by Dennis Doss
There are two sides of the private or hard money mortgage business, lending and investment. A mortgage company lends money. Unless it has unlimited capital or is a mortgage pool, it needs buyers for its mortgages. Some companies sell loans to institutional buyers. The majority of the industry sell their loans to private investors.
The competition for borrowers in California has never been stronger. The barriers to entry to the mortgage business are low, so competition has proliferated. All you need is a real estate broker’s license to get into the business. Net worth, bonding and insurance are not required. Loan documents are easily obtained. Advertising for loans and investors is permitted. Private investors, starved for yield, practically throw their money at mortgage brokers these days.
The heat of competition has some mortgage brokers looking beyond California for quality loans and yield. Rates are higher in states with a less developed private money marketplace. Borrowers have fewer choices so they are forced to pay more.
What is involved in lending in other states? What about selling loans to out of state investors?
There are three concerns:
1. Do I need a license to make or arrange the loan in the state
2. Do I need a license to put private investors living in the state into my loans?
3. How do I comply with state and federal securities laws?
This article would be too long if we covered all three questions. So, in this segment, let’s just focus on the first question: Do I need a license to make or arrange out of state business purpose loans?
Making Business Purpose Loans Outside of California
When you are looking at an out of state loan, your first concern has to be licensing. Does the state where the borrower is located or the collateral is located require any type of license to lend or broker? California certainly does for business purpose loans. So you first job is to research the need for a license in the state you are considering. The SAFE Act (the nationwide system or licensing mortgage loan originators) made things complicated because some states modified it when adopting it, broadening its reach to non-consumer loans. In California’s version of the SAFE Act, California kept the requirement that the loan be a consumer loan for its version of the SAFE Act to apply. However, separate statutes require licensing for all types of lending. Thus, the states fall into three categories: (a) license required for any non-consumer loans regardless of collateral or purpose (e.g., California), (b) license not required for loans on commercial property but required for loans on residential 1-4 regardless of purpose, and (c) license only required for consumer purpose loans.
It is beyond the scope of this article to canvas the laws of all 50 states to see where they fall, but let’s look at the surrounding states where you are most likely to roam.
Nevada. Nevada is regulated by the Division of Mortgage Lending. Mr. James Westrin is the Commissioner. Nevada Revised Statutes 645B requires a license when a person:
(a) Holds himself or herself out for hire to serve as an agent for any person in an attempt to obtain a loan which will be secured by a lien on real property;
The law doesn’t define what it means to “hold oneself out for hire to serve as an agent” but suffice it to say, you don’t want to broker a loan in Nevada without a license. However, if you make an occasional non-residential loan on Nevada property, there is a process (NRS 645B.016) to obtain a loan specific Certificate of Exemption from Mr. Westrin. We have been successful in obtaining these Certificates.
Arizona. Arizona mortgage brokering is regulated by the Department of Financial Institutions. Arizona requires a mortgage broker’s license to make any kind of loan in that state. It has a peculiar licensing system where you can “rent” a local person with 3 years experience to sponsor your Arizona brick and mortar mortgage office. Cost is $500-$1,000 per month to rent the local representative, office included.
Oregon. Oregon lending is supervised by the Division of Financial Regulation. Both mortgage brokering and using funds from private investors requires a license.
Washington. Washington law only requires a license if you make or broker consumer 1-4 mortgage loans (see definition of “residential mortgage loan” in WAC 208-660-006).
Texas. Like Washington, Texas only requires a license for consumer 1-4 mortgage loans (see definition of “residential mortgage loan in Title 7 of the Texas Administrative Code, Chapter 80.302(16)).
In a future segment of this article, we will talk about the investment side: licensing to raise private investor capital in other states and securities compliance. But already you should realize that brokering out of state loans is not a simple matter. Licensing of both the loan and investment aspects may be required. In addition you have the state and federal securities laws to comply with. If you do decide to test the water, do your homework with good legal counsel, study the state’s website and confirm your conclusions directly with the responsible regulator in that state. Most are happy to take your call or email.
This article is intended as educational material not legal advice. Consult a knowledgeable lawyer before implementing any of the ideas in this publication.