Lender’s Blueprint: National Market Expansion Workshop [VIDEO]
In this workshop, Doss Law’s Managing Partner, Christopher Donovan, leads a powerhouse panel through the real-world playbook for taking private lending across state lines. From California’s regulatory minefield to Nevada’s HOA nightmares, they break down licensing traps, usury landmines, foreclosure timelines, and bankruptcy surprises, all with boots-on-the-ground insights from a lender, litigators, and 47 years of mortgage law.
Featuring Participants
- Christopher Donovan, Partner, Doss Law, PC (Moderator & Lead Speaker)
- Dane Valadao, COO, ReProp Financial
- Chase Berger, Partner, Ghidotti Berger LLP
- Michael Brooks, Director of Legal Services, Ghidotti Berger LLP
States Covered in This Workshop
- California
- Texas
- Florida
- Arizona
- Nevada
- Washington
- Oregon
- Utah
Full Transcript: National Market Expansion Workshop Video
Welcome and Introduction
[00:00.2] Host, Matt Rosen, National Lending Conference: This is the lender’s blueprint and it’s going to be led by Mr. Chris Donovan from Doss Law. He’s going to be on stage with Chase Berger with Ghidotti Berger, Michael Brooks, director of Legal Services with Ghidotti Berger, and Dane Valadao, COO of ReProp Financial.
So if you folks have listened to the podcast, then you’ll know exactly what they’re talking about. If you’re interested and bringing your business to market across state lines and learning a lot more about the legal sides of things, these are your guys. Get to know them.
Please give a big warm welcome to Chris Donovan and the staff here. Thank you, guys.
[00:47.2] Christopher Donovan, Partner, Doss Law, PC: All right, good morning everyone. Today we’re going to be doing the lender’s blueprint, national market expansion. My name is Christopher Donovan. I am a partner of Doss Law. I’m the manager of Doss Docs. Doss Law is a law firm that’s been solely dedicated to representing private money lenders and brokers for the last 47 years.
We do pretty much anything on the front side that private money lenders and brokers need. So loan docs, fund formation, securities work, compliance, deal analysis. Doss Docs was created kind of like a legal zoom for private money lenders and brokers so that they could generate attorney grade documents at a fraction of the price.
And next up, I have my friend Dane here.
[01:29.2] Dane Valadao, COO, ReProp Financial: Hi. Dane Valadao with ReProp Financial. We are a western regional small balance commercial lender. We lend in six states.
We lend in California, Oregon, Washington, Arizona, Texas and Nevada. As we move through these states, I’ll talk about why we moved into the various states. And we lend up to about $3.5 million.
[02:00.7] Chase Berger, Partner, Ghidotti Berger LLP: Morning, everyone. My name is Chase Berger. Our firm is Ghidotti Berger.
We are a litigation practice that’s focused in lender representation. We do foreclosures, we do bankruptcies, we do evictions. We’re in nine states, which is Arizona, California, Florida, Nevada, Texas, Washington, Utah, Illinois, Oregon.
Think I covered it all. We’re at the back end of the process, so hopefully you don’t need us. We’ll talk about that more on this panel. But with me in the room today is the eminent Michael Brooks. He’s our director of legal services, has a ton of experience and I’ll let him sort of give his own bio.
But a great guy. And we’re super pleased to be here today talking to you all. Thank you.
[02:38.0] Michael Brooks, Director of Legal Services, Ghidotti Berger LLP: We’re a creditors rights firm. We handle large and small matters as he indicated. You know, you might need something as small as a post foreclosure eviction.
We also handle challenges. It could be priority disputes, wrongful servicing, other types of consumer protection statutes you might encounter as well. So we and we’re, you know, federal courts, state courts, you name it.
And we are try very hard to understand the needs of lenders in this process, understanding where we can find efficiencies, where we can,
[03:12.8] Christopher Donovan, Partner, Doss Law, PC: all right, some quick housekeeping that none of this is legal advice.
This is purely educational and you cannot use it against us in the court of law. We’re going to do our best to cover everything we have to cover. Today, we’re going to be covering California, Texas, Florida, Arizona, Nevada, Washington, Oregon and Utah.
For each state we’re going to attempt to cover licensing, usury, what it actually looks like to be a lender day to day. And then we’re going to move to foreclosure, bankruptcy, litigation, eviction. Again, it’s high level. We can’t cover every single nuance of every single issue that there is because there’s just too much.
But we’re going to do our best. What are the hesitations and risks of moving into a new market? Well, every state’s different, has different laws based on the purpose of the loan, the collateral type, lender type, borrower type.
Where do you get these answers? There’s no easy place. You need to either hire someone to do the research for you or try to do it yourself, which is a daunting process. If you need a license, which one do you need? Are there exemptions?
How does usury work? What does it actually look like when you’re doing it day to day and what’s involved if things go wrong? If there’s a default in foreclosure litigation, bankruptcy, eviction, how does that all play out?
So, ground rules. Business purpose loan. When I say that, I mean that it is a loan for commercial gain for business purpose, not for personal, family or household use. And it’s supported or it’s the collateral is a one to four residential purpose is king.
Purpose in many states is more important than collateral type. People get hung up on owner occupancy and non owner occupancy. But you can have a business purpose loan that’s secured by someone’s primary residence. As long as the purpose is for commercial gain. There’s different business purpose traps that you have to look out for.
