such records available to the Director upon request. Records must be maintained for a period of five years after each loan is made. A lender may maintain records in any electronic format capable of being reduced to written form; and

(j) In addition to the records that the lender is required to maintain under OAR (1)(k), the lender maintains records used to make the residential mortgage loan, including, but not limited to, tax returns, bank statements, financial statements, annual operating statements, and business operating statements. Applications for commercial construction loans should be limited to balance sheets and other information customarily collected for commercial real estate lending.

(2) Section (1) of this rule is self-executing and does not require filing or a fee.

(a) Persons relying on exemptions from licensing have the burden of proof in establishing the availability of the exemption.

(b) If the lender fails to document and maintain records of a transaction, the rebuttable presumption is that the transaction required a mortgage banker license and a mortgage loan originator should have taken the loan application."

Jay Hinrichs · Answer

Account Closed  key to this is making sure your borrowers are either licensed GC or have a Developers license.

in Oregon to rehab homes for resale a developers license is required. or a GC license.. Many folks don't realize this.

but that's why its mentioned in this correspondence with the state.  10 loans a year is more than I thought I thought it was 3 to 5 .. so that's pretty good carve out here in Oregon..

Jay Hinrichs · Answer

With our HML in this area averaging 250 to 500k  this allows someone with 2 to 5 million in cash to get it deployed and be totally legal and control their own loans.. Very nice for Oregonians..

Jay Hinrichs · Answer

other tidbit that is an Oregon rule.. is loans under 50,000 .. have strict usury rules.. so as a matter of practice loans should always be 50k and above.. although it would be rare to find a sub 50k first in this market  rural Oregon not so much. Again this means your originating not buying an existing note.

Jay Hinrichs · Answer

YUP  big question would be if your doing those out of a check book IRA which is usually set up with an LLC. Most mom and pops lend out of the IRA's in some form or fashion.

Jay Hinrichs · Answer

I believe you would be ok and fall under the carve out provisions. that are intended for private investors.. they don't want you advertising or holding yourself out as a lender and the volume is like you describe a couple a year.. but you did the right thing check with the state.

Jay Hinrichs · Answer

Oregon has a carve out for 3 or so loans a year no license required.. but if you doing volume or in the business then yes license required..  WA no licnese required.

Account Closed · Answer

@Jay Hinrichs

Thanks Jay!  The blog post motivated me to ensure I wasn't exposed to any liability with my personal capital.  So if I was doing these notes through an LLC, about one or two a year, would this activity require a licence in Oregon?  I sent an email to the state department as well to see what they say.

Chris Seveney · Answer

@Jay Hinrichs

Other key there on exemption is “ordinary person” vs corporation.

Licence For Promissory Notes?

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