Multistate Lending: A Strategy Guide to Licensing Compliance and Applications

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As lenders grow beyond their geographic area and expand their businesses into new states, they need to carefully consider licensing requirements for business purpose lending on a multi-state level. Understanding which entity should become licensed (especially if operating a mortgage fund) and the various timelines and requirements associated with each state will help facilitate a seamless expansion of the lender’s growing business.

The hosts discussed:

  1. 50 state overview of licensing requirements for business purpose loans.
  2. Strategic considerations for choosing which business entity to get licensed.
  3. Timelines and requirements related to license applications.

Melissa C. Martorella: Thank you all for joining us. Jen and I are looking forward to this webinar to round out the year and hopefully give you guys a little bit of stuff to think about as we head into 2024. So with that, we'll be talking about multi-state lending, a strategies guide to licensing compliance and applications. Next slide. Jen, if you could.

Awesome. So a few housekeeping items before we get started here. First things first, we will definitely be answering questions during this webinar. However, if you look on the zoom link here, there are two things. There's a chat box and there's a q and a. Please do not put questions in the chat box. We can't monitor that there's too much going on. So if you have a question for Jen and I put it in the q and a box and at the end of the webinar we'll answer all of those questions. So again, no questions in the chat box. Put them in the q and a box and we'll get to those at the end here. The second item, we get this every single time and oftentimes people forget we are recording this webinar and the slides will be provided to you at the end afterwards once the recording is uploaded and all of that so you can distribute it to your teams and watch it at a later time. So yes, it will be recorded. Yes, you will get the slides. Without further ado, to introduce ourselves very quickly, my name's Melissa. I am the partner and department head of the banking and finance team here at Geraci. What my team does is prepares loan documents in all 50 states. So we represent many lenders and sometimes brokers and things like that, but mostly lenders who are making business purpose loans secured by real estate all over the country. And that is our main focus. And then with me today is Jen,

Jennifer Young: Everybody. I'm Jennifer Young partner here at Geraci as well. I'm on the corporate and securities team. We help our clients with new fund formations, debt funds, real estate funds, and we also help our clients with licensing, which is what we're going to be discussing today. All right, ready to get started?

Melissa C. Martorella: Yeah, let's do it.

Jennifer Young: Okay.

Melissa C. Martorella: Awesome. So here's a brief agenda that we'll go over. So a couple things. First I'll get started and I'll give you guys a big picture overview of 50 state licensing requirements for business purpose loans, but also some other key factors to look into when you are looking into lending in other states. So usually you're pretty good about the home state, where you're based, you know what's going on there, but then sometimes for various reasons you want to look to other markets, here are the things you should think about before you head into those new markets to be prepared. Based on that, we'll talk about how licensing is sometimes required, and then Jen will go into some strategic considerations for choosing which entity you might want to get licensed and how you might want to structure that as you move into a new market. And then finally, she'll talk about some of the timelines and requirements related to licensing applications because it can take quite a bit of time sometimes. So just want to get you prepared so that you're off to a good start as you start.

So big picture as we get going here. So multi-state lending, as many of you probably already know, it can be pretty heavily regulated and it can be very confusing because there are laws in all different states and unfortunately there's usually not one answer that applies everywhere. It depends on where you're lending, what the collateral is, who your borrower is, and all sorts of different questions to know what is applicable to your loan. So with that, we've kind of identified five keys here that you can look to as a start to get your bearings when you're entering a new market to understand whether or not you need to worry about licensing and other issues in that state or if you do to reach out to us. Again, this is just a starting point for these items. There could be many other issues at play that you'll want to reach out to us about or any council before you end up moving or moving into a new market.

But these should give you big parameters and a big baseline for starting. So those five keys that I'll talk about in the next few slides here are federal regulations and how that deals with state licensing and also foreign registration issues. We'll talk about usury or what is the maximum interest rate you could charge on your loan. We'll talk about late charges and other construction concerns. So those random maybe state specific regulations or restrictions that you might encounter. We'll talk about title and closing can be very different depending on where you are lending. We have a lot of New York lenders who move to other states or other lenders who move into New York to close loans and everybody is very confused. We'll try to shed some light on that. And then finally we'll talk about foreclosure and the different options that are available to you there. These are all big considerations for you as you move into a new market.