But you can absolutely do that. We’ve locked horns with the Department of Real Estate where they thought a owner occupied property, where someone took out a loan to write a book. Clearly for commercial gain was a consumer loan. And they tried to take one of our clients licenses away.
We sued them in Superior court and three days before the hearing, district attorney called us and said you guys were right. We can’t make business purpose loans and put out a bulletin. So purpose is king.
California
California: Licensing & Usury
[06:03.0] Christopher Donovan, Partner, Doss Law, PC: Do you need a loan or do you need a license to make loans in California? Will spend a lot of time on California because it’s very complex, it’s highly regulated.
I assume there’s a lot of people that do deals here in California. It’s the fourth largest economy in the world and it’s actually growing faster than the top three. Let’s see. So yeah, if you can make as an unlicensed person in California, you can make unlimited loans as long as they’re arranged by a department of real estate broker.
If you are not arranged by a department of real estate broker, you can make one loan. But the financial code says that if you’re engaged in the lending business, then you cannot use that exemption. Caution dictates that the majority of the people here are engaged in the lending business.
So in California, you absolutely need a license to make a loan. There’s three licensing options in California. Department of Real Estate, California Financing Law, the CFL and the California Residential Mortgage Lending Act.
CRMLA. And that’s a consumer Mortgage banking license that we’re not gonna really discuss today because very few of our clients have it and I assume very few of the people in the audience have it as well. The main two licenses are DRE and CFL. Now what are the differences?
There’s many differences. The DRE is the most versatile broker’s license. You can arrange and sell loans to unlicensed investors. There’s no net worth requirement, no bond. You can service loans even if you didn’t make that loan. There’s a lot of LTV restrictions.
The loan officers have to be licensed. There’s a lot of paperwork involved. You owe paperwork disclosures to the borrowers, you owe paperwork disclosures to the investors. It’s paperwork intensive. The nice part is you can get the license in 30 to 60 days. You do have an education requirement.
The Department of Real Estate is a difficult taskmaster to deal with. They are pretty ruthless. You are guilty before proven innocent in their eyes. They will look for reasons to take your license. So you have to be very careful with them.
Also, it’s not a good license if you want to make construction loans. There’s a lot of restrictions on Construction loans. $2.5 million loan cap, 100% funding into escrow, which your borrower is not going to like. Appraisals by a licensed appraiser. And if there’s a holdback of more than $100,000, then your funds have to be held by a neutral independent escrow account.
Disbursement draws on verification of an independent qualified person. CFLs, on the other hand, they’re primary balance sheet lenders. Direct lenders, using their own capital, make loans with limited brokering authority. The downside of CFL is that you can only broker to other CFLs.
Limited brokering authority, and you can only sell loans to institutional investors, other CFLs, banks, insurance companies, credit unions. With the DRE license, you could sell to doctors, lawyers, and candlestick makers. The pros are many. I’m not going to read all of them, but it satisfies usury and licensing.
You could charge advance fees when you’re acting as a direct lender. You can make construction loans without all of those DRE restrictions. You have no LTV limits. You don’t have to worry about grace period and late charges for late fees.
There’s less paperwork. You don’t have continuing education. Your licensees don’t have to, or your loan officers don’t have to be licensed. And the DFPI, the regulating body, the Department of Financial Protection Innovation, is much easier to work with than the DRE usury in California.
The number one way people avoid usury, which is a 10% cap, and remember that 10% cap includes interest points, fees, is that their loans are either made or arranged by a DRE or CFL licensee. There’s a less used exemption where it’s under the corporation’s code.
If the lender has more than $2 million, the loan’s over 300,000. Entity borrower, entity guarantor, pre existing relationship, sophisticated advisors to protect interest, or sophisticated borrower. You know, imagine trying to have all that in one deal.
It’s very rare, and that’s why it’s seldom used. It’s difficult to thread that needle. And then there’s a joint venture exception, which is rarely used, where there’s a five factor court test, and there’s different factors there, but again, very, very rarely used. The number one is CFL and DRE.
California: On the Ground
[10:21.4] Christopher Donovan, Partner, Doss Law, PC: All right, Dane, what’s the story on the ground in California?
Dane Valadao, COO, ReProp Financial: Thanks, Chris. So we are headquartered in California. California is our largest market. We do about 75% of our business in California. We hold both CFL and DRE brokers licenses.
We originate with our CFL licenses. We are a portfolio lender. And so that license works well for us. We do not sell off our loans. We do have a broker’s license, for various instances. We do have a trustee portfolio that we use that to service.
And it does. We utilize that if we need to sell a loan that falls outside the CFL. What’s allowed under CFL? One thing I will say about the differences in the audits is when you’re audited by the DFPI, be prepared to be in it for 18 to 24 months.
They’re not, I wouldn’t say they’re super intrusive. They’re just very backed up. And you’ll get a request for information, you’ll submit it, and you won’t hear for them for six to nine months. And so these audits drag out a long time. You know, California, it’s a difficult state in that there is a lot of competition here.
And so making loans in the major markets, LA County, Bay Area, Riverside county, everyone’s loaning there. And so you’re competing on leverage and you’re competing on price. And so to differentiate ourselves, you know, we’ll go into markets that others won’t go.
