CA Private Lenders Licensing Considerations

Jennifer Young:

Hi everybody, my name is Jennifer Young, I am a partner with Geraci. I'm on the Corporate and Securities team and our team really helps our clients with fund formation, so debt funds, real estate funds and licensing. And today's webinar is about licensing in California specifically just to note, we do help our clients with getting licenses all across the US for those states that do require a license. So feel free to reach out if you have any questions that are outside of California, but today we are going to be focusing on California and the CFL license specifically versus the DRE license. Before we begin, there are a couple of housekeeping items just to let you guys know if you have questions, they will be taken at the end of the webinar provided we have time, I think we will, I don't think we'll be taking the whole hour, at least my presentation and you should not be using the chat box beneath. Please use the q and a question and answer q and a box at the bottom of your zoom, not the chat box Questions in the q and a box will be answered. Provided we have time, we will send this recording as well as the slides to you guys after today's webinar. Marketing will send that to anybody that's registered and I also wrote an article related to this topic specifically so they will be sending a link to the article as well. Alright, so without further ado, let's get started.

Alright, we're going to be talking about the two California licenses for private lenders. The first one is the CFL, that's the California finance lender license. The CFL license is governed and regulated by the DFPI. The CFL license is very, very useful for private lenders because it allows you to lend for both consumer and commercial loans and not just loans secured by real estate but also non-real estate secured loans. So any type of business working capital loans, business loans to other companies, et cetera. The DRE broker's license by contrast is regulated by a different entity. The California Department of Real Estate, the DRE broker's license only allows you to transact for real estate secured loans and obviously acquisitions of real estate property but they are governed by two different regulators And so keeping that in mind, the DRE and the CFL does have separate compliance requirements and reporting requirements that you'll need to think about because they are governed separately by different agencies.

Alright, so let's first start with how do you get each of the licenses. Now the CFL license, it's a company more so than not it's a company license so you will get your company licensed. You don't have an individual licensing requirement for the CFL license unless you are doing any type of consumer mortgage lending. If you're doing only business purpose loans, the CFL by itself or the company is all you really need. And so looking at this chart right here, there's no education or prior experience. The only thing that is required of the individual is any owners of the company and any managers really anybody that has authority and control over the company's lending activities will need to submit their fingerprints for a background check. And this is an FBI background check done through the department of the DOJ. The CFL license also requires a company itself.

This is the applicant entity to have a company net worth of 25,000 or more at all times. So when you apply you have to show a balance sheet Assets minus liabilities equals owner's equity and that has to be a positive net worth of 25,000. On top of that, there is a surety bond that the DFPI requires when you apply for the license and that surety bond, depending on the activities is typically a $25,000 surety bond. The bond premiums are usually around a hundred or 200 couple thousand per year, but that bond has to cover 25,000. And additional requirements for the CFL that you probably want to consider as well is the DOPI has been really asking for detailed business plans. So how are you marketing your company? Are you working with other lenders or brokers, et cetera. They want to see kind of operationally and outward facing what that's going to look like.

So they do want a clear detail of the company's business plan. Now for the DRE broker license, this is initially an individual license so there's going to be a lot of individual requirements for the person getting the DRE broker's license. Once you get your DRE broker's license at the individual level, you can then apply for a corporate broker's license. We can talk more about the entity's allowance for getting that broker license, but it is a little bit more heavy when it comes to the educational requirements. The prior experience that you have to show, for example, you need a few years of a DRE salesperson license experience before you can even apply for the DRE broker license net worth and charity bond not required for either the individual or later on the company. So that's a little bit easier on that side but it is a little bit more intensive for the individual when they're applying for the broker's license and you can't just outright apply for a DRE broker's license for your company.

You have to start with an individual first. Okay, moving on and just a reminder, I think I saw a question in the chat box, please direct all questions to the q and a box. That's where we're going to be reviewing questions at the end and we'll be answering questions from that q and a box. Alright, moving on. CFL license key considerations. First of all, the entity type, so the CFL license, you can apply it to your company and there's no restriction on the type of company so you can apply it for your LLC or an LP if it's a fund, LLC, if it's a fund, sole proprietors, individuals, even corporations, they're very flexible there. There's not many restrictions but depending on what type of entity you're applying under, you might have additional related requirements for that entity that the application will require. Number two, lending authority.