So first things first, you want to make a loan and it is secured by real estate in the United States. The first thing you have to deal with is do I have to be licensed federally to make this loan? For our purpose today we are talking about business purpose loans. So consumer purpose loans. So those loans that are intended primarily for personal family or household use will require licensing at the federal level that they put restrictions in place about the sorts of loans that you can make. And there's all sorts of regulations and requirements and restrictions on those loans. So for our purpose today, we're talking about business purpose loans and those are loans that are not intended primarily for personal family or household views, but are instead used for business, commercial, or agricultural purposes. Those loans are exempt from most federal regulations.

There are some that still apply like ECOA for example, and a few others, HMDA. However, the two big ones that especially deal with licensing and whether you can even make that loan to begin with, you are exempt from if you are making business purpose loans. So big picture, we are talking about loans that are secured by real estate somewhere in the country, but for a business or investment purpose, if that's the case on a federal level, you would not need to be licensed. However, that's the next slide we'll go into. That just means now you have to look into, okay, well where is the property?

What state is this? Yeah, what state is this property located in? I'm trying to make this loan because unfortunately what that means is every state has a different answer. And so the federal level just sets that baseline and they say, Nope, business purpose loans, it's okay. You don't need a license federally, but each state you can decide to regulate more than that if you so desire. And so unfortunately that's where we are, here. I've got a helpful little map. This is not completely inclusive, but these are the major issues you want to look at. And again, this is all dealing with if you want to lend, if you want to be a lender, making a loan secured by real estate in these states. If you're looking at other activities, servicing, brokering, things like that, there may be other licensing requirements not outlined here, but this is big picture related to I want to give the money myself, I want to lend, do I need to be licensed in that state?

So we'll kind of break down this a little bit. So there are six states, these are in red where you need a license to make a loan regardless of the collateral. You'll see that it's usually more restrictive on the west coast. So we've got California, Arizona, and Nevada. I would say those three states are also not just the most restrictive, but also one where it is most difficult to get a license. And Jen, we'll talk about that in a little bit. But then also you have the Dakotas in Vermont, they care about the type of collateral no matter what it is, even for a business purpose loan. So you have a lot of restrictions there right out in some major markets, you have five states in orange where a license is required. If the property securing the loan is a one to four family property.

So when I talk about a one to four family property, I mean either a single family home or a piece of property that has up to four units in it. Residential property, if it's multifamily, so five plus or commercial, these states don't care. But if it is secured by a one of four family properties, these states will care and will require a license. There are three states in purple where a license is needed if it's secured by an owner occupied one of four family property. And remember we talked about for business purpose loans, they're exempt federally and people oftentimes confuse, oh, I don't make owner occupied loans. That kind of thing. Owner occupancy doesn't matter. From the business purpose standpoint, the question you need to ask is what is the money used for? What is the borrower using those loan proceeds for? If that is for a business or investment purpose, you can make that loan secured by that borrower's primary residence.

And so in this case, that's where these three states come in and they start to care because they say, okay, that's fine, you can do that. But if you're going to make the loan secured by the borrower's residents, we do have some requirements here that will apply to you. And then finally I put other, there's four states in blue here, North Carolina, Florida, Texas, and Georgia. These states have interesting restrictions related to, for example, homestead laws. Florida's got an interesting licensing scenario where if the borrower is an individual and the property is commercial or multifamily, then you need a license. But every other scenario is fine. So it's just interesting. And then North Carolina has a registration requirement, and Georgia similar to Texas also has a homestead issue. So there are just other things that you'll want to keep in mind. Before we leave this slide though, just wanted to let everybody know this is a blanket.

This is big picture. You need a license in these days. That said, there are many exemptions to licensing available as well. For example, in California, if you are not licensed as a lender, but you have a licensed broker, arrange that loan, you can make that loan no problem in, I believe it's Oregon. If you are making that loan, yes, it's Oregon. If you are making a loan secured by a one to four family property, but you run that loan through a broker, similarly, that loan is exempt from licensing on the lender side. So there are many available options to you if you want to make loans in these markets, just talk to us and make sure that your loan scenario fits. Okay, so the next kind of item to talk about here is lender foreign registration requirements. What is this? So in general, if you are going to conduct business in another state, that will require, sorry, that should say the entity lender to file a foreign registration with the Secretary of State.