We lend throughout the state. So we’re headquartered in Eureka, California, if anyone knows where that is. We’re about 90 minutes south of the border of the Oregon border. And so, you know, we’re not going to compete in those states. We’re going to lend where others won’t lend. A couple of things with California, over the last five years is the changing legal landscape.
The legislature is always coming up with new, you know, new laws. Just in the last five years, they’ve essentially gotten rid of default interest. With the exception of matured loans. You’re heavily advised not to charge it if your loan is not matured.
They change the post foreclosure process on residential with the ability for, you know, buyers to come in and make offers post sale. What that does is delay you either receiving your funds or receiving ownership of the property so that you can sell it or do what you want with it.
And then most recently is AB 130, which severely impacted second lien lending to the point of it’s possible your lien may be unenforceable or inability to foreclose on it. So, and it’s retroactive so it’s something that you could have done, you know, that was not illegal at the time.
Now you can’t foreclose on. So just constantly monitoring what’s going on at the legislative level, making sure that you are involved in seminars like this, to educate yourself on what’s going on in California. One thing we, you know recently came across, you know Chris says purpose is king and yes, that is correct.
But we just found out we made a business purpose loan on an owner occupied property, and it was actually less than 12 months. It was a 10 month term. And we always issue our 90 day balloon notices as a courtesy even though we don’t have to.
We do it on owner occupied under 12 months. You don’t have to. But we still did. But we issued extensions and we issued several extensions and it finally came to a point where we’re like no more extensions, we’re going to file foreclosure. And when we issued these extensions we did not issue a new 90 day demand.
And that 90 day demand trumped our extension agreement and he got a 90 day maturity extension before we could proceed on sale. So just little nuances in servicing, especially residential, regardless of the purpose. There’s a lot more when it comes to default servicing.
California: Default Risks & Litigation
[14:28.4] Dane Valadao, COO, ReProp Financial: Just to add something, when you talk about the evolving landscape in particular of California risks, they are legislative as you mentioned, AB 130, but there are also the default interest was a result of a court case ruling that came down.
Chase Berger, Partner, Ghidotti Berger LLP: Those can happen at any time, coming out of the blue sometimes, as attorneys in this industry, we’re regularly involved in filing amicus briefs on behalf of lenders and lenders rights. Trying to provide some insight from an industry standpoint into how these cases would play out in the real world.
We’re not always successful but we’re fighting the fight at least.
Christopher Donovan, Partner, Doss Law, PC: Michael, do you want to discuss the default risks in California?
Michael Brooks, Director of Legal Services, Ghidotti Berger LLP: California is a non judicial state. And whenever we say a non judicial state, it’s important to remember that you have two options.
You either have a judicial remedy which you have in every other state or you also have this add on of a non judicial procedure which does not require the involvement of a court or a judge, sitting in Nevada and most of you who land in the western United States, you’re probably pretty familiar with this term and the process prior to 2006.
It was pretty streamlined and pretty consistent throughout the country or the west non judicial states following the financial collapse. In 2009 we started to see all kinds of new statutes. The California Homeowners Bill of Rights in particular.
There are some jurisdictions where they have mediation programs before you can go to foreclosure. I say jurisdictions within counties even, I think within California. So you have a variety of ways to intervene to make sure that the borrower really you know, they, particularly in a consumer context, I did see the HOEPA up there, which so made me think about that.
But in a consumer context, the other thing to remember is you may have a loan that again is business purpose or that they’ve signed a non occupancy declaration saying that they’re not going to live there and they move it back into, into that house. They can claim the primary, the benefit of being their primary residence.
So you might have to contend with some of the homeowners Bill of Rights aspects. So you’d have to be mindful of that going forward. You see that a lot in bankruptcy where they will move in or move out depending on which suits them best. When it comes to lien stripping provisions in California there are, there’s a lot of consumer protection statutes that will hold up the foreclosure process.
The one thing, I want to mention this recent. I know there’s probably a lot of people that have been very interested in AB 130. It only applies to second deeds of trust on residential property. Now interestingly, there’s some people who believe that it is a second deed of trust if the first deed of trust.
So in a sale transaction where the first deed of trust was not contemporaneously reconveyed with the recording of the new deed of trust, you are in second position. So there’s no there’s some people who believe that that 30 day, the reconveyance of that original deed of trust so still subordinate to your first position deed of trust.
So we’ll see how the case law comes out on that. It’ll be really interesting because it essentially will mean every single loan is second or a subordinate deed of trust. If that’s the case, as long as it’s sold part of a transaction, not a new build. In other words, as lenders in these situations, I think really in a commercial context, if you’re looking at mostly doing commercial loans, one of the things you’re going to want to do is move quickly I think to appoint a receiver.
A lot of counties now are a little hesitant to grant ex parte relief on the receiverships. You’ll want to confer with council on the timing of the receiver. It used to be you could go into LA county and have a receiver point.
You know, you’d go in in the morning and your receiver would be showing up at the property in the afternoon handing out notices to tell them where to send the money. It’s not always like that anymore. So you want to confer with your counsel. Significantly, you’ll also, if you, if there are any exigent circumstances, if the property’s in danger, there’s some health or safety issues, you want to bring that to the attention of your council.
Those are really important factors whether you’re appointing a receiver or whether you need to go in and intervene to protect your collateral. The bankruptcy we have we’re talking about again, chapter 13 is significant when it comes to consumer loans. They probably aren’t as significant in the commercial context.