So the CFL license allows you to lend for both consumer and commercial or business purpose loans secured by real estate or personal property or unsecured. This is the larger difference between the DRE license and the CFL license. For those people who are making CNI loans or business loans to companies, the CFL license is pretty much your only option. The DRE of course only allows you to make real estate related loans. If you are doing consumer loans under your CFL license there will be an additional requirement and that is to have an MLO an individual with an MLO license attached to the CFL license. Number three loan brokering. So the CFL license is really a lender license. It does allow you to broker but it is strictly prohibited to broker to other CFL licensees. So that's something that's very important. If you get or have your CFL license, you have to remember you can only broker to another CFL licensees and vice versa.

You can only have another CFL licensee broker to you if you are A CFL. If you hold a CFL license yourself, so it's CFL to CFL only for servicing loans. The CFL allows you to service your own loans, so loans that you originate, but it does not allow you to service third party loans. And this might be something that you would want to consider because the DRE and we'll talk more about it, but the DRE is the one that does allow you to service to third party loans, but CFL license you can only service your own loans usury exemption. So why are we getting these licenses? It's because basically the CFL license allows you to be exempt from California usury laws. So that means when you're making a loan and you have a CFL license, you can exceed California's usury limits 10% if you have a CFL license.

And the last thing is limitations on loan sales. So technically the CFL license doesn't restrict you from selling loans, but you have to consider when you sell eight or more loans, that would be considered DRE brokering activities. And so once you hit eight loans or more and you're selling these loans to third parties, that would kind of trigger DRE, the DRE to look at you and say, hey, you're kind of acting as a DRE broker and you need a license because now you've sold eight or more loans. And to do so you need a DRE broker's license. So if you keep it under seven, you're not technically violating that. But compliance purposes keep in mind eight or more loan sales in a year, you need to think about getting a DRE broker's license or having those loans arranged by a DRE broker.

All right, the DRE broker's license. So the entity type, it's really weird and a little bit archaic, but right now the DRE is only allowing your personal individual DRE broker's license to be attached to a corporation. That means once you get your DRE broker's license, you can't apply for a corporate broker's license if you entity is an LLC, you can only apply for that corporate broker's license by setting up a corporation as an entity and that's the only way that you can get a corporate broker's license. Hopefully that'll change. But right now that is the rule. And so if you're thinking about setting up an LLC and you want to attach your corporate broker's license, that's not going to be possible loan originations. So the DRE strictly related to real estate, you can only do real estate type deals, real estate acquisitions and real estate related loans.

So that's loan secured by any type of real property. You are not going to be able to work on any other types of deals. Loans secured by working capital loans secured by equipment or accounts receivable or something like that. It has to be real estate related for loan brokering. The DRE is really flexible and this is one of those things where people use A DRE broker to broker to unlicensed lenders because A DRE broker's license will allow you to broker a loan to an unlicensed entity or individual who does not have a CFL who does not have a license in California to make a loan. And so when you have a DRE broker that loan, you are able to have that lender fund the loan without being licensed. Loan servicing is something that a lot of people get the DRE license for because the DRE broker's license does allow you to service all third party loans.

So not just your own, any other entity, any other lender's loans. If they need you can provide that Dear broker. I mean, sorry, loan servicing to them. Sorry, just messed up my screen. All right, construction loans restrictions. So this is something specific for the DRE license, the DRE broker license, although it is pretty flexible with brokering and servicing the types of loans that it can broker for you or you can broker using a license is restricted when it comes to construction and rehab loans. The CFL does not have these restrictions or limitations, but it is a DRE broker construction loan restriction that you have to keep in mind. And so when you are making or brokering a construction loan or a rehab loan, some of the restrictions that you have to keep in mind is the total loan amount cannot exceed two and a half million.

There are LTV limitations, LTV ratios limitations. They do want the loan to be fully funded to escrow. There's a couple of other things, but when it comes to construction loans and rehab loans, you do have a couple of restrictions that you want to keep in mind. Finally, there are a little bit more additional requirements in keeping your DRE brokers license compliant and active. A lot of it involves the ongoing education and reporting and we will talk quickly about compliance later on. But the individual, because this is largely an individual license, the individual broker does need to keep up their ongoing educational requirements, et cetera. So there's also disclosures that you want to make sure that you're providing when you are using your DRE broker's license. So we will talk a little bit more about compliance things, but that's something to keep in mind between the two licenses.