So if you are a lender and you're an LLC and you are based in California and you go to one of these states, you're going to go to, we'll say Massachusetts, and you want to make a loan in Massachusetts with that California LLC as the lender, we looked at the prior slide. Massachusetts didn't require a license to make a business purpose loan, but on this slide, they do require that lender to register as a foreign entity in their state prior to making that loan. So you'll just want to keep this in mind as a little registration requirement to do. Jen's team can help you with that if you need assistance. There are also a little caveats here. Some of them it's the business activity report only that you have to file other ones, it only applies if the lender company is a corporation, not an LLC. So come talk to us and we can let you know if you're good to go before you dive into those other states on this end as well.

Moving on to the second key that I have for you all. A big picture issue that you should pay attention to as you were making loans in other states and also your own state is usury. These laws are, they go back to prohibitions on loan sharking from back in the day, but also they vary across states. So what this means is what is the highest interest rate you can charge on a loan secured by real estate in that state? And similar to licensing, there's no federal. If it's a business purpose loan, you're good. It's a state by state issue and analysis that has to go into play. So I'm giving a couple examples here. You have loans like California where if the loans are made by licensed parties, either a licensed broker or licensed lender, those loans are all exempt from usy. So that's really helpful.

So if you have a licensed party arranging that loan transaction, you're good to go in that state. There are several states that are very similar to California in that regard. You have states like Washington, Washington and also Utah. If the loan is for a business purpose, it's exempt from mey. Also very, very helpful. You are making a business purpose loan secured by real estate. Good to go, don't have to worry about the interest rate that you charge. But then you have states like Florida. Florida is a little complicated and usury changes depending on the loan size. So you also have to pay attention to that. And there are other states that are like this as well. Texas comes to mind for example, and as does New York, so just pay attention to where the property is and things like loan size, so that whether or not there are usury issues at play.

The other thing that I talk to people about related to usury though is choice of law. And what this means is when you are drafting the loan term, you can choose you and the borrower can choose the law, the state law that is going to govern those loan documents. So in this case, what you need to do is determine whether the state at issue, so the state where the property is situated, does that state allow you to use a foreign governing law that might be or friendlier to lenders related to usury to govern that loan transaction. So again, it's a state by state analysis. Most states allow you to do this. There are a few that come to mind that do not. For example, Montana has extremely strict usury laws and do not allow for your choice of law. And then on the other end of the spectrum, you have Tennessee.

So Tennessee usury is capped at 4% over the primary rate. It's not as bad right now because we have interest rate hikes, but if the primary is very, very low, then you have a usury cap that's also very, very low. But thankfully, what they have done in Tennessee is they have explicitly in a statute allowed foreign governing law to control with respect to usury as long as you have certain nexuses to the state where you're choosing. So for example, we talked on the last slide, or no, I'm sorry on this slide. Washington business purpose loans are exempt free from usy. So if you're a lender in Washington and you decide to make a loan secured by real estate in Tennessee, you could use Washington law to govern that loan transaction because you the lender have sufficient connections to Washington to do so. You're based there, your entities there, you collect payments from there, you solicited the borrower from there, you did all of these things from Washington.

So you can show that Washington law should govern this loan transaction and Tennessee is very friendly and will accept that. So as long as you can prove that connection, it's very helpful. This is a complicated topic, but it's one that is also very important because you don't want to assume that you're okay to make these loans and then all of a sudden your home state might've been a lot friendlier on this issue in the state you move into decides those rates that you were charging before are too high there or they might consider other things like other fees, default interest, that kind of thing to be included in the user analysis where it might not be in your home state.

The next key in consideration here are things like late charges and construction. So this really goes into what kinds of loans are you making and the terms of those loans, making sure that you look on a state by state level to make sure that you are okay doing those things in that state. So these are just two examples that come up. First one is late charges, restrictions on late charges, not just the amount of the charge but also the timeframe, like the grace period you need to provide before you can charge one vary. State by state, most states allow for 10% after 10 days. However, some states reduce the sound to 5%. Some states require you to wait 15 days. So while 10 and 10 is a safe bet, generally there are certain states, Texas comes to mind that have different requirements. So make sure you reach out before you make that first loan in a new state and say, Hey, do I need to do anything about this or my standard late charge provisions in this new state, or do I have to tweak them because they have different requirements.