Usually they’re not. We are seeing more in chapter 11. It’s a slower process and creditors have more control over the process where their collateral is being potentially jeopardized. Significantly.
There’s a new subchapter 5 provision in the bankruptcy code. It’s much quicker and it gives the debtor a lot more flow. Flexibility, I shouldn’t say flexibility. A little more leverage against lenders. They can confirm a plan much more quickly. In some ways it’s better from a lender standpoint.
You don’t get dragged out into this long confirmation process where you’re having claims disputes. It can go pretty quick. You can reduce your cost, you can get the borrower back on it. Assuming they have adequate cash flow, which is anytime there’s confirmation, that’s a huge issue.
Subchapter 5 can actually work to the advantage of the creditors by way of reducing your costs in the bankruptcy context. Eviction, this is a big snafu for a lot of lenders. Borrowers can do.
It’s not just the borrowers, it’s the borrowers and their friends. You know, they’ll have somebody sign a lease shortly before the foreclosure occurs. They’re allowed to stay in the property for, it could stay there for two, three years. It’s a five year lease, allegedly at market value.
There’s two approaches to this. One is to fight the legitimacy of that lease and say, no, that’s not a legit lease, it wasn’t arm’s length transaction, it’s not fair market value. The other way to approach it is to say, okay, this is you, the lease, this is how much you owe me.
And as soon as they stop paying, then you try to do a typical eviction for non payment of rent. But it’s a, the eviction process in California is particularly troublesome. It’s the source of a great deal of litigation and expense and.
[19:30.0] Christopher Donovan, Partner, Doss Law, PC: Thank you. Yeah, just three quick things and we’ll try to move on to the next state, otherwise we won’t get through all of them.
Texas
Texas: Licensing & Usury
[24:08.7] Christopher Donovan, Partner, Doss Law, PC: So, all right, we’re moving on to Texas. You do not need a license to make a commercial loan. You do not need a license to make a business purpose loan. But you cannot make a business purpose loan secured by a borrower’s homestead.
There’s definitely no shortage of cases involving lenders who ran afoul of the Texas constitution trying to get around that and making an invalid home equity lien. In Texas, the usury rate is 18%. The qualifier there about unless computed rate, that’s not coming into play anytime soon.
So, to be safe, keep it under 18%, including again, all interest points, fees. All those calculations will go into that, that calculation. What you could do if you’re getting close is you could extend the terminal loan and then amortize those fees.
Texas: On the Ground
[24:30.0] Dane Valadao, COO, ReProp Financial: So Texas is a pretty new state for us. We’ve been there for a little over two years. We moved into that state based on a referral from a broker that we have a history with, to a borrower who’s looking for a 15 year, fully amortizing loan.
And we love those because they, they do well in our fund. We just park them there. You know, when moving into a new state, one of the questions Chris asked was, you know, what do you do? How do you get comfortable with that? And sure, we do get our appraisals, we do like to do our inspections.
But what we rely on is what we call hots, is help on the street. And that, to us is typically a local broker with local real estate knowledge who can tell us, you know, is this pocket good to lend in? Is this like the rest of, you know, the city?
What’s wrong with this property? You know, is it on the wrong side of the stoplight or something to that effect? So we do rely heavily on local knowledge when, when expanding and lending throughout our entire footprint. We don’t have a whole lot going on in Texas quite yet just because we recently moved there. But one thing we do is when servicing defaulted loans, we will a lot of times use a forbearance agreement.
So we will file our notice of, for our notice of default, and then enter a forbearance agreement. What it does is it gives us leverage to work with the borrower on an exit strategy from our loan. Whether it’s a sale of the property, it could be a refinance, but typically when there’s an NOD on file, that’s not the case.
It’s usually a sale of the property. One thing we found out in Texas is, although it is a quick state, in about 50 days you can go from a notice to a foreclosure sale when servicing or when trying to work with the borrower to postpone the sale or push the sale date.
You know, here in California you can postpone one week. In Texas you can’t. You have to push it out 30 days. And so, you know, 30 days might not seem like a long time.
Florida
Florida: On the Ground
[27:00.0] Dane Valadao, COO, ReProp Financial: So we’ve been lending in Florida for quite a while. Mostly Maricopa county. We’ve expanded into Mojave County. Florida is a good state with California because there’s a lot of investors in California who own investments in the greater Phoenix area. So we do get a lot of referrals because, from referral sources in California because they are not licensed in Florida.
And so, we get a lot of that way. One thing Chris mentioned about the licensing and having a brick and mortar. While yes, it’s true, that is a relatively easy hurdle to overcome because you can hire an attorney there and you hang your license in his branch and you pay him a W2 check every Check every monthly.
Essentially like rent. And so you don’t have to have a staffed office, you can hire an attorney. Business there is interesting, the market, the local lenders there like higher leverage and really high interest rates.
For example, 85% LTV, 15% plus points. That’s not our model. We are more conservative on our leverage and we’re more conservative on our interest rates. And so it really depends on what the borrower is looking for.
You know, if they’re trying to, they don’t mind high leverage and trying to buy as much as they can. That’s great. But so it’s just, it’s unique with, with the local lenders. It has changed over the last probably five to seven years with more regional and national private money lenders moving in.
But yeah, it’s an interesting one.