All right, comparing the licenses, so it's kind of summarizing right, the CFL license, definitely for our debt fund clients, the fund is usually the one that gets a CFL license because the CFL license does require you to lend off of your own balance sheet. So that means in California generally also across the board for California there is no table funding allowed. Table funding is strictly prohibited ea your CFL license, you have to use the loan proceeds have to come from your own entity's balance sheet. So if you have your LLC license as a CFL lender and you want to go and fund a loan using your CFL, those loan proceeds have to come from your entity, your LLCs balance sheet straight directly to escrow and you have to be the lender of record at closing. On the closing docks. The DRE broker is similar. You can obviously broker loans to unlicensed entities, but they still, because there's no table funding allowed, the lender has to provide the loan proceeds to the escrow directly from their own balance sheet.

They're similar in that way, but the CFL is very, very strict where you have to have the funds if you're going to make a loan moving on. Alright, the compliance requirements, so the CFL versus the DRE being regulated under different regulatory agencies. Historically the DRE is a little bit more difficult to work with. They do come and audit quite more frequently and they're a little bit harder to work with the CFL regulated and the DFPI, they're not as bad. I mean the harder part is probably the application process, which by the way is taking about 10 to 12 months right now. From the submission of the application, the DFPI is just completely short staffed and they've had a huge personnel turnover in the past year and so the license applications are moving pretty slow, but once you get the license it is a lot easier to deal with them and they don't audit as frequently though I feel like I've seen it pick up a little bit more in the recent year or two.

So CFL compliance requirements, the quarterly M Cs need to be done and this is all in the NMLS for business purpose loans. You can mark these as zero or you can ignore it for California, you don't need to docr for business purpose loans. For consumer purpose though, it's a different story. You have to report everything. The big compliance requirement for CFLs is the annual report and this is due every year March 15th, which means for those who have a CFL license right now, you should be on it and working on it and hopefully submitting this in the next week or so. This is a very, very, the most important compliance requirement that you need to think about for CFLs because if you do not submit it by March 15th, you will be penalized every day and if you ultimately don't submit it, this is the only thing that will get your license revoked.

So very important that timeline is coming up. It is in about two weeks, so if you haven't already, you need to think about filing your annual reports. If you need help reach out. My team can help with those annual report filings. The last two are assessment fees and renewal fees. The CFL license is a perpetual license. It doesn't get revoked without you renewing the license. The only way to really get it revoked is not filing the annual report. So the assessment fee, this CFL assessment fee, it's due by the end of the year, around the end of the year and it's based on the prior year's CFL activity. So really what's reported in your annual report and they take what you report as CFL activity and CFL income and they compare it with all other CFL licensees and their CFL income generated in the prior year and it's a pro rata kind of a fee that's spread amongst all CFL licensees.

So this is just a fee. You go into your NMLS and then you pay the fee and you're good to go. The last thing is an N ML S renewal. I don't know that this really applies to CFL licensees per se, but it is something that is required because A CFL license is on in NMLS and so you have to pay your NMLS renewal fee every year and this is just really a fee for NMLS to use their platform and have them store your information and store your documents. The DRE broker requirements are a little bit more hefty and the first thing that's important for our lenders is that if you are a DRE broker and you meet the threshold broker requirements, you need to file a notification and that notification has to be within 30 days of meeting that threshold requirement, two, three and four quarterly trust fund status, annual trust account review, and annual business activity review. This is for all DRE brokers licenses. This is just kind of quarterly and annual reports that you have to do to maintain your DRE broker license regardless of whether or not you've met that threshold.

All right, so choosing the right license, the first thing that we want to consider is a business model, right? What type of lending are you doing? What's the activities that's going on for your company or for your fund? Do you intend to make only real estate secure loans or are you also thinking about providing business loans to other companies? And if so, the CFL license would allow you to do that, whereas the DRE broker's license is only limited to real estate related transactions target market. So you want to evaluate your borrowers and the types of loans you'll be originating. Sometimes with the DRE broker's license, you do have a little bit more flexibility in who you can broker loans to keep in mind, remember the CFL only allows you to broker to other CFL licensees. So these are lenders who are kind of in the business and providing loans regularly for DRE brokers, you can broker to individuals high net worth trust deed investors, multi lenders without issue, but you wouldn't be able to do that with the CFL license compliance requirements.

