Why Hard Money Lenders May Need a Mortgage License

Question

Private money, non-bank lenders, also called hard money lenders have always lent money without the need of a mortgage licensing. But the financial reform following the real estate meltdown, namely the Dodd Frank Act, has subjected most financial services companies to regulation. For non-bank lenders who are lending their own funds, whether as individuals or as an organized company or fund, it now depends on the property “type” whether or not mortgage licensing is required. If one is lending one’s own money, or a fund’s money, on residential property with one to four units, one may need to be licensed depending on the State the property is located.

Many hard money lenders are confused and believe it is not the property type that dictates licensing, but rather the occupancy status, e.g. owner occupied versus non-owner occupied. This is the most common mistake that hard money lenders are making, and this mistake could cost them up to a $10,000 fine per transaction if caught making loans without a license on residential property. Make sure you’re in the know if you’re lending your own funds or other people’s funds! Don’t consult an attorney, but rather start by calling the Division of Real Estate or the Division or Mortgage Lending at your State level. Whichever institution at your State level that governs mortgage lending and/or real estate. Give that State regulatory official that you speak with, a very detailed description of the type of lending you are doing, how you’re doing it, etc. Bottom line, under the Dodd Frank Act, you must now have a mortgage license in most States in the U.S. to originate residential loans on properties one to four units, regardless of whether the properties are owner occupied or not.

Jeff S. · Answer

I'm among the world's leading experts on retaining the most world class, lousiest, unknowledgeable, blow-hard, attorney's you will meet, @Corey Dutton.

In fact, I've written here previously how we found the worst real estate attorney on the face of the Earth when we first started lending.  No one is better at this than I am.

Since then, and more seriously, I've written how we figured out how to find a truly great and well-respected lending attorney, as well as other professionals who fit our needs as lenders, perfectly.  Our attorney lives and breaths lending & securities and is used by many, I'll say most, of the serious private lenders in at least southern California.  (PM me if you want the name)

I'm always leery of writing about legal matters on this board but I so disagreed with you, which is why I did. The unwashed masses, of which I'm a card-carrying member, will often believe anything they read on a message board or from the front of the room at a real estate club. Had you qualified your post and said it was Utah specific, which I now assume it is(?), I wouldn't have responded.  I can assure you everything I mentioned above, though grossly paraphrased, came from our lending attorney – the good one.

Finding a good attorney in this business is crucial to navigate the minefields, and I agree that it must be done state-by-state.  Unfortunately, as you suggest, recognizing when you've got a loser lawyer is equally important and this is not always obvious until it's too late.

Jeff

Anje Walfoort · Answer

This is directly from the California Department of Real Estate. Key to the type of license that you have to have when working as a Hard Money Broker is how the borrower intends to use the property. Please read the following to get answers to questions from above.

Bureau of Real Estate SAFE ACT &dash; Frequently Asked Questions

Do the New MLO License Endorsement Requirements Apply to Me? 1 Q. What is the definition of mortgage loan originator?

A. Mortgage loan originator means an individual who for compensation or gain in expectation of compensation or gain takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan.

Q. What is a residential mortgage loan? A. A residential mortgage loan is any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling or residential real estate upon which is constructed or intended to be constructed a dwelling. Dwelling means a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit,, if it is used as a residence cooperative unit, mobile home, or trailer

Q. I broker only commercial mortgage loans. Do I need a Mortgage Loan Originator License Endorsement on my CalBRE license?

A. No.

Q. I am a broker or salesperson arranging residential mortgage loans 1-4 unit properties for investors. Do I need a Mortgage Loan Originator License Endorsement on my CalBRE license?

A. Yes, if the loan is made for personal, family, or household use. Note: A mortgage loan originator who only originates loans for investors who will use the loan to purchase rental properties for income will not need an originator license, but if any of those investors purchase a property for a family member or for other personal use, then he purchased it for personal, family or household use and the loan agent would have to have the MLO License Endorsement on the CalBRE license BEFORE soliciting the investor/borrower, taking an application or negotiating the loan terms. Disciplinary Do the New MLO License Endorsement Requirements Apply to Me? 6 action and penalties would apply if any of these activities were conducted without the MLO License Endorsement

The use of the property is key to determining the need for a Broker's License or an MLO license.

Jeff S. · Answer

Sorry @Corey Dutton, but I disagree with almost all you wrote, much of which is not even state specific.  Dodd Frank for example, does not distinguish between occupancy status, but the use of the money.  See Section 1002 5(A):

"The term ‘‘consumer financial product or service’’ means any financial product or service that is described in … offered or provided for use by consumers primarily for personal, family, or household purposes…"

(For what it's worth, this definition was written into the California Constitution decades ago.)

It's not occupancy that defines a consumer purpose loan, nor the property type, but the use of the money.  That is, is the use for personal, family, of household purposes?  If not, it's a business purpose loan.  This might dictate the disclosures, but not necessarily licensing.

There are many instances where you could lend money to a homeowner, secured by his or her single family personal residence, that would be for a business purpose and therefore exempt from Dodd Frank, the Safe Act, TILA, RESPA, etc.  Similarly, there are instances where you could borrow money secured by a shopping center where DF and the others would collectively apply.

Many lenders don't seem to understand this and believe occupancy is the criteria. How does this dictate licensing anyway?

I would not rely on anyone that picks up the phone at your state's licensing authority to confirm this. You'll have no idea who you are talking to.  While there's nothing wrong with that, here you really need a good attorney who specializes in lending in your state.  That doesn’t necessarily mean a real estate attorney.  Advising others not to speak to an attorney for this sort of information is ill advised.

