CFL vs DRE—Which Is Right for You?
By Dennis Doss
Most of my clients operate their mortgage companies as real estate brokers under the jurisdiction of the Department of Real Estate (“DRE”). The DRE license is very versatile. Without any net worth or bonding requirements they can make and arrange both consumer and non-consumer real estate loans, conduct escrows for their own transactions, sell loans to licensed and unlicensed investors and service loans. However, at the end of the leash is the Department of Real Estate. The DRE can be a difficult taskmaster if you come within its cross-hairs.
Clients frequently ask me about operating under a California Finance Lender’s License administered by the Department of Financial Protection and Innovation (“DFPI”). So, I thought it might be helpful to compare the two licenses.
Entity Type. DRE licensees must be individuals, corporations or limited partnerships where the general partner is a licensed real estate broker. An LLC cannot hold a real estate license. CFL licensees may be corporations, limited liability companies, or limited partnerships.
Net Worth. DRE licensees do not need net worth, even to make consumer loans. CFL lenders must have a $25,000 net worth for non-consumer lending and $250,000 for consumer lending.
Making Loans. Both licensees are allowed to make loans as a principal, free of usury restrictions.
Selling Loans. DRE licensees are able to sell mortgage loans to anyone that is qualified to buy them. The DRE broker collects the Investor Questionnaire from each investor to assess their qualifications. CFL licensees, on the other hand, can only sell loans to institutional investors. However, if they engage a real estate broker to facilitate the resale, they can sell to anyone a real estate broker can sell to.
Brokering Loans. DRE licensees can arrange for unlicensed investors to fund the loans they arrange. A CFL licensee can only act as a broker for another CFL lender and cannot take investment money from unlicensed investors. This is the largest difference between the licenses. CFLs are supposed to primarily act as direct lenders, using their own capital to make loans with limited brokering authority.
Servicing Loans. DRE licensees can service real estate loans, even loans they did not make or arrange. A CFL licensee, on the other hand, can only service a loan they have sold to another CFL licensee or institutional investor.
Construction Lending. DRE brokers must cope with severe construction loan limitations in Business and Professions 10232.3, including the prohibition on incremental funding, a $2.5 Million loan cap, the requirement that funds be held in a neutral escrow and more. CFL lenders, however, do not have these restrictions. But they must use their own money to fund new construction loans. The perfect combination for construction lending is a CFL licensed mortgage fund.
Loan Officer Licensing. All loan originators working under a DRE licensee must have a salesperson or broker’s license. If they originate consumer loans, they must have a NMLS endorsement to that license. CFL licensees can employ unlicensed loan officers. However, if the loan officer originates consumer loans, a NMLS approval must be obtained.
Reporting. Most DRE licensees have quarterly reporting of trust fund activity and one annual loan activity report. There are some other one time filings when the broker initiates a fractional loan or achieves “threshold” status. CFL’s have a report due each March 15th. CFL licensees are billed their proportionate share of the cost of the administration of the CFL unit of the DFPI.
Audit. DRE licensees are audited on an ad hoc basis. The common triggers are a missed quarterly filing, the reporting of a self-dealing transaction or a complaint. CFL licensees, on the other hand, are audited about every three years. If mistakes were discovered the DFPI usually requires correction but it does not file accusations at the drop of a hat like the DRE is prone to do.
Time to Get a License. A DRE corporate license can be obtained in about 30 days. However, a CFL license take an average of 4-6 months. Doss Law, LLP files a handful of CFL license applications a month so let us know if you want one.
This article is intended as educational material not legal advice. Consult a knowledgeable lawyer before implementing any of the ideas in this publication.