We kind of just went over, there's compliance requirements on both licenses. Obviously the DRE does require a little bit more heavier quarterly reporting, whereas the CFL is a very important annual report that you will have to do. The last one is financial resources. So do you meet financial requirements? Oops, sorry. Do you meet the financial requirements that are required, right? So for CFL license, can you show a minimum net worth of 25,000 for your company, for your CFL licensee? Are you able to maintain that bond for the CFL license? If you are applying for a consumer lending activities, you will need to show 250,000 as a company minimum company net worth. And keep in mind you have to maintain this company net worth at all times, right? So not just for the application purposes has to be at all times while you're holding a license.

But again, business purpose it's only 25,000. And then bond considerations, it's pretty negligible, but it is something that you want to consider as part of out-of-pocket expenses and fees to maintain a CFL license. The DRE again does not have this requirement. And so really depending on what you're intending to use a license for, what is your business strategy? The two licenses are always good together. I always encourage if you're going to be especially servicing third party loans, maybe consider DRE broker's license as well. But for fund debt funds, definitely no question about it. You should get your fund licensed at the fund entity level or a subsidiary level just because the balance sheet requirement will require the licensee, the CFL licensee to provide the loan proceeds directly from that balance sheet, right? So if you have a fund, you're raising capital when you close a loan, the fund entity is the one that has a capital.

And so that's why I always say get your debt fund A CFL license or a subsidiary if you're closing it at the REIT level, at a subsidiary REIT level, get the REIT level REIT entity license with the CFL so that you can make loans and close loans under that REIT entity. It really depends on what you're doing, what you're thinking about and a lot of considerations to think about when deciding between the two licenses and ultimately it is not never a bad idea to have both, although it is a little bit restrictive to get the DRE broker's license because of the individual requirements there.

Alright, so it is nuanced. There's a lot of little moving parts to think about. You definitely want to speak with somebody who is well-versed and has expertise in this area. There are a lot of things to consider. So if you guys have any questions, you definitely want to reach out to somebody who is very knowledgeable in the California lending licenses, especially the differences, pros and cons between the CFL license and the DRE broker's license and we made it to the end of the presentation. So with that I'm going to open up our chat and see if we have any questions. Bear with me.

And just a reminder, please put all the questions that you guys have in the q and a box, not in the chat box. I misspoke. Alright, so let me open this up. So is there a difference between a corporate broker's license and a regular broker's license? Yes. The regular DRE broker's license as I mentioned, is something for the individual to initially apply for. You technically can't apply for a corporate broker's license unless you have an individual broker's license that you can attach to it and that process is a very easy, I think it's a page and a half, it's a DRE form that you fill out and your responsible broker is the individual broker who needs to be listed on that corporate broker application. So you can't just apply for your corporation and again, it has to be a corporation, but you can't just apply for a corporation without having at least one individual with their DRE broker's license.

D-D-F-P-I now seems to want A-C-C-P-L commercial financing annual report through DFPI serve service. How does this differ from CFL annual report? All right, so the question, and I don't know if I would be able to answer this, but the question is the DFPI now seems to want A-C-C-F-P-L commercial financing annual report through the DFPI self portal. The DFPI self portal is kind of where you go for the annual reports. How does this differ than the annual report? So this is a commercial financing report. It might not apply to all CFL licensees, but the CFL annual report definitely does and the CFL annual report is really where you provide a loan tape where you confirm if there's any changes to the licensing structure, management structure, ownership of the company and main contact information. But predominantly they really want to look at the CFL lending activity and the loans that were made. And this does apply to all CFL licensees. The C-C-F-P-L commercial financing report might not apply to every single CFL licensee. So it depends on whether or not you have to file this annual report. I'm happy to take a closer look into what the requirements are for those who need to fill this out, but I dunno this off the top of my head.

Does your company do the reporting for DRE and CFL? Yes, so we do reporting for A CFL including the quarterly M MCs if needed and definitely the annual reports. If that's something that you need help with right now, please reach out sooner than later because our fees are tiered for the annual report and the longer you wait, meaning the more we have to rush when we're filing this report for you, the higher your fee is going to be. But we're happy to help with your CFL annual report if you need, feel free to reach out to me directly. The DRE reporting though is not something that we can help with because a lot of it is individual educational requirements that need to be done. So on the DRE side, not so much CFLs. Yes, definitely.