Similarly, we have some construction issues, California and New York come to mind in particular. Other states have issues with construction as well, but these are the two biggest ones. California has issues if the loan is arranged by a licensed broker instead of a California finance lender, they restrict the loan amount, how much you can hold back if you are holding back. There are LTV restrictions, there are third party fund control requirements. There's all sorts of different requirements that come into place with construction loans in California if arranged by a broker. And so if you are relying on that licensing exemption for California, but you're making construction loans, just know that there are some additional requirements there. And then for New York, there are additional filings that you have to do with the construction agreement and the construction loan agreement where it has to be recorded and dealt with in other ways. And mechanics, lien issues pop up in that state. So it's really helpful to know what that specific state's requirements are as to these issues because again, something that might fly in but might be totally fine in one state just could be either restricted or more complicated in another. So reach out to us ahead of time and we can help walk you through that.

Key number four, another big one, title and closing. So this can change depending on the state you are in. Some states have both a title company, so that's the thing that's running the state of title, what liens are here, what's the property currently vested in, the type of interest, that kind of thing. And it's going to give you that title policy. And then also for the closing side, sometimes it's the title company that is acting also as the closing agent. Sometimes it's a law firm that is acting as a closing agent. Sometimes it's a third party independent escrow. All of these different options could apply. So knowing what your state does or that new state does is really going to help facilitate that loan closing because then you're not asking for things that is not typical in that state or you're prepared to ask for new things that maybe you don't have to deal with in your home state, but you do in a new state.

So you'll want to figure that out. So that's the big first thing. Figure out who that closing agent is. Is it title? Is it escrow? Is it an attorney? Is it somebody else? Figure out who that party is you need to be talking to. The other thing too is several states either don't have the typical title policy or they have limitations on certain endorsements that they will issue. So you'll also want to look into that as well. So in general, what we recommend is the 2021 ALTA policy or if that's not available, the 2006 ALTA policy. But some states, Florida and Texas in particular do not issue those policies. They have different policies. So you'll want to make sure that you are therefore requesting the right endorsements that relate to their policies and getting the coverage you need. Other states, Illinois for example, they have different construction requirements and so they don't issue certain construction loan endorsements that you would see typically in other states.

And then New York as well has different endorsements that you need to request, especially if it is a construction loan. So just depending on where you are and the type of loan you're doing, your title policy could be different. The endorsements available could be different, and you want to make sure that you are protected and have the policy in place that you want. And then finally, identify recording procedures. All good. Identify the recording procedures that are in place in that state to see when you receive your title policy. Some states will record the same day that you fund loans. Other states there is a gap and there is also a gap sometimes between the time the loan records and when you receive your title policy. So know what's typical in that state so you're not freaking out saying, oh my God, why is my mortgage or my date of trust not recorded or where's my policy and all this, but figure out what's normal in that new state so you're not freaking out, but also so you know what's right and what should be happening so you know when to reach out and follow up with people.

And then my last one here is foreclosure. Another big one, especially if you are used to states like California, we have a fairly streamlined non-judicial foreclosure process. In a good scenario it takes four to five months end to end foreclosed, but then you have other states, mortgage states, Florida comes to mind, New York comes to mind, Massachusetts comes into mind. Hawaii, these states have very long drawn out foreclosure processes because they are mortgage states, which means there is no non-judicial foreclosure option available. You have to go through a judicial process. And so that's subject to court timelines which can be backed up and all of that. So when you're looking into this, it's another consideration for you if you are looking at the end of the loan cycle, hopefully you all get paid off and you never have to deal with foreclosure, but unfortunately that doesn't always happen.

