Private lenders provide vital financing options for real estate investors. However, there are numerous myths and misconceptions surrounding the licensing rules for private lenders, specifically in Business Purpose Lending (BPL) secured by residential real estate. Contrary to popular belief, several states in the United States require a license for such lending activities. Understanding the specific requirements, obligations, and complexities associated with licensing in each state is crucial for your success. This article aims to demystify the state-by-state approach to licensing, highlight key requirements in certain states, and emphasize the importance of careful consideration to navigate the licensing process effectively.
The State-Specific Landscape
As a private lender, it is important to be aware of the licensing requirements in the states in which you operate. For non-owner-occupied BPL, these states require a license to lend: California, Arizona, Nevada, Utah, Idaho, Oregon, Minnesota, South Dakota, North Dakota, and Vermont. Additionally, states like Florida, Tennessee, North Carolina, Washington, and Texas impose additional obligations beyond licensure. These obligations may include exceptions, special rules regarding owner-occupied BPL, usury, bonding, or specific exemptions to which you must conform.
Navigating Unique Checklists
Licensing requirements vary from state to state, and each state maintains its own unique checklist. It is crucial to be well-prepared and familiarize yourself with these checklists to avoid unnecessary burdens during the application process. For example, obtaining an Arizona Mortgage Banker’s license requires a qualified employee residing in Arizona, audited financials, a brick-and-mortar office in Arizona, and Mortgage Loan Originators (MLOs). Similarly, Utah’s Mortgage License necessitates a lending manager with sufficient mortgage experience and MLOs. Understanding which states require MLOs and which do not is an additional layer of complexity.
Importance of Background Check Rules
Understanding each state’s background check rules is paramount for a successful application. Different states have varying regulations regarding who must provide a background check for applicants. Although it is common for control persons to submit to background checks, ownership is typically a complicated issue. Some states require anyone who owns 10% or more of the applicant to submit to a background check. Others are those that own over 20% of voting interests. Finally, certain states will require additional credit checks along with background checks. With these considerations, the applicant must strategize in advance of the application.
Overcoming Challenges and Nuances
One of the significant challenges that private lenders face is the lack of understanding among states, particularly in non-metropolitan markets, regarding the distinction between “Business Purpose” Residential Mortgages and standard mortgages. Recent encounters with state examiners in Minnesota highlighted initial difficulties in differentiating between these two asset classes. However, through an interpretive process, Minnesota acknowledged that BPL lending will not require MLOs since it lacks a consumer component. This lack of understanding underscores the need for private lenders to navigate the application process with caution and clarity.
Submitting Accurate Applications
Given the nuanced nature of BPL licensing, submitting applications with meticulous care is vital. Some states, like California, equate “residential mortgage” with consumer-purpose mortgage lending, while distinguishing “commercial” as BPL. Misclassifying your lending activities can lead to increased burdens and potential complications. For example, when applying for the California Financing Law License (CFLL), private lenders can opt for the “Commercial” version, which has a lower net worth requirement and does not necessitate MLOs. Identifying as a “residential mortgage lender” could subject you to higher standards, as the NMLS system and regulators may assume you are a consumer mortgage lender. Notably, the CFLL application process currently stands out as the lengthiest among the states. Currently, it’s taking over eight (8) months for CFLL approvals, with recent requests for document samples such as loan agreements and relevant disclosures likely contributing to this significant extension in processing time.
Conclusion
As a private lender, navigating the maze of licensing rules for Business Purpose Lending secured by residential real estate is crucial for your continued success and compliance with state regulations. By understanding the state-specific landscape, unique checklists, MLO requirements, and background check rules, you can streamline the licensing process and avoid unnecessary burdens.
It is essential to approach each state’s licensing requirements with diligence and meticulous preparation. Misunderstandings and misconceptions surrounding BPL and its distinction from standard mortgages can complicate the application process. Contact the team at Geraci today to ensure you are compliant with all state licensing and lending requirements.