Do you recommend that a licensed CFL lender also obtain a corporate broker's license to handle all types of lending and scenarios? If so, do we just list and disclose both licenses on everything? Yeah, this is a good question. So I do like having, especially for people who are doing the third party servicing to get both licenses, but you don't necessarily need both. I mean for a CFL lender you can make loans, broker loans to other CFL licensees and service your own loans. So technically in that scenario you don't need a DRE broker's license, but if you are kind of wanting to help service third party loans, loans that you didn't originate, loans that are not yours, you definitely do need to think about getting a DRE corporate broker's license to handle that type of fact pattern. The CFL as far as lending capabilities go, it definitely provides you with more flexibility, right?

You can make loans secured by both real estate and non-real estate, whereas the DRE license is really just strictly for real estate related transactions. So if you are thinking about making business loans or starting CNI lending the CFL license is definitely the better way to go on top of that for construction and rehab loans, like I mentioned earlier, the DRE broker does have loan limitations, so you have that two and a half million total loan for construction loans, rehab loans, you have requirements to fully fund to escrow. You have LTV limitations when using your DRE license. The CFL doesn't have any of those limitations. You're free to make any type of construction loans, any type of rehab loans as you want without LTV limits. But I think when you want to consider anything related to brokering to unlicensed individuals or servicing third party loans, that's where the DRE broker license comes into play. It's not very often, I don't see it as common for a lot of our private lenders because they're really focusing on originating their own loans and servicing their own loans and not dealing with any construction rehab loan limitations. So the CFL license would be a little bit easier for you to have to give you that flexibility.

Okay. Can a company have A CFL and employees DRE? I think the question is can a company have a CFL and also employ DRE maybe salespeople? And the answer is yes. It depends because if you have a CFL license for your company and you also potentially have a DRE brokers corporate brokers license, you usually would have all those employees sit under that entity. I don't know if I'm understanding your question, so feel free to let me know if you meant something different. It's hard to tell from the question. So next question. So to do any type of loan in California from a California company to a California company for business purpose, you need a license? Yes. So the way that you want to think about this is when you're making a loan, is it a California loan? Meaning is the collateral located in California, are the borrowers in California?

And if so, then yes, you need a license to make that loan business purpose or consumer purpose. You need a license to lend and so as long as you have a real estate property securing that loan or California assets business assets securing that loan, then yes, you do need a license. Happy to chat more. I'm not sure if I answered your question, but it was a pretty broad one and there are some nuances there, so feel free to reach out if you want to chat more about that. What is the process for applying for other state CFL licenses?

Good question. Every state is different. They're not all called CFL licenses. Other states it's typically a mortgage lending license. Certain states will require you to have a license to lend even if it's only business purpose loans. And how long is the procedure? None of them are as long as California. The California 10 to 12 month window is just insane to me. But the other states, their lending license application process, I would probably budget around three months or so. We've been getting licenses approved between two and four months depending on the state. Feel free to reach out to me directly for the state or states that you're thinking about. Different states also require different documents. They probably to sometimes have state specific documents, they sometimes have a brick and mortar requirements, so you have to have an office in that state or a qualified individual residing in that state for that specific state license. So it depends on the state, but I'm happy to go into further details with you about that.

If you're originating only business purpose loans that are secured by only real estate using your own entity funds and possibly servicing, isn't the DRE the best? Yeah, I mean the DRE definitely covers all of those activities, but then again, so does the CFL, right? But in comparison, depending on the type of business purpose loan that you're originating, that's secured by real estate. If you are doing a construction loan or a rehab loan, the DRE isn't going to be the best because it will limit you in the type of loan that you're originating, whereas the CFL won't have any limitations to the types of loans that you're originating.

Okay. Would the USY exemption apply to companies that have a licensed DRE broker working there or would the company need to get a corporate broker's license so that the USY exemption applies? So the USY exemption applies when you have a license, right? And so either the company corporate DRE broker's license or the individual DRE broker's license, if you attach one of that license and have that license arrange or broker that loan, then it is exempt from usy. It doesn't just apply and blanket cover everything, it has to be loan specific and then you have to have that CFL or DRE broker license listed for the usury exemption to apply for MCR quarterly reports to NMLS. You said lenders who only make commercial loans do not need to file only lenders who make consumer loans. We've been filing anyway, even though we exclusively making commercial loans.

