As a private lender in California, it is crucial to understand the unique requirements and limitations between a California Finance Lenders License (CFL) versus a Department of Real Estate (DRE) Broker License. Each license imposes specific restrictions based on the nature of the company’s activities—whether it involves brokering, lending, or servicing. Additionally, both licenses come with their own compliance obligations. Private lenders must carefully evaluate not only the legal and regulatory requirements but also how each license aligns with their business model and operations.
Here’s an in-depth look at the differences between the two licenses and what to keep in mind when deciding which license best fits a private lender’s business model.
Prerequisites for Each License
A DRE Broker has stringent entry qualifications and operational limitations. In contrast, the CFL provides greater flexibility, but its range of allowed activities is more limited. The CFL has less demanding qualification requirements, making it a more attainable option for many private lenders.
Below is a quick comparison of the basic requirements for each license:
| Requirement | CFL (DFPI) | DRE Broker License |
| Education | None Required | Required |
| Prior Experience | None Required | Required |
| Background Check | Required | Required |
| Net Worth | $25,000 Required | Not Required |
| Surety Bond | $25,000 Required | Not Required |
California Finance Lenders License (CFL)
The California Finance Lenders License (CFL) is issued by the DFPI, and allows license holders to engage in lending activities, including making consumer and commercial/business purpose loans. CFLs can only lend from their own balance sheets and are restricted in their ability to buy and sell loans. While the CFL does allow loan purchases and sales with institutional investors and other CFL licensees, it may trigger DRE regulations under California law if loans are sold to unlicensed individuals.
Key Considerations for a CFL License
- Entity Type: CFL licensees can be corporations, limited liability companies, or limited partnerships. Fund Managers should have their Fund entity hold the CFL license due to the DFPI’s balance sheet lending requirement.
- Lending Authority: A CFL holder can make consumer and business purpose loans secured by real estate, personal property, or unsecured property. For consumer loans, the CFL license requires the sponsorship of an MLO.
- Loan Brokering: While primarily a lender’s license, the CFL does permit some level of brokering. Specifically, a CFL licensee can only broker to another CFL licensee.
- Servicing Loans: CFL licensees are only permitted to service loans they originate, or loans sold to either another CFL licensee or institution. This includes collecting payments from borrowers, managing escrow accounts, and handling foreclosures in case of default.
- Usury Exemption: One of the major advantages of the CFL is its exemption from California’s usury laws. This exemption allows private lenders to charge interest rates higher than the state’s capped rate, which is especially attractive for fund managers seeking to offer competitive returns to investors through high-interest-rate loans.
- Limitations on Selling Loans: A CFL licensee may sell an unlimited number of loans it originates to “institutional investors,” but must “arrange” through a DRE broker the sale of more than 7 loans during a calendar year to non-institutional investors.
California Department of Real Estate (DRE) Broker License
A DRE Broker License, regulated by the California Department of Real Estate, allows the licensee to perform a wide range of real estate activities, including making, selling, and arranging loans, as well as negotiating the sale, purchase, or lease of real property. DRE Brokers can also service real estate loans, even if they didn’t originate them. However, DRE licenses have significant hurdles to entry and transactional restrictions, including limitations to construction lending.
Key Functions of a DRE Broker License
- Entity Type: Under guidelines established by the California DRE, a DRE Broker licensee must be either an individual or a corporation. Limited liability companies cannot hold a DRE Broker license.
- Loan Originations: A DRE license only allows the licensee to originate loans secured by real property. For consumer loans, all salespersons who originate loans must have a salesperson or broker’s license with an MLO endorsement.
- Loan Brokering: A DRE Broker is authorized to act as a mortgage broker for – and make loans with funds from – an unlicensed lender. However, the DRE imposes specific disclosure and regulatory requirements on licensed DRE Brokers, particularly when brokering loans to borrowers. These regulations are more stringent compared to the CFL’s requirements, especially in terms of transparency and borrower protection.
- Loan Servicing: DRE Brokers can service any real estate loan, whether they originated the loan or not. A written service agreement must be in place, and the agreement must comply with a series of detailed rules under the DRE.
- Construction Loan Restrictions: DRE Brokers making loans using private investor funds or selling loans to private investors must comply with Business and Professions Code 10232.3. Key requirements include a $2.5M loan cap, full funding of the loan into escrow, use of a neutral escrow agent for undisbursed funds, appraisals by licensed appraisers per USPAP, and LTV ratio limitations.
- Additional Requirements: DRE Brokers are subject to ongoing education and reporting requirements. This includes disclosing any commissions, abiding by specific advertising guidelines, and maintaining strict records of all real estate and lending activities.
Conclusion
Both the CFL and DRE Broker licenses are widely used by lenders and brokers in California, but they serve different purposes. Lenders who primarily arrange loans for unlicensed investors tend to favor the DRE license, while those utilizing balance sheet lending, credit lines, or fund-based financing often benefit from holding a CFL.
