Broker Needed for Hard Money Loan

[Reese Newell]

First off, I am a long time lurker of the forums and have finally began to segue over in to real estate investing in the last year.  I have so much respect for those on this forum that help out and am so thankful from the knowledge I've gained from browsing over the years.

As to my question, I am looking to secure a second lien position with a personal guarantee on a hard money loan in Pasadena, CA.  The usury laws from what I have been able to learn about in California are very ambiguous as to what is legal and what is not.  The 10%+ loans appear to need either a qualifying CFL or a Broker to write the note.  The other work around seems to be if they are a seasoned investor with over a certain amount in loans.  While they fit the latter part, I am nervous to violate any laws.  While searching the internet for weeks and contacting a lot of brokers, I have had a very hard time finding any broker versed on this niche and able to help.  Would anyone be able to help with this by pointing me in the right direction, or a broker themself willing to provide assistance.

Thanks so much!!

Reese

[Jeff S.]

You don’t need a broker at this point, @Reese Newell, you need a good lending lawyer to explain the law and clear things up for you. You seem dangerously confused.

Perhaps this will help you.

Usury is defined in Article XV Section 1 of the California Constitution, which is admittedly tough to read. It basically says that any loan made in excess of 10% APR is usurious. There are other references to the S.F. Fed rate + 5% but this total has been so low for so long, it's not currently relevant. This is for any loan on anything, though it seems that everyone and their brother gets a usury exemption including banks, credit card companies, and even pawnbrokers.

If you are making a loan secured by real estate, there are at least two other entities that get usury exemptions: Licensed CA Real Estate Brokers and Licensed California Finance Lenders (CFL's). That is, if a real estate loan is originated by either license holder, there is no limit on the interest rate that can be charged. (Although the CA supreme court recently cracked down on a payday lender for charging "unconscionable" rates into the triple digits – could be a sign of things to come for HML's).

A CFL can only originate loans using their own money and they can only sell them to other CFLs. There are exceptions, but this means that a CFL cannot arrange a loan for you, Reese, only for themselves. FYI, my wife and I are licensed CFL’s.

CA real estate brokers are licensed to do business with the public. They can transact real estate, hire and fire RE agents, make and originate real estate loans, as well as sell them to the public. You will need a broker to originate your loan.

Understand that since they deal with the public, there are more restrictions on a real estate broker. Since around 2013 I think, brokers must comply with SB 978 which defines suitability requirements. That is, you can’t use more than 10% of your net worth exclusive of your home and possessions, per loan. There are also LVT and funding requirements that depend on the type of loan, which you didn’t state. That is, this might or might not work for you.

All Hard Money Lenders have or are a broker of record (or they are CFLs). Instead of looking for a broker, who might only be knowledgeable about transacting real estate, I suggest you talk to some of the larger HMLs in the area. The AAPL website is a good place to find legitimate HML's and knowledgeable lending lawyers. (Full disclosure: We are on-again off-again members.)

Also, there is no “workaround” for a seasoned investor. I don’t know where that could come from. On the other hand, and I WOULD NOT RECOMMEND THIS, if your loan is for 10% APR or less, you might be able to arrange the loan yourself under some very limited circumstances. Here again, you should speak to a local lending lawyer. You might want to do that anyway and not listen to me.

Though I see it on this board all the time, lending is not a do-it-yourself activity, Reese. Seconds, I’ll add, are even more dangerous. I assume you have the wherewithal to get wiped out on occasion? Please be careful. And, talk to a lawyer first.