Dazed and Confused: California Mortgage Licenses

April 30, 2021 by Kevin S. Kim, Esq.

Mortgage licensing in California can be a confusing venture if you’re not aware of the distinctions between the governing agencies and licensing regimes.

California has two government agencies regulating private lending: The California Department of Real Estate (“DRE”) and the Department of Financial Protection and Innovation (“DFPI”). Each division has its own regime. Unfortunately, they aren’t mutually exclusive, which makes the distinction confusing. Because of this, we get many questions about the interplay between each mortgage license, the capabilities of each, and how to maintain them. This article will answer some of these frequently asked questions.

Unless otherwise stated, these questions will focus on private lenders who make business purpose loans secured by residential real estate or who make loans secured by commercial real estate.

Do I need a CFL mortgage license if I have a DRE license?

No. You can successfully operate a private lending business with a DRE license. However, many lenders will elect to shift to a CFL license for three reasons: (1) if they fund off their own balance sheet; (2) if they want to reduce their reporting; and (3) if they want to expand their underwriting guidelines beyond the DRE’s limitations.

I have a CFL license for business purpose residential loans and commercial real estate. Can I upgrade or convert this mortgage license to start doing consumer purpose loans?

No. The DFPI requires a separate application through the NMLS portal.

Can a CFL licensee sell loans to the public?

No. CFL licenses are strictly limited to selling loans to “institutional investors” and CFL licensees. It is important to note that the DFPI defines a “institutional investor” more strictly under the California Financing Law than the colloquial use. There is conflicting authority because there is case law authorizing CFL licensees to sell to the public, but the courts and the DFPI acknowledged that the activity of selling loans to the public may trigger licensing regulations under the DRE. Further, the DRE has refused to take a position on this publicly. For these reasons, we do not advise selling loans to the public as a CFL licensee.

Do I need a mortgage license to BUY loans in California?

Technically, no. While both the DRE and DFPI heavily regulate the origination, funding, and SALE of loans, they do not technically require a license to buy loans. However, this changes if you are buying loans that have held back funds for purposes of future advances or draws. Those types of buyers will require a license in California. For this, a CFL is sufficient.

How hard is it to maintain a CFL license?

Super easy. As long as you do these 3 things you can maintain your CFL license indefinitely: Firstly, maintain eligibility; Secondly, send in your annual report on time; and lastly, notify them appropriately for material changes. Eligibility is simply two-fold: (1) $25,000 net worth; and (2) surety bond. The annual report is due every March 15. Do not miss it. You will lose your license if you forget to file it. Finally, notify the DFPI about big changes. These include changing addresses, adding new officers, directors, managers, general partners or owners over 10%, and adding branches.

Can I have both mortgage licenses?

Yes. In fact you should. Especially if you are a portfolio lender. It grants you the maximum transactional capabilities. Furthermore, it allows you to minimize non-compliance in California because you have both license at your disposal.

If I have a CFL license can I service loans?

For yourself, YES. For others, NO. Further, the DFPI does not impose any requirements for trust accounting to service loans for the licensee.

I can make loans nationwide with a CFL mortgage license, right?

Absolutely not. CFL licenses are strictly meant for loans in California. Likewise, they do not grant you any authority to make loans outside the state.

Can I obtain a CFL mortgage license if I’m out of state?

Absolutely! The only limitation is that the application process changes a bit: the application’s signature pages must be notarized if executed out of state. Also, if the subject individual resides out of state, the background checks must be done via FBI fingerprint cards instead of livescan.

Can a licensed DRE broker be broker of record with multiple corporations?

Yes! The DRE corporate broker’s license requires a licensed broker to be an officer and listed as broker of record.

Does the DRE or CFL require a brick-and-mortar?

No! You do not need a brick-and-mortar office in California to maintain either license.

If you have any questions about California mortgage licenses, our Corporate & Securities team would be happy to help. Click here to send them a message.

About the Author

Kevin Kim leads Geraci LLP’s corporate & securities practice. His expertise lies in fund formation, private placements, and other securities offerings for private lenders, real estate developers and investors of all sizes. Additionally, he and his team have advised and prepared hundreds of securities offerings including mortgage funds, structured debt offerings, real estate syndications, crowdfunding offerings, EB-5 projects, and Qualified Opportunity Funds. The corporate and securities lead’s passion lies in serving his clients as a pragmatic advisor focusing on real world solutions.

Kevin is also a nationally recognized expert in mortgage fund formation. Lastly, Kevin is the lead instructor for the American Association of Private Lender’s Certified Fund Manager courses, where he teaches mortgage fund managers throughout the United States on fund management and securities laws.

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