Private Lending in California

[Adit S.]

What's going on everyone,

What does it take to originate and record a loan in California from an LLC?

Will a simple promissory note be enough to record a lien on the asset?

Do I need to be licensed? Any advice?

Thanks

[Kyle J.]

@Adit S. You don’t say what type of loans you’re considering making, so I’ll just offer a few general comments. 

Under the Dodd-Frank Act, if the loan will be secured by a property that the borrower will use for residential purposes, then the person who makes or arranges the loan would be defined as a “loan originator,” and must have a mortgage originator license.

However, Dodd-Frank doesn't apply to non-consumer buyers, so (for example) if you want to loan money to an investor who will borrow under their LLC to flip a house then you'd be exempt from the mortgage originator license requirement of Dodd-Frank.

But since you’re in California, there are state laws that apply. The main one is 10131.1 of the Business & Professions Code, which basically says that you need to be licensed if you’re “in the business” of making loans. The code explains in detail what “in the business” means, but for most people the one that matters is (in summary) making 8 or more loans in a calendar year from the person’s own funds to the public. 

So if you make less than 8 loans in a calendar year, you don’t need to be licensed.

Lastly, to answer one of your other questions...no, a simple promissory note would not be enough to record a lien on the property. Having only a promissory note would basically be an unsecured loan. (You don’t record notes.)  You’d also need a Deed of Trust to make it a secured loan.

That’s by no means an exhaustive list of everything you’d need, but here’s another post with a response that does have a good list and some excellent information from an experienced lender who’s also in California:

https://www.biggerpockets.com/forums/49/topics/413352-private-lender---forms-required