Private lenders doing business in California have the option to obtain two distinct licenses to originate private mortgages: the Department of Real Estate license and the California Finance Lenders license. Private lenders (aka hard money lenders) must have a clear understanding of the differences between these licenses before pursuing the application process. Private Lender Link’s CEO, Rocky Butani visited Geraci Law Firm’s office in July 2023 to interview Dennis Baranowski, Esq. to identify the differences between these licenses and what lenders/brokers need to consider. You can either watch the video or read the transcript provided below.
ROCKY BUTANI:
California has two licenses that a lender can get. There’s the Department of Real Estate and then there’s a CFL license. Could you tell us a little bit about them?
DENNIS BARANOWSKI:
Yes. The first one you mentioned that’s regulated by the Department of Real Estate is just your broker’s, regular broker’s license that’s governed by the Business and Professions Code. As you mentioned, the Department of Real Estate is the regulator that oversees that license, and that license really gives the license holder the ability to make loans, to broker loans to third parties. And actually, you could also broker real estate as well. It’s kind of at an all-purpose license that’s all in one place.
The other type of license is, as you mentioned, is the CFL of California Finance Lenders. And, that’s regulated by the DFPI, the Department of Financial Protection and Innovation. That license is more of a lender’s license. You can broker, but you can only really broker to other licensees. It’s not like you could go and broker a loan to an individual investor or even to a DRE licensed party, but you could actually, if you were a DRE licensed party, you could broker a loan to a CFL licensee.
The CFL license is typically what I would consider more of a lender’s license than a brokering license. And as a result, I view it, and we look at it here as more of a lender friendly type of license that if you’re not looking to broker loans and you’re primarily going to lend, and that’s it, that a CFL would be an easier option and a better option to operate. And, there are a couple of different reasons why you would want to do that. And, it’s really, again, if you’re only going to direct lend or make loans. If you’re going to broker, then you would want to move to the broker’s license. But, a CFL license, the regulations, the oversight by the regulator is not quite as harsh. The DFPI has more of an interest in catching bad actors than people that just make honest mistakes. So, you may get audited, but it’s not the same type of audit where they’re nitpicking. They’re really looking for something where you’re doing something that’s dishonest and then really meant to try and defraud the borrowers or the public.
Your maintenance as far as your reporting requirements are much simpler. To obtain the license, you don’t have a testing requirement. There is an application process you still go through. There’s a net worth requirement. You have to get a bond. But beyond that, it’s not a huge undertaking to get licensed, like obtaining a broker’s license where you have to get experience hours and take a bunch of classes and then pass a test. It’s a much easier situation or much easier the process to get a CFL license as opposed to a broker’s license here in California.
ROCKY BUTANI:
And with the CFL license, so you say it’s more for a lender. That just means that I have a balance sheet. The money that funds alone is coming from my balance sheet, not another party.
DENNIS BARANOWSKI:
Correct. So really, it could be your own funds. It could be a mortgage fund. You could be operating off of anything, if you like warehouse line or something like that. But yeah, definitely. Like you said, it’s more a matter that it’s coming directly from whatever entity, whoever the licensee is.
ROCKY BUTANI:
But, there’s some DRE licensed folks that, they call themselves a lender. Is that in cases where, let’s say it’s their own money, but they’re still operating under a DRE license because that’s just what’s easier.
DENNIS BARANOWSKI:
Yes, and they still are lenders, especially if they’re not really holding themselves out to the public and going out and brokering loans to third parties or brokering their investors, you could still be a lender. You can legally lend. The code section, the business and professions code allows you to not just arrange loans, but actually to make loans. So, that’s really being a lender. So, you could technically be a balance sheet lender with just a DRE license. Again, does that end up working for you in the long run? Maybe, it depends on your practices, but again, I found that it’s much easier if you’re really going to focus on lending and not brokering and doing it from a balance sheet perspective rather than getting investors in for each different loan that’s being made.
ROCKY BUTANI:
Do you have clients that operate under both licenses?
DENNIS BARANOWSKI:
Yes, we do. I think that’s good practice if you do want to do some of your own kind of balance sheet lending, but then, you also have investors that for whatever reason, want to be the ones that are on the loan. And, we have quite a few clients that operate under that business model because a lot of times they start off as their broker, and they’re brokering, and they start fighting investors and then building up that investment pool. And then usually, they’ll end up moving into a mortgage fund and then sometimes they’ll start doing it with their own funds, or they’ll get warehouse lines or whatever it may be. But, that’s kind of the natural course of how they build. And once they get into that point of where, “Okay, we’re a mortgage fund now,” and they’re no longer really brokering to third party, a CFL makes sense.
But, if maybe some other investors go, “I don’t want to be in a mortgage fund. I want to be able to pick and choose each individual deal that I’m investing in, and I want to decide how much I want to put at risk in that individual loan, and I want to be the party named as the lender on that loan.” Well then, the CFL is not going to allow for that. And, you’re working as a broker and as a businessman, you don’t want to turn down that type of business. So, you’re going to keep your DRE license active so you could broker loans to these people because sometimes it also makes more sense to have those individual investors rather than putting that type of loan in the fund, especially if your fund is geared towards specific types of loans or has limitations on LTB requirements or property type.
Or it could be, if it’s a commercial property or strip mall, maybe it’s like, “Okay, well we need like 70% occupancy,” and it’s a 50% occupied property and so you’re not really able to use your fund to make the loan. But you know what, you have some investors over here that would be more than happy to make that loan. And so, the way that you would be able to make that happen is by having your DRE license and bringing them in and have them make the loan that way.