Many states require a license for a lender to do business in, however, there are some exceptions within the rules. Lender Link’s CEO, Rocky Butani visited Geraci Law Firm’s office in July 2023 to interview Dennis Baranowski, Esq. to learn about these states and how private money lenders can take advantage of some of the exceptions to the licensing requirements. Watch the video or read the transcript below.
ROCKY BUTANI:
If I’m a private lender, I only do business purpose loans for investment properties, which states require a license?
DENNIS BARANOWSKI:
It’s going to depend on the type of property and, potentially, even whether or not the borrower is an individual or an entity. Some of the better known states are California, Nevada, Arizona, and Washington. But overall, there’s about, I believe it’s close to two dozen states that have some sort of licensing requirement or another. Most of those have pretty simple exceptions to the licensing requirement. Oftentimes, it can be something as easy as it’s brokered by a licensed broker who’s licensed within the state where the loan’s being made, or it’s not a single-family residence, or it’s not owner-occupied. So there’s a lot of different nuances in how that operates. We have a 50-state survey that we reference on our own, pretty much on a daily basis. So anytime a loan transaction comes in, or a client has a compliance question, we’ve conducted and compiled thousands of hours of research and conversations and advice from local counsel to create these 50-state surveys that cover everything from whether or not a license is required to be a broker, to be a lender, what are the usury restrictions there, if any? What’s the choice of law, if your loan documents have a provision and say, ” The parties agree that the law that governs this note is going to be California?” Does Tennessee honor that agreement and honor your choice of law and the borrower’s agreement to California being the choice of law? Or does that state say, “No, actually, when it comes to these specific things, it’s usually usury that we’re going to apply our state’s law and not what you chose in your loan documents.”
ROCKY BUTANI:
Aside from all the nuances of each state, if I’m a lender that’s doing a business purpose loan secured by residential investment properties primarily, maybe some small multifamily, and I want to do it on a national basis, but I don’t want to deal with these states that require a license. What states should I avoid?
DENNIS BARANOWSKI:
It’s still kind of the same thing. Most of the states that require a license will have some sort of exception to the rule. For instance, in California, a license is required to make a loan here. But an exception to that rule is having your loans brokered by a DRE licensed broker. And again, it could be a matter of, if you’re a private lender and you do fix and flip loans and you want to go into another state, I believe it’s, and don’t quote me on this, but I believe it’s Washington that has certain restrictions on single-family real estate and require a license. But again, you can remove yourself from that requirement by having a licensed broker involved.
ROCKY BUTANI:
California is one of the states that you mentioned where if I’m a lender in another state, I can still do a loan there, I just have to have a licensed broker involved. So that means I don’t have to have a license there and I’m essentially acting as the lender or investor for that loan. How does it typically work? I find some broker who’s got a department of real estate license in California and they have to process the loan for me and they essentially become the broker of record?
DENNIS BARANOWSKI:
Correct, and thank you for clarifying how that works. I know a lot of people look for the Reno broker-type of situation, but if you end up getting audited and have a regulator really look into it, I’ve seen this happen in both Washington and Arizona with clients before where they had a broker in name only, and they really handled all the contact with the borrower and collected all the information and even provided the disclosures. And the broker really did nothing, he was just copied on e-mails. And the clients got in trouble. The state regulators looked at that as like, “Nope, that does not fall within the exception,” because the whole purpose of those broker requirements is to ensure that the borrower is adequately represented and is receiving the disclosures that are required and that somebody’s going to be held accountable within that state. And so if you’re a licensed broker, let’s say, in Washington, you’re going to be held accountable by the Washington state regulators to make sure that you’re making the disclosures and you’re doing what you need to do. And so the states have an interest in ensuring that it’s not just a broker name-only and it’s really, someone that’s participating and engaging with the borrower.
ROCKY BUTANI:
If there’s a deal that I, as a lender based in Florida, want to fund in California, and I find a licensed broker who’s willing to work with me, they just have to be a lot more involved and not just say, “Hey, I’m gonna receive this fee for being your broker of record.” How involved do they need to be? Do they need to be involved in the underwriting and some of the due diligence?
DENNIS BARANOWSKI:
They don’t necessarily have to underwrite the loan itself. It’s really a matter of collecting the information from the borrower and providing the disclosures that are required under the Business and Professions code and the California Code of Regulations. That’s really more of what we’re looking at, is them being active and doing the things that a broker is supposed to do to protect the borrower.
ROCKY BUTANI:
Could you tell us about some of the other states that have that similar dynamic where if I’m a lender in Florida I have to use a licensed broker to complete that loan? Besides California.
DENNIS BARANOWSKI:
Arizona is another one, it operates very similarly there as well.
Oregon is another state that requires that. Oregon actually was the first state where I saw the issue pop up for one of our clients that really just rented a broker and the broker wasn’t involved. And so it was really difficult to really make sure that the regulator didn’t come down too hard on our client.
Washington is another state that does it as well. So that’s just a few examples.
ROCKY BUTANI:
How about Nevada? I’ve heard a lot of horror stories about Nevada, not in terms of people getting into trouble, but just the regulations in Nevada.
DENNIS BARANOWSKI:
Nevada is a really interesting state. And we’ve talked to Nevada counsel that have said “if it’s business purpose and it’s brokered by a licensed broker here in Nevada, then you’re fine.” It’s an exception to the rule. But there are other people that read that exception to really apply to individual investors. So, if it was like me or you that were making the loan and they were brokering the loan to us as investors, rather than a lender that engages in the practice of lending as their business and they go out and solicit borrowers and other things like that. So there’s a little bit of a difference of opinion on how that operates.
Then there’s some other exceptions that might apply, if the borrower’s not located in Nevada, [or] the lender’s not located in Nevada. There’s a previous relationship that exists between the parties and it’s not residential property. So that’s another exception that could apply there. So Nevada’s kind of a real sticky situation, a sticky place to lend in. And if from a lending standpoint, or even if you’re looking to just try and go in and do something in that state it’s definitely not a place where I would move in and start operating without consulting with an attorney first, just to make sure that what I’m doing is going to be exempt from the licensing requirement, or conversely, having somebody assist with obtaining the license in Nevada that’s there. We have a couple of clients that have opted for that because I think really best practice is if you’re making a few loans in a state, then you’re not carrying as big of a risk. But if you start having a major practice there and you’re a big presence then I think the safest route would just be to go ahead and get a license rather than trying to rely on one of these exceptions.
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