So you should look into it. Are you okay? Did you underwrite this loan in such a way that you have enough equity in this property to deal with an extended judicial foreclosure process or is this thing going to end up overwater or underwater? So you really need to figure that out going into it to make sure you underwrite those loans right away. And also so that you are prepared as a lender to know how long you need to wait to have recourse against this property. What does this process look like? This map here is helpful as well for you. The states in blue primarily use a deed of trust, which means they typically permit non-judicial foreclosures. The other states are primarily mortgage states and therefore it will need to follow a judicial foreclosure process. There are a couple of states where you could use either instrument and go either way, but they're very custom and depend on the loan terms and property type and that kind of thing. Happy to discuss and walk you through, but in general, this is what you're looking for. If you wanted a breakdown of which states are deeded of trust and which are mortgages and therefore, which are non-judicial, which are judicial, and I think this is it for me. Take it away, Jen. Yeah,

Jennifer Young: Thanks. All right, so let's talk about some specific licensing considerations. The first question I often get, especially for those who are managing funds or have multiple entities in your org chart, which is the entity that should be applying for the license in general for lending licenses. If you have a fund, we usually like seeing the fund have the license. And this is especially important in California because California requires balance sheet lending, which means that the loan funds need to come from the lender of record and the lender of record would be the CFL holder in California, right? So if you have the manager, the fund manager with the CFL license, there would be some issues in having the manager close a loan in its name because the capital is coming from the fund. So in general, this also applies to Nevada in general, we like the fund entity having the license.

The second item here is the type of licensing to get right, which licenses are you going to get? We talked about Melissa went over the specific states that require lender licensing for other activities such as brokering or servicing. There might be some additional considerations there. For the most part, lenders licenses usually allow you to service, but there are some exceptions. And on the other end of that spectrum is some states that don't require a lender license may require you to have a broker license. So for example, New York, Michigan, New Jersey and Minnesota come to mind. Minnesota does require lender license, but it does also require an additional broker license. If you are intending to broker New York, Michigan and New Jersey don't require lender's license, but they do require broker license. So there's other examples too, but wanted to give you guys some specific states to call out to keep in mind.

Alright, the fun part, licensing applications. Woo-Hoo ooh. So in general, and I think most of you guys know licensing applications for each state and depending on the license vary, the requirements vary, timelines vary. Everything is really varies, right? In general, most states do require you to be foreign registered if you're going to be applying for that license in that state as part of the application requirements and most states do require a surety bond in place for the license. They also will need FBI background checks for control people. So those individuals in charge of with the authority and control of the lending activities or the entities licensing activities, they'll have to undergo FBI background checks, and this is usually done through a fingerprint process. Timelines, I'm just going to run through these bullet points real quick. Timelines for license approval, this really varies from state to state for the most part.

The states are taking about a month to two months for license approval and the only huge exception there is California. California is taking about eight months minimum and this is from submission of the application. So this is not all the time that it takes to prepare the application and prepare all the documents. That's all before. And once you submit it in California, it'll take about eight months or so. Right now, California is the DFPI, which is the regulatory agency that oversees the CFL applications. They are extremely short staffed and I think they are having a lot of new personnel onboarded. So the process itself is excruciatingly slow. Keep in mind, if you are thinking about applying for your CFL license, I would get ahead of it and get that going. ASAP because even if you started today and we submitted the application tomorrow, you probably won't get your CFL license until summer-ish earlier at the earliest company net worth. So this is something that is required to be shown on the license application on your financial statement. California for example, requires a $25,000 net worth, whereas Arizona requires a hundred thousand net worth and this is a net worth at all times on your company balance sheet. Each state of course varies and some of them don't have a net worth requirement.

Brick and mortar office location, a lot of states do require that you have an in-state office location and also an employee located in that state who is licensed in that state if you're applying for a certain license in that state. Nevada and Arizona come to mind, especially because they are very popular on the west coast and they are very strict and stringent about this rule. They do want to see you have a licensed office in Arizona or Nevada and an employee who actually resides in Nevada or Arizona as part of the license application. The bond amount, as I mentioned, the surety bond is required. The bond amount, however, will vary from state to state and for California, I believe it's 25,000 for Arizona and Nevada. I think if I remember correctly, it does depend on your activity in the prior year. So every year your bond amount might change or need to be updated.

Audited financials are not generally required for most of the states for these licensing applications, most of them just require you to submit a balance sheet showing your assets and liabilities and owners equity. But our favorite Arizona does require audited financials and they do require that to be submitted every year. So if you apply for a license in Arizona and you get approved for that license as part of your ongoing compliance, you will need to provide audited financials on a yearly basis. Background checks and credit checks. So this, the background check is something that is generally required. Credit checks of those control individuals are required for certain states. For California it is not. It does vary. So of course this is a variation by state company internal policies. This is something that some states will require as part of your licensing application. So they will want to see your policies and procedures, maybe your A ML policies, IT security policies is something that's kind of common as well.