Arizona
Arizona: Foreclosure & Risks
[48:28.0] Christopher Donovan, Partner, Doss Law, PC: Okay, so I’m going to go really quick on this. Arizona, interestingly, after the crisis was unlike its neighbors in California and Nevada, had very limited adjustments to their foreclosure and a recovery process.
And it actually saw its housing market rebound a lot faster and much more robustly. It was very interesting. I haven’t seen any economic studies on how changes in foreclosure law can slow down a recovery. But it happened.
The case Shiller price index for Arizona and Nevada flip flopped as a result of Nevada’s very onerous pre foreclosure and post foreclosure requirements. So again Arizona non judicial foreclosure process, fairly streamlined.
You do face the risks of temporary restraining orders. The I need more time arguments. The one thing that distinguishes Arizona is it has an interesting six year statute of limitations. The six years can apply to an accelerated loan.
So if you’ve accelerated the loan and you have not commenced your non judicial process or your judicial process within that six years, your debt could have been discharged as a result of your failure to act. In addition any individual payment that is more than six years old becomes unrecoverable.
It’s interesting. I’m not aware of any other state that really treats it like that. But it’s in their codes and there’s plenty of case law that supports the interpretation. But generally speaking Arizona is a more favorable state with that one exception.
As far as the six year statute of limitations, add something even though it’s not one of our footprint. Well it’s one of our footprint states but I personally am not licensed there. I’ve seen some of the dirtiest knockdown drag out litigations in our firm in Arizona. I mean I don’t know why that is.
I’ve also seen like meaning when things go extremely sideways. And I’ve also seen and Mike, incorrect. There’s seem to be like a dearth of case law, real estate related cases. So when you do get into a fight in Arizona there’s like not a lot to draw from and that could be problematic.
Like a state like Florida, Texas, you know there’s cases coming out of your ears on every sort of interpretation and that’s a good thing because it gives lawyers tools to like fight for you. In Arizona for whatever reason there’s like both sides will read the same case and take two different interpreters.
There’s just not a lot of case law. Some of the fights we’ve had there have been the nastiest. We’ve had some and some of the judges there, even though it’s very lender friendly should be. Am I wrong? I mean we’ve seen some, some problems that are.
Chase Berger, Partner, Ghidotti Berger LLP: Yeah, there can I think it, you know there’s wherever there’s lawyers there’s going to be problems.
I mean that’s It’s a reality. So yes, to the extent that I’m painting it as a rosy place, it has its thorns. And you do need to be cautious. I’m not certain that it’s any worse than anywhere else. But you do have some quality attorneys down there and a good attorney can make a good argument and it can be problematic.
So you need to make sure that you have your own good attorneys.
Nevada
Nevada: Licensing & Usury
[54:14.1] Christopher Donovan, Partner, Doss Law, PC: All right, thank you. Moving on to Nevada. Nevada, you do need a mortgage company license to make a business purpose loan or a loan secured by commercial real estate. As long as you’re not advertising, you can, you can make those loans and act as a direct lender if it’s arranged and documented properly by a Nevada mortgage company.
And Nevada also has a brick and mortar requirement. There is a commercial property exemption if you have time, which usually we don’t have this much time in this business. But if you do, you, we can help you contact the commissioner in Nevada.
And we’ve gotten exemptions for non licensees to make commercial loans in Nevada. It usually takes 30 days. We’ve done it in as little as two weeks. But it’s usually a 30 day process. To qualify you have to make an occasional unsolicited commercial mortgage loan.
So you can’t be advertising, you can’t be soliciting. And then there’s other requirements there that you could see that you do not maintain an office, you do not solicit, you know, those things. And they’re usually pretty reasonable to work with but they’re backed up like every other regulator seems like every state and it takes them a little while to process the request.
Usury. There is no limit to usury in Nevada. That it’s basically like the other ones going back to contract law. As long as the parties agree to it in writing that then you can go to whatever you want. There is a little cap for credit extended to covered service members, probably not applicable, but something to watch out for.
I don’t think anyone’s going over 36% but you know, just something to be aware of.
Nevada: On the Ground
[54:40.0] Dane Valadao, COO, ReProp Financial: So Nevada is an interesting state. We have wanted to expand into that state for a long time and given the brick and mortar requirements, were never able to pull the trigger.
So unlike Arizona where you can hire an attorney, Nevada you have to have a physical in state office that is staffed, that is open for business during normal business hours. And you also need to have a qualified employee who is approved by the commissioner of the Division of Mortgage Lending.
So, and that qualified employee needs to have certain experience, verifiable experience. And so it’s not just a stamp. You can’t just hire a bookkeeper to be your QE. You actually have to have someone with knowledge. Is it obvious?
They’re trying to keep Californians out. So that kept us from lending in Nevada for a while. A year ago, thanks to Doss Law, we were put in touch with a firm that was looking to merge. And so in October we merged with them.
They’re based out of Zephyr Cove. So it’s great because it came with a turnkey office, it came with significant local real estate knowledge in the greater Tahoe Basin and Reno. That, that was their focus.
You know the struggle. There’s always struggles with a merger, especially with another lending company. I don’t necessarily think this is a Nevada wide struggle. But we inherited their book of business and marketing to their borrowers, marketing to their referral sources.
Our pricing is different. They were very conservative on their pricing. When I mean conservative, I mean slightly above bank rates. They would also lend higher leverage because they knew their market so well, higher than we’re will, than you know, our fund will go.