Can we just stop submitting them now that we've begun? Yeah, so we've actually gotten direct confirmation from the DFPI on this. You can go in and put in zeros in your M Cs and it'll be fine or they've told us that we can just ignore it and it won't hinder the license. It'll just stay on your N ML S account and it'll show that you haven't filed the M MCs. Because keep in mind the NMLS is separate than the DFPI and the CFL license, right? The license is on the N ML s and N ML S is just a platform, so you do need to take care of certain NMLS related things and the MCR quarterly reports, they're automatically added on to your NMLS account. But whether or not the actual state regulatory agency requires you to file, it depends on the state. And for California for business purpose loans, they've told us, no, you don't need to do any filings or if you want to get rid of it, you can go in and just put zero for business purpose loans.

What would the benefits be of having both CFL and DRE brokers licenses and cons? Yeah, so pros, you have the capability of both licenses, right? Because A CFL restricts you from servicing your own loans, if you have a DRE broker's license, you can serve as a third party loan, right? So that's a pro to having both if you want to make certain construction loans, you would lean towards your CFL license side because they wouldn't have any restrictions on those construction rehab loans. Whereas A DRE broker's license will, if you want a broker to an unlicensed entity, the DRE broker will allow you to do that. But the cons would be additional compliance requirements because now you have two licenses that you are maintaining and keeping compliant. So there's going to be additional reporting on both sides that's going to need to be done and then keeping things kind of separate and clearly accounted for.

It's going to be something that you want to keep in mind because for the CFL annual report, you will be reporting CFL activity and non CFL activity. So non CFL activity would be any type of loans that were made not using the CFL license and obviously A DRE broker's license. So that would have to be reported separately as non CFL activity. So in general, keeping clear differentiation between the type of licenses and the activities that fall under each is going to be something that you definitely want to keep in mind and do if you have both licenses. But really for me, if I were you guys and getting both licenses, it's the reporting requirements and the compliance requirements for both because nobody likes to do all that compliance reporting. Right.

Okay. So what are the costs of getting the CFL license including your charges? I'm happy to talk with you. And we do our licenses, our CFL licenses on a flat fee basis. So it's project by project. Every CFL is a flat fee and we really just take the application from beginning to end and we work with the principals at the company because we'll ultimately have to help them get fingerprints and submit that for a background check. We put together the org chart, we put together the management chart, we help you with providing the balance sheet to show the minimum company net worth requirement. We help you get the bond placed. So we really just take the application from beginning to end and we do it on a flat fee project basis. Reach out if you want to chat more about this, and I can give you our fees and our scope of services included.

If lending in other states business purpose loans only secured by real estate, do you need either DRE or CFL? I know that some states have their own license requirements but do not for business purpose. Would you want the DRE or CFL to mostly avoid usury laws? Yeah, so this is a common question that I get and I just want to be very, very clear. So you guys all understand you need a separate state lending license for that state. If you are going to be lending or doing any type of lending activity in that state, if that state is a licensable state, so meaning if you have a CFL or you have a DRE, California DRE, that's not going to be applicable to any types of loans outside of California. Those licenses are only going to help you for California loans and California activity. If you're going outside of California, we need to evaluate which state you're thinking about or which states you're thinking about and whether or not a license is required in that state. Happy to chat more if you want to kind of dive into specific states and we can go through that evaluation together.

So does the DRE have any restrictions on using out-of-state lenders to fund loans? Does the CFL I'm in California, so can I just use California resident capital or can they be from anywhere else in the state? Yeah, so this is more of a securities issue when you're thinking about using investor funds from other states. For purpose of this presentation, I'm going to stick to the licensing aspect. And again, the balance sheet requirement, balance sheet lending requirement is going to be something that you want to keep in mind because it's not about where the investors capital is coming from. It's for the entity. And so a fund, a debt fund who is making a loan in California, they can obviously they're raising capital all across the US so their investors are providing capital to the fund and the fund LLC as A CFL license is going to be making loans in California. And so the fund would have a CFL license and that is totally okay. You want to think about the entity itself, which entity is licensed, and when you're thinking about high net worth investors and trusted investing and multi lenders, where they reside does come into play. But this is a securities analysis that we would need to do because if you're raising capital from investors and depending on where they are, we do need to address some securities laws. So feel free to reach out and we can chat more about that.

