Learn about some compliance considerations for private lenders (aka hard money lenders) that want to lend on a national scale. Private Lender Link’s CEO, Rocky Butani visited Geraci Law Firm’s office in July 2023 to interview Dennis Baranowski, Esq. Watch the video or read the transcript below.
ROCKY BUTANI:
So for lenders out there that lend in one state or one region and they’re ready to go national, they want to just lend in as many states as they can, what are some of the things that they need to consider and be cautious about?
DENNIS BARANOWSKI:
That’s a great question. And I think a lot of lenders, when you’re trying to move into a different state, don’t always understand or consider that when they’re doing so. Probably the first question is, are you able to lend in that state? And that’s really taking a look at whether or not a license is required to make a loan there. Some states will require a license, some don’t. There are a lot of nuances that are involved in making those decisions. You want to conduct your compliance analysis and determine first whether or not a license is required. And then once you get past that, then you have to look at what else is required to comply? Every state has different usury laws. Every state has different limitations on late fees, default interests, whether or not you’re even able to collect default interests, whether or not you can collect a prepayment penalty. And there are a lot of nuances involved in each of those different aspects of a loan and the loan terms that are going to depend on the type of property, the type of borrower, even the type of loan or purpose. Obviously, consumer loan is going to have a much more stringent requirement on what type of terms are allowable as opposed to if you were making a business purpose or a commercial loan.
ROCKY BUTANI:
But in general, private lending is mostly business purpose lending. So most people just assume that, “hey, it’s business purpose. I can lend in any state anywhere”, but the exception of California and everyone knows that they require licensing, but in general, that’s kind of what I hear from a lot of lenders and brokers. They think they don’t need a license anywhere in the country.
DENNIS BARANOWSKI:
Yeah, And in general, that is going to be true. But a lot of states you would be surprised require a license still, that lenders may not even understand that one’s required. And a few examples, you know, Oregon requires one, Washington requires one, Nevada requires one, just to name a few. Oftentimes, there’s a going to be an exception to that licensing requirement if it’s brokered by a licensed broker. Like California, for instance, you had mentioned, there’s an exception to the licensing requirement if it’s licensed by a DRE broker. An individual without a license or an entity without a license is allowed to lend in California. So it really is going to depend on which state you’re in, again, type of loan and not just whether it’s consumer versus business purpose, which as you had mentioned, most of our clients and the listeners here would be making business purpose loans but it’s also gonna be property related because, you know, a lot of times, there are gonna be limitations related to single family residences. They’re going to be a little bit more stringent on the licensing requirements there versus maybe doing multifamily or some other type of commercial building.
ROCKY BUTANI:
Let’s say a lender has this plan to go national. Do you find that they do it in phases, where they pick a certain region and say okay, let’s expand here, get our compliance down, and then let’s move on to the next region and go all the way west or east, depending on where they are?
DENNIS BARANOWSKI:
Generally speaking, when I am first contacted by a client or a potential client, looking to expand their practice and the boundaries in which they’re going to lend, at first it is kind of that, “let’s take a look at all 50 states, what do I have to do?”, And then when we kinda have a conversation, you start really narrowing it down. And operating a business, you really wanna have a plan and you really want to use precision when determining where you wanna lend. And so generally, as we have a conversation a little bit longer, we determine, oh, well I’m really just looking at Florida and Texas and maybe Colorado. And then we start really focusing in on those states. I think trying to take a holistic approach to the entire US is going to be a pretty big mistake. It’s a huge task to really undertake. And quite frankly, it’s quite expensive. It’s not a cheap undertaking to try and make sure you’re compliant in all 50 states, especially if you’re not even gonna lend there.
So what we found is trying to figure out, what states are you interested in? What states are you trying to move in? Do you have any leads in specific states? Let’s focus on those ones first and then we’ll operate and we’ll go okay, well what are the loan terms that you want to have? Do you need to be licensed? And if a license is required, what are the exceptions? How are you going to build out your business model to practice in that state so you can be compliant? What are the loan terms that are allowable there? Are there limitations, for instance, on a prepayment penalty because it’s secured by a single family residence? And then also the loan, your loan documents are going to change. You need to make sure that you understand when you go into a specific state, what are the disclosures that are required? What has to be in my loan documents that are different, even something as simple as is it gonna be a deed of trust or is it gonna be a mortgage or is it a security deed like in Georgia or something like that. And so each state is going to have different requirements. I also think it’s a good idea for a lender to understand what the foreclosure process is.
Obviously from a lender standpoint, I shouldn’t say obviously, but from a lender standpoint in most instances, they’re gonna wanna move forward with a non-judicial foreclosure. That’s gonna be a summary process. They’re gonna be able to complete the foreclosure in much less time. In a lot of states, it’s anywhere between probably about two to four months as opposed to needing to foreclose judicially, which means you have to file a lawsuit and then go through all of that lawsuit. And even the best states that are most streamlined are still at best, comparable to the lower end of the non-judicial states because you’re not just dealing with timelines that are statutory, saying okay, you have to file and do this by these dates.
But also a lot of times, courts are clogged up and move a lot slower. And then you get into other states, where, for instance, like Vermont has, the foreclosure in Vermont is like 300, I think the average is about 370 days. So as a lender, you’re gonna have to wait over a year to foreclose on your loan judicially in Vermont, which, nobody wants their money tied up like that. And especially if you start getting into a situation where the economy were to turn and you start losing equity in the property, how are you gonna recoup your investment? How are you gonna make sure that if you have investors that you’re responsible for, how are you gonna make sure that they’re gonna continue getting the return on their investment if the borrower’s not making, at least even interest only payments. It just keeps compounding and then, hopefully you’re able to recover everything. But that’s not always gonna be the case.