And so it’s been a learning experience educating the referral sources, educating the borrowers who are coming back for new loans that okay, the pricing’s gonna be a little bit higher and the leverage gonna be a little bit lower. Both things they don’t want to hear. But you know, another benefit of lending in Nevada again is leveraging our referral sources in California because you know, folks in LA county, brokers in LA county, they’re getting deals in Vegas and they’re not likely unlicensed there.
And so you know it’s a good, we’re able to offer them a referral or you know, an output for their outlet for their clients needs.
That’s all.
Nevada: Default Risks
[58:52.0] Michael Brooks, Director of Legal Services, Ghidotti Berger LLP: So the default risk on consumer loans, it is very problematic. A lot of post foreclosure crisis, intervention into the foreclosure process to slay, to delay, slow the process.
If you have any kind of consumer issues, you have the they had their super priority HOA, super priority priority lien issue. One of the worst decisions I’ve ever seen a court issue. A first year law student couldn’t have written a worse decision that found that HOA Liens $7,000 HOA Lien wiped out an $850,000 first deed of trust.
The ruling actually defined a term reference, to term that wasn’t even in the statute. But the court felt that it was important to throw it in there. It was abysmal. That actually brings up another issue. The judiciary in Nevada, it can be a problem.
So you’ve got to be, from courthouse to courthouse or courtroom to courtroom, you don’t know what kind of outcome you’re going to get. So you need local counsel who’s familiar with the judges who can give you guidance in that regard. Wrongful foreclosure suits. You’ve got the typical, the same types of issues that arise in other jurisdictions.
And I do. Well, I just wanted to touch on something broadly and to tie into something that Chase was saying. And I know we’re kind of running short on time, but I wanted to. I would be remiss if I didn’t mention this. Chase is mentioning, there’s a universal theme and that is that if you have your ducks in a row as a lender, it is so important and so valuable to you.
In the bankruptcy context, in the bankruptcy context, the bankruptcy judges. So let me put this in the proper context. You’ve made a loan. It’s your money that’s sitting out there. Somebody stopped paying you, and now everybody’s looking at you like you’re the bad guy because, you don’t have all of your numbers in order.
Right. And it really turns it on its head, head. But it’s a reality that you’re going to have to face. So making sure that your numbers are correct, whether you’re in front of a bankruptcy judge who might be fine, tooth combing, your proof of claim, or in a claim objection.
Or is your notice of default really correct, you know, or all of these issues. You’ve got a borrower who hasn’t paid in six months and now you’re the one who’s on the hot seat. So that’s a very important aspect. The other thing I wanted to mention is, And Chase, mentioned how the borrowers are really just looking for time and playing into that theme a little bit.
It’s really important. Again, whether you’re in the bankruptcy court or in the state court. He mentioned expectations. If there is a sale process or a refinance prospect. Get in front of the judge, let the judge, judge know, hey, we’re here, we’re gonna, we’re gonna do something.
We’re gonna do right by this borrower. They’ve got to have an agent hired by this day, they’ve got to have it listed by this day. They’ve got to have a right price. They set benchmarks that the borrower has to perform. Don’t leave it open ended.
Make sure that the judge recognizes that you’re being reasonable by allowing for some time, but you’re also reasonably expecting performance from your borrower so that you can hold their feet to the fire, when they fail to perform on these agreements.
So that’s those are universal principles. I just wanted to mention I’m mentioning them in the context here of Nevada, but we’re going to go really fast through the rest of these, I’m assuming.
Washington
[62:35.0] Christopher Donovan, Partner, Doss Law, PC: All right, Washington, you don’t need a license to make a loan secured by commercial real estate.
You also don’t need a license to make a business purpose loan. However, you do need a license if it’s the borrower’s primary residence. No limit for business or commercialikian purpose loans in Washington. As far as usury goes.
Dane Valadao, COO, ReProp Financial: Just real quickly, we’ve been lending in Washington for a long time.
You know, being in Eureka, Oregon, Washington, same distance, Bay Area, Southern California, we’re right in the middle of the west coast. Other than just kind of your typical bankruptcy threats, we really have had no issues lending in that state.
It’s been a pretty clean state.
Chase Berger, Partner, Ghidotti Berger LLP: Yeah, I honestly have nothing to add. First of all, I’d like disclosure. I’m licensed in California, Nevada and Missouri. So if I speak on Washington and Arizona, you’re not allowed to listen to anything I say or at least hold it against me later on. Same issues.
Christopher Donovan, Partner, Doss Law, PC: I’m gonna, we’ll just move on to the next state I think assuming you’ve taken notes on all the other states.
Oregon
[66:21.0] Christopher Donovan, Partner, Doss Law, PC: All right, Oregon, you do not need a license to make a loan secured by commercial real estate. However, you do need a license to make a business purpose loan secured by one to four residential units.
Again contract, no limit on usury or interest as long as the property parties agree. If the parties do not agree, then the default is 9%. So make sure you agree.
Dane Valadao, COO, ReProp Financial: So again, been lending in Oregon, you know, for quite a while. It’s a state that we do get a lot of referrals, from our broker network because it does require a license on residential, and so it’s good to have an outlet for them.