So if you are looking to enter into a new state and they require this, this is something that you'll want to get ahead of and start putting together in preparation for your licensing application in that state. Some specific state variations or nuances I guess is North Carolina. So while North Carolina doesn't require a license per se, they do require what's called a broker filing or registration with the Secretary of State in North Carolina. And that is just a filing with the state of a disclosure questionnaire, a disclosure statement, your financial statement, and a 10 K surety bond. So this filing or registration is only required if you've made a loan over if your total aggregate loans in the prior year is over a million. It's a little bit weird if you're thinking about North Carolina or have had any activity in North Carolina. Let's talk and we can talk about whether or not we need to do this registration.

Utah has a specific requirement for their lender's license and that is that they need an individual who has a Utah principal lending manager license. That person would have to technically sit through the Utah educational requirements, pass a test and get that lending manager license and be attached and sponsored by the company in order for the company to get approved their Utah license. These are just some examples of variations, it's all nuance and it's all fun stuff. So if you guys have any specific questions for a specific state, I'm happy to go through any specific state and run through the requirements for you.

Alright, so after you get your license, some compliance items that you'll need to consider on an annual basis would be the state license renewal. So for a lot of these licenses, you'll need to renew them every year and part of that renewal process depends on the state, will require you to confirm or make any changes that are needed to your organizational structure or your ownership structure and management structure. Make sure your MUN on the NMLS account is all up to date and you pay the licensing fee. The NMLS annual fee is something that all licenses will need to pay annually. I think this is usually around November, December, right now this time it's an annual fee for the license and it also includes any branch offices that you have. You pay a small fee for keeping that information on NMLS. So the NMLS annual fee is really just a fee from the NMLS for holding your documents, holding all your information and being that platform for all your licenses.

The licensing and assessment fee, so this is specifically for CFL, certain other states do have it, but CFL does have a licensing assessment fee and this is a fee based on your gross income from the prior year for which you use the CFL license. So it'll vary for each licensee and it's calculated based on the income generated from using that CFL license. Quarterly M Cs are also required for most states. This is for when you have, especially for residential properties and for California it's weird because California does distinguish between business purpose loans and so for those business purpose loans, they do not require M Cs, but for most other states, if you are even doing only business purpose loans, if it's secured by residential real estate, you are going to be required to quarterly submit your MCs.

Alright, so I didn't want to bore all of you guys with all the nuances with every state, but I wanted to give you a good understanding that these requirements really, really vary from every state. And some states like North Carolina, it doesn't require licensing, but it does require that registration. Other states require some sort of compliance. So don't enter into a new state without considering these specific requirements. If you're thinking about it or you're talking to somebody in that state, I would take the time to do your diligence, talk with us, speak with one of us, and get a good understanding of what you need to consider. What are some things you need to probably get prepped and get ahead of schedule so that when you do have that deal coming in, in that state you are ready to go. In general, licensing process varies from state to state.

Every state is unique and so keep us in mind and have open conversations with us. We're always here to help you answer any questions you have. We're happy to do any research for you. We do have a very comprehensive 50 state licensing survey and that will give you kind of a basic idea of what type of license you'll need, which state you're looking at, and it takes into consideration the lending activity, even the loan type and the collateral securing the loan. So this is something that I personally refer to a lot and I feel like it would be very helpful for all of you guys to take a look at as you expand into all the different other states out there. All right, so I think that's the, that's end of our presentation. We wanted to save some time to answer some questions. Our contact is here on the screen, reach out to us, we'll be happy to help. We also have an in-house lending compliance expert. We can do a more thorough evaluation for you. I can do that too. And if you guys know any states that you want to go into, send me an email and I'm happy to get that started. My team is great and we're efficient and we'd love to help you get started on your licensing.