If you have both licenses for construction rehab loans, would you still be subject to DRE license restrictions? IE, even if you have both licenses, can you pick and choose which you are acting under? Yes, definitely. And that's the beauty of having both, right? If you want to predominantly use your DRE license, by all means use that. But if you have a construction or rehab loan that might fall outside of the DRE requirements for construction loans and those LTV limitations, then definitely you can use your CFL license. You just want to make sure that you remember to report that specific loan to be under a CFL activity and not DRE activity. But yes, you can pick and choose which license you want to use.

Can a DRE broker broker or fractional interest loan where A CFL licensee is a partial lender? Yeah, you definitely can. Part of the DRE broker capabilities is to broker these multi lender, multi benny co lender scenario fact patterns, right? The thing that you want to keep in mind is whether or not you have just the two lenders on the loan. And again, securities laws should be considered because a lot of times these are securities transactions. But to answer your question in short, yeah, CFL licensee as a partial lender can be done for a CFL lender to do loan originators have to be W2 employees. So this question depends, the answer to this question depends on the type of CFL activity. If you have consumer activity, all of your individuals who are talking to borrowers who are taking in applications, who are negotiating loan terms, they all have to have their MLO license for consumer loans.

And there's not a requirement per se for W2 employees. But I think when you think about it as a whole for the company, a lot of times the W2 or independent contractor status works, but they have to have an MLO license attached to the CFL for business purpose lending. You don't need to have any originators with their MLO license. And even for our funds, our debt funds who have a CFL license, there's no employees sitting at the fund entity level, right? And so a lot of times the origination comes from the fund manager side who's acting as an agent for the CFL lender, the fund that they're managing. But as a W2 employee, I don't believe that that's required in either scenario, but you might have to have a required for MLO. I'll double check with you on that for you, but reach out and I'll get you a confirmation on W2 employee status.

Does DRE have restrictions on using out-of-state lenders to fund loans? Does the CFL I'm in California, oh, I think I just answered this for draws which license requires escrow account and what are the limitations? That's the DRE. The DRE broker's license and the limitations are pretty specific. I think they're based on the A RVI dunno them off the top of my head, but if you reach out, I can see if I can find that for you. But it's a DRE broker's license that has limitations. Can you originate the loan under the CFL license and then sell the loan to a private investor under the DRE license? Yes, you can do that.

I mean best practice is always to have any loan sales arranged by A DRE license because once you hit eight or more, you will be required to have a DRE license, A DRE broker's license because selling eight or more loans per year is considered DRE brokering activity for which you need to be licensed. Okay, a few more. Oh, hold on. With CFL license only doing business purpose commercial, do we need to file annual mortgage call report that includes the financial condition reporting? I know the answer to this, but I dunno it off the top of my head. I want to say we were recently told that we do for the annual MCR, but let me check with you. Can you email me after this and I'll get that answer to you?

Okay. So what if you have a CFL license and you make a loan to a California business entity, but the property is located in another state, is the California license sufficient? No, you definitely need to consider which state the property is in because it is more likely than not that the property that's located in that state makes it that state's loan. So if the property is in Arizona for example, then it'll more than likely be considered an Arizona loan. And so for Arizona lending you definitely need a license and so you'll have to consider licensing requirements for each state. But typically just generally speaking, the collateral that's securing the loan, wherever that collateral is located makes it that state's loan. Generally speaking, do you need to have a California CFL license if you have been licensed in other states? Yes you do. So keep in mind that if you are licensed in other states and vice versa, if you're licensed in California, that state's license has no applicability in any other state than the state in which you got a license. So these lender licenses, they don't allow you to operate in any other state outside of the state that you got that license in. So for example, A CFL license, you can only operate in California with a CFL license, right? A Nevada license, you can only operate in Nevada with that license. Coming over to California and making a California loan with your Nevada license is not going to work. You need a California license to do a California loan

Apply to private lender loans. Okay, next question. USY does not apply to private lender loans in business entities in California. Is there another reason a private lender would need to be licensed to make loans to business entities excluding sole proprietorships? So usury applies to all loans in California. This is definitely a misconception. If you're going to be making a loan, you need to consider the USY limitations, but if you're licensed, then you can exceed the usury limitations in California. When lending in other states do we need to register in each state as a foreign business? All business purpose loans, we are located in California. Yeah, so depending on the state, you often do need to foreign register in that state to lend. If it's a licensing state and you are applying for a license in that state, so for example, Utah, you want to lend in Utah, you likely will need to register in Utah as a foreign entity doing business in Utah. But at the same time, Utah will require you to have a license for loans for one to fours specifically. And so the application requirements for the specific lending licenses will more often than not require you to register as a foreign entity to apply for that license in that state.