One thing we recently encountered, on dealing with an issue In Oregon was foreclosing on an owner occupied property even though it was for business purpose. You cannot initiate foreclosure until the loan is 120 days delinquent.
And so again, might not sound like a bad deal given them four months. But when you’ve been dealing with this borrower for years and they’re continually 60, 90 days delinquent, you finally get tired of it. It was, we were ready to proceed and then our foreclosure council said we got to continue to wait.
And so one other thing is to enforce a guarantee in Oregon, you have to foreclose judicially. You have the non judicial route but you cannot go after a guarantee if you do a non judicial foreclosure.
Chase Berger, Partner, Ghidotti Berger LLP: Oregon is non judicial, but I would say one of the things they also have in Oregon a mediation program I believe on primary residence. So if you’re doing a foreclosure on a borrower’s primary residence, they do have a mediation process in Oregon.
Generally it’s completely unconstitutional under the separation of powers. But nevertheless the judges supervise this non litigation where the parties just have to get together and talk and make nice. And there’s usually requirements for the lender to participate.
Oregon and Nevada are fairly unique in those contexts.
Utah
[66:40.1] Christopher Donovan, Partner, Doss Law, PC: Yeah, Utah is just like, just like Oregon, you do not need a license to make a loan secured by commercial real estate, but you do need a license to make a business purpose loan secured by one to four residential units. There’s no limit. And in Utah, we recommend 24, don’t go over 24%.
And then as long as everything’s agreed to and in writing back to contract law, then you can go to whatever interest rate you want. But we recommend 24, not going higher. That’s based on local council and case law.
Dane Valadao, COO, ReProp Financial: No, we do not have any loans in Utah nor we’ve made it.
Chase Berger, Partner, Ghidotti Berger LLP: Same issues. Utah is less threatening. And I mean I think everybody feels that when they go to Utah. Right. It is generally fairly easy state to operate in as far as the processes.
You get to some of the outlying counties though and there are quite a few, you might get some provincial judges that might make things a little bit more difficult. So again just assess the risks on a case by case basis. And you know, choose your counsel wisely.
Q&A / Closing
[67:41.8] Christopher Donovan, Partner, Doss Law, PC: Well amazingly enough we hit 11:10 so we have exactly five minutes for Q and A, which is what we hoped for. So we got lucky. Do we have any questions from the audience?
Question #1: Should a lender apply for both licenses in California?
Workshop Participant: Yeah, I’m in California, just opened up the business a few months ago, and I’m applying for my, CFE license. What if you. Or CFL license. Would I. Should I apply for both of those licenses just to be safe?
Christopher Donovan, Partner, Doss Law, PC: You said you’re, moving into California to do loans and you applied for a CFL license or you obtained it?
Workshop Participant: I’m in the process of applying for it, but it could take like a year or something. In the meantime, I want to lend.
Christopher Donovan, Partner, Doss Law, PC: I feel very sorry for you. I’m going to pray for you tonight. The licensing department with the DFPI, with the CFL. I used to get CFL applications. We did them on paper, and it took, 60 days. I’d get them. Now they switch to the NMLS system.
You’re thinking it’s going electronic, it’s going to be way more efficient. No, it’s like, gone up six times and you’re looking at 12 months. And so their license department, we’ve, considered writing a letter to Newsom about it. We’ve gone, after the top because it’s just so inefficient.
Once you get the license, it’s great. So that’s my little, sorry. Rift on CFL. So, your question is, should you also get a DRE license?
Workshop Participant: That’s my question.
Christopher Donovan, Partner, Doss Law, PC: Yes. You know, if you. Are you a balance sheet lender?
Workshop Participant: Yes.
Christopher Donovan, Partner, Doss Law, PC: If you’re a balance sheet lender, you really don’t need one. I think the ultimate, you know, kind of my favorite place in this business is if you’re a mortgage fund with. If you’re doing deals in California mortgage fund with a CFO license. Because you don’t have all those DRE restrictions, you’re not regulated by the DRE. If you wanted to incorporate some things you can’t do with the CFL.
So let’s say you don’t portfolio, you don’t hold your loans, and you want it to be able to sell to unlicensed individuals. You would need a DRE license to do that. If you’re, if you’re holding on to them and. Or you’re just selling to institutional investors, you don’t really need a DRE license. So there’s some instances where it’s a DRE license.
You can hold both and utilize it, but it just kind of depends on what you’re doing with your loans after you make that loan.
Question #2: Are broker fees included in Texas usury calculations?
Workshop Participant: Hello. Great, panel, by the way, question is on fees in Texas. So A placement or broker fee, processing and legal fees. Do those need to be calculated in the interest rate to hit that 18% max?
Chase Berger, Partner, Ghidotti Berger LLP: It’s about usury recalculation. Yes. My understanding in Texas is that the third party fees are not included in usury recalculations. So all the fees that are not charged by a broker and lender would, you know, closing costs, escrow, title, legal, would not be included in the.
Workshop Participant: Right. And specifically the broker fee. Since the broker, I get nothing of that, they’re bringing the deal to me. Can I exclude. Exclude that from the calculation?
Chase Berger, Partner, Ghidotti Berger LLP: No, that, that’s, that’s the cost of getting the loan. So I believe that would be included in the interest calculation as well, the usury recalculation.
Workshop Participant: Okay. Thank you.
Question #3: What trends do you see in defaulting borrowers and property types?