In addition, licensing is generally controlled by the states, though federal law such as the SAFE Act could apply, depending upon its adoption in your state.  Some states, such as Nevada, are extremely restrictive and do not recognize a difference between consumer and business purpose loans.  They pretty much require a license for all loan activity that's secured by real estate.  Others are quite lenient, such as Colorado.

Plus, the consequences for making a mistake can be more severe than the $10,000 fine you cite.  I don't know where that came from.  In CA for example, the penalties for usury, which can result from lending without a license, can be both civil and criminal.  These include paying back a multiple of all interest paid by a borrower over the past few years to (not widely used) jail time for loansharking!! No, the borrower doesn't get a free house, which is also believed by some, though there are strategies they can use to try.

Sorry, but in my view, you made some overly broad, ill advised, and in many instances flat out incorrect statements and recommendations here, that others should take heed before accepting.  In fact, since neither you nor I are attorneys, no one should listen to either of us!!! Something we can both agree on :-)

Jeff

Account Closed · Answer

As a private lender, I do like Utah's usury limit ... none.  I wish we had that limit in California.

Logan Hicks · Answer

If you want the definitive answer, call the person who will be handing you the fine. They will be able to tell you what is, and is not allowed, and its illegal for them to intentionally mislead you, and can be used against the state should you get their comment in writing. Being mislead by an official of the state in an oversight position to a particular field is grounds for dismissal of fines, penalties, and/or charges against you.

Dont waste your time and money calling some two bit attorney who charges you a 3500 dollar retainer, call the people who will charge you for violations. They are a lot easier to get ahold of, and far more reliable.

Jeffrey S. Breglio · Answer

Corey, first, you're using other people's money (OPM) to loan out. That's a VERY different thing. That's "brokering" and ALWAYS requires a license, period. So the above analysis is irrelevant to what you're doing and it's good you have a license. It's less clear with private lenders using their own money, which is what the majority of local hard money lenders are. All lenders that I work with that use OPM also have a license. So it's good to clarify that to readers of this post. Second, using OPM may also subject you to SEC and state securities regulations and registrations, depending on how you are raising the OPM. :)

j.

Jeffrey S. Breglio · Answer

Hello All,

I am an attorney here in Utah working with real estate investors. And I hope I was not the one being referred to... :)

Here's the short answer: Any person involved in the origination or making of a loan secured by a first position lien against a “dwelling” is engaged in the “business of residential mortgage loans” and is regulated under the Act, irrespective of whether the loan is a “hard money” loan, a commercial loan or a business loan (as opposed to a loan primarily for personal, family or household purposes).  Under the Act, however, a “dwelling” appears to be limited only to residential-type property that actually is occupied or otherwise “used as a residence.”  Of course, this position is not beyond argument. So, in other words, unconfirmed.

The longer answer, but still short, is that there are two problems with Utah's statute. First, the "use" argument (i.e., if the loan is not used for "personal, family or household use" then you don't need a license) seems to be (and mostly likely will) applied to "mortgage loan originators". These people already have a license so it's kind of moot. They essentially created an exception where there doesn't need to be one. So, why? We don't know. This is the exception that other states, and many federal interpretations, as Jeff S pointed out, have used to allow hard money and private lenders to make loans without a license. Utah has not taken, at least not by statute or court interpretation yet, that position.

The second problem is actually the term "dwelling" that is used in the statute as part of the licensing requirement. Here the term "dwelling" is defined as a home, condo, etc used as a  "residence." (This is different than personal, household use) Like the "use" argument above, this has not been clarified by statute or by court interpretation. But, strictly speaking, if you're not loaning on a "dwelling" then you don't need a license. This is why most of my clients have covenants of "non-occupancy" and "agreement not to lease" in their loan docs to pass the liability onto the borrower in the event the property is ever occupied as a residence. This is the exception that most local lenders without licenses rely on. But not super solid ground to be sure.

Finally, the issue of enforcement is important. How aggressive is the DRE in enforcing this? Not very. Some big lenders have been around a very long time and are quite open and public in their advertising. The DRE always takes a very broad view of licensing. That's their job--to protect licensees and the public. They don't always win their case, however!! In fact, I've often seen them lose. So, just because they take a position doesn't mean they are right. That's what courts are for. I imagine they will take the position that what we call "hard money lenders" will need a license (simply because 15 years of experience with the DRE leads me to that conclusion, not because it's fact). Lenders have to be aware of that, and do they want to be the one to challenge a DRE position... On the other hand, there are strong "strict interpretation" arguments that a license is not required.

So, see short answer above.

Hope that helps.

Jeff

Corey Dutton · Answer

Thanks Jeff. I couldn't agree more with you on that.

Chet Mazur · Answer

Before I say hard money lender organized on the consumer finance law which has now become Department of BusinessOversight (DBO) protects consumers and oversees financial service providers and products

Jay Hinrichs · Answer

@Corey Dutton

Jeff S Na

Agree with Jeff on this one way to broad and inaccurate.. portions are correct others are not.  and most states did not adopt the stricter federal guidelines in fact the opposite is true.. 17 states or there about adopted federal standards as state standards.

And this is very state specific.. for instance in Oregon.. it does not matter what the rules are in other states you may lend in.. If your business is domiciled in Oregon and you make a loan on a 1 to 4 regardless of business purpose or not you need NMLS license and state license.  And Oregon had these rules PRE dodd frank.

In CAlifornia a RE brokers license will allow you to do some lending as well.

So yes each state is different and one needs to be up to speed....for sure.

Why Hard Money Lenders May Need a Mortgage License

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