Does JUSI have a list of states that do require their own license requirements and the states that do not require a license to lend for business purpose loan secured by real estate? Yes. The answer is we do have surveys. We have 50 state surveys, we have two versions for licensing. We have two versions. One is a more robust version with all the statutes and the analysis and exemptions for every state. And then we have a kind of a quick and dirty survey for all 50 states and the survey just goes through all of the states and it lists all the types of lending activities. Are you going to be originating, are you brokering, are you lending, are you servicing? And then whether or not you need to be licensed in that state. It also kind of breaks it down by yes, if it's a one to four only or you only need this license if you're making a loan to an individual borrower versus an N entity D borrower.

So our surveys have been really helpful and a really great resource. If you guys are interested in our surveys, feel free to reach out. I'll point you in the right direction. We do also have surveys for other types of compliance lending requirements like user limitations for different states or prepayment penalties, late fees, those kind of considerations that you'll need to think about when you're entering into new states. We also do have state, state surveys. So for the state of Arizona for example, what is the licensing requirements? What are the USY limitations? What are the prepayment penalty or late fees that I can charge? So reach out and I can put you in touch with our banking and finance team. They're the ones that put together these licenses and they are the ones that can give you more information on pricing for these surveys. But definitely recommend you guys to have, especially if you are going out to different and new states and you're not fully aware or might not fully know the specific lending requirements or compliance requirements that you need to know to make loans in that state.

Would you be willing to speak to my community of private lenders on a particular topic? I'm happy to reach out to me and we can talk more about what you want me to speak on. Will the recording of this presentation be shared? Yes. The recording and the slides I believe will be shared for draws what license requires escrow account. I think I answered this. What are the limitations? This is the DRE broker's license that has limitations on construction loans and rehab loans and reach out. I can find, I don't know off the top of my head what the LTV limitations are, but I do know that there's a two and a half million loan cap. I know that the construction loans have to be fully funded to escrow. There's some other limitations and requirements, so reach out and I can put you in touch with the banking and finance team who I believe has the reference sources for that.

Okay. If you buy a loan from another investor who originated the loan, do you need to have a CFL license to buy the loan? Technically to buy California loans, you don't need to be licensed, but best practice is to make sure that A DRE broker is brokering or arranging that loan sale just to remain compliant, but technically you don't need to have a CFL license to buy the loan. Do you have any clients that lend in states that don't require license for business purpose secured by real estate? Do you have any clients that lend in states? Yeah, I mean a lot of our clients, so a lot of our clients like our 50 states survey because based on that survey and the information provided in that survey, they can quickly see which states require license and also which states don't require license. And so some of them will only focus on those states that don't require a license for business purpose lending and only go into those states to access these surveys that I'm talking about reach out to me or the banking and finance team. They are the ones that will have these surveys and can help you with obtaining them.

Okay, so I think I had a few more. I don't know how much time we have. Oh, I will try to answer these other questions. There's so many questions that you guys have, but I'll try to answer them maybe offline or if you want to email me, my email is here on the slide. Feel free to email me. I can put you in touch with the Banking and Finance team for surveys, a lot of securities laws issues that I'm happy to chat with you guys about. It's a little bit more nuanced, but we definitely should talk through those, especially when it comes to co lending, multi-bene deals, types of deals in California. But other than that, I hope you guys found this session helpful and I'm around. If you guys have any other additional questions, reach out to me. I'm happy to hop on a call and chat through any specific questions you guys have. Some of the questions were really specific and I also had, I don't know, probably 20 or so questions that I did not even get to. So email me and we can go from there. I hope you guys had a very nice time listening to me answering all these questions and I hope you guys learned a lot and I hope to hear from you guys soon. Have a great day. I will hopefully talk to you guys soon. Thanks everyone. Bye bye.