Workshop Participant: Chase Dune Wounds in Florida. I live in Florida too, and I have an office in Philly. So it’s funny when you said that about Philadelphia because it’s, it’s crazy up there too. But my question is, what do you see as far as types of borrowers?
And with the lending. When the lending. When you’re, when the lender’s foreclosing the type of property, the type of borrower, is there one more than another, you know, more of a commercial type of client, or is it more of a developer type of client? I would assume it’s developer, but, you know, it sounds like you’re saying, am I noticing trends in borrowers who are delinquent?
Chase Berger, Partner, Ghidotti Berger LLP: In essence, yes. In essence, the businessman borrower who’s a business purpose borrower, typically does not want his property foreclosed, doesn’t want to lose his investment. And so that person or that individual or that entity, we see they reinstate rather quickly.
So the demand letter brings them down the straight and narrow. Or you file first legal, you know, you file a complaint or you know, record the first legal document as the case may be, and they come down to the, to the straight, narrow, narrow. And I think that that’s my understanding that would be like the majority of your target audience too would be the business, the business purpose borrower who’s on a multifamily or investment property or a fix and flip or a bridge.
Those people don’t want to lose their investment, especially if they believe that they have equity. And so we see very, very quick reinstatements. I hope that that answers it.
Workshop Participant: Yeah, that does. Yeah.
Question #4: Is a business purpose license easier to get than a consumer license?
Workshop Participant: One more. Okay. One more. Just in general, with the, business purpose license versus the consumer license, because we’ll do loans, a lot of loans.
For commercial purpose, business purpose. But then we have clients that also own homes and they’ll come to us. And so we’re licensed in Pennsylvania and Florida for consumer loans too. Certainly makes sense, but, how we’re looking in Texas, we’re looking in, even California.
But as far as. Is the business purpose license, I would assume is a little easier to get than the consumer one. I mean, should we be working on them the same time? Or is it easier to get the business purpose license first and then the consumer license?
Is it totally separate type of thing?
Christopher Donovan, Partner, Doss Law, PC: Yeah, they’re separate, but, I think it is easier to generally. Generally speaking, to get a business purpose license. And then a lot of states after you have that, you’ll just get a. Not even another license, but the NMLS endorsement to that license so that you can make consumer loans.
Workshop Participant: Perfect. That’s great. Thank you.
Question #5: Was D.C. on the list? And does a real estate broker commission count in Texas usury?
Workshop Participant: 3. First is, you had DC up on your list, but you didn’t actually talk about D.C. i don’t think we had D.C. up there as an option. We just had Washington, the state of Washington.
Christopher Donovan, Partner, Doss Law, PC: Okay, I, I went back to the picture.
Workshop Participant: DC was on there, so. Okay. But, second is. I’m wondering, and she can correct me if I’m wrong, if she’s talking about broker, as in real estate broker, as in the real estate commission. That’s a percentage, right? The commission that the real estate broker gets.
She might, Are we talking about lending broker? She’s talking about the, the. The real estate broker commission. I think she was talking about the broker. Right. Oh, the refer. Person who arranged the loan. Yeah, yeah. But so my question was whether or not the broker’s commission actually like the real estate brokers commission, because it is a percentage commission, which you can’t have that deal unless it was actually part of the. It’s on the HUD as a broker. Is that being counted in the 18%, a real estate commission. For the purchase. For the purchase, yeah, because it is part of the. You can’t get that wouldn’t be involved in the. Yeah, and I use recalculation. That’s the whole calculation is based on like the cost of borrowing money.
Chase Berger, Partner, Ghidotti Berger LLP: Okay.P
Question #6: How can we be your boots on the ground in Texas?
Workshop Participant: And then we’re in Texas, boots on the ground. So how do we work for you? I’m sorry? We’re in Texas, boots on the ground. You were talking about meeting people who were there. How do we come work for you? Is that to you to be your boots on the ground?
Chase Berger, Partner, Ghidotti Berger LLP: Oh, yeah. Happy to talk to you. Yeah, yeah, it is the second echo and here’s, here’s a, here’s contact info up there. If you want to, you know, follow up with anyone to call us, email us, let us know if you have follow up questions that we didn’t have time for.
I know the next panel was supposed to start three minutes ago. Do we have, we have time for one last question?
Question #7: Do you need a license for business purpose loans on 1–4 units in Oregon?
Workshop Participant: Yeah, one more quick question question in Oregon to clarify. Do you need to have a license, for business purpose loans secured by one to four units?
Christopher Donovan, Partner, Doss Law, PC: And the reason why I asked because you said Oregon and Utah is similar and Utah said no.
Both Oregon and Utah have, that, have that same, the way they run their licensing that you do not for a loan secured by commercial real estate, but you do for one to four residential.
So it’s a licensed activity to do a business purpose loan secured with one to four units, even if it’s business purpose.
Workshop Participant: Okay, thank you.
Closing
Chase Berger, Partner, Ghidotti Berger LLP: I want to point out that Mike Brooks’s email is brooks@ghidottiberger.com if you want to reach the great Mike brooks, he’s brooks@ghidottiberger.com
Christopher Donovan, Partner, Doss Law, PC: I apologize. All right, I think, I think we’re ready for the next panel. I just want to thank my fellow panel lees for doing a great job today. Thank you guys. Appreciate you gentlemen. Thank you for listening everyone.