Melissa C. Martorella: Awesome. Well, to take it away, we'll start answering questions. So first question we have here is with respect to foreign registration, if a lender is also the servicer, how does that change the analysis? Reach out to us in general, that map was just for if you are a lender, whether you need to deal with foreign registration. So if you want to reach out to us with the state and in the information, we can do a search and make sure whether or not you would need to do that. But if that lender is making a loan in that state and you're using the same entity, then you would need to get it registered if that state requires. Next question. In USY calculations, do points or origination and processing fees get included in the calculation? It depends the great attorney answer. Some states

Don't include it, other states do. Sometimes states will include default interest in the analysis, other ones don't. Other ones include finance charges or even late charges, things like that, other ones don't. So reach out to us with the states that you're in and we can walk through and make sure that you're doing the loan correctly in that state. Next one. What are the consequences if an entity fails to secure the required licensing in advance? What kind of hurdles need to be cleared to secure the necessary licensing? This question happened early on, but I'll let Jen jump in just a second. But in general, what we see sometimes is if you are making loans in a state and you need it to be licensed in that state, they'll usually yell it to you. They'll fine you and do something like that to be like, Hey, you cannot do this activity without a license in our state, pay this fine. But then as Jen knows and she can talk a little bit about, if you have really violated that a lot, it might be difficult or impossible to then get a license in that state highlighted it so much.

Jennifer Young: Yeah. So one of the things that you do have to work through are these questionnaire, these disclosure questions on the licensing application. And those questions, a lot of them are specific to any judgments or lawsuits or any type of penalties that you've received. And you do need to disclose that. Oftentimes if you violated the law knowingly it is going to affect you negatively, but for the most part, disclose it. We always say disclose everything. The department for the state will review and it's kind of up to them, but they will also find out whether or not something has happened and you had some adverse judgment against you. So always disclose if anything has happened, if you are intending to apply for a license. Awesome.

Melissa C. Martorella: Next question. Will GSI docs alert us if H loan triggers usury? So we know to change it when the docs are being drawn? So if you are using our in-house legal services, or if you're using my team, there will be processes and attorneys on every file and we are going through and double checking various things. We're making sure that no license is needed for this loan. We're making sure that the loan doesn't trigger usury in that state, and we're looking at a million other things as we're going through and drafting. If you are using lightning docks, we are building warnings into that system. So for certain scenarios it will pop up, but right now it will not. And you could bypass and you could go through and click through everything and do a loan that's that's not enforceable in that state or could cause you problems in that state. It's one of the reasons why when we're selling the difference between our in-house services and lightning docs is the people on Lightning Docs usually have the support of somebody, a compliance person in-House who knows these answers or you just know the answers for these things, so you're not making problematic loans and if you don't know or and it's a new state and new environment, you're running the loans through our firm to make sure everything is okay. So that's a big difference there.

Next question. The loan docs and lightning docks are state specific and adjust per the state late fees and grace periods that they're different. Do they also apply usury laws? Great question. So thankfully late charges and grace periods are very easy to figure out because they're set by statute and so we defer to what the statute says and we don't give you an option to change the late charge or do something different than what the statute says. Usually though, that's really hard because if for example, in California it's 10% and say for whatever reason you didn't have an exemption, well there could be an exemption if you are licensed where you could exceed 10%. So there's million different factors that go into that, so it's really hard to know whether that applies or not. So we do not automatically apply anything. Sometimes enlightened us, like I was saying, we are building up compliance triggers, so it tells you to go look into that issue, but in general it will let you make that loan because again, there's no person behind it telling you that it's not. Okay.

Next question. Many lenders will rely on the borrower's local counsel opinion regarding enforceability. Should lenders separately confirm things like enforceability of grace period in the applicable rate for late charges? I would, because yes, that borrower counsel is providing that opinion letter, but I don't want you to have to get into that fight of you've got a loan with your borrower and they're fighting to you and now you're tendering it over to the borrower council. Why deal with all of that when you could just know, hey, this is what it's, and this is okay, and then all of your loans in that state are compliant to that issue rather than having to deal with forwarding it to borrower counsel every time. It's a good backstop for issues and definitely in certain loan scenarios and certain transactions, we would recommend you get a borrower opinion letter from counsel. But for something like this where it's easily preventable, I would just make sure the loan is okay to begin with. The next question, if you're acting as a contract processing service but not making the final underwriting determination for individual private lenders, how does that affect the need to be licensed in multi-state areas? I'm not sure I know what this means. I don't know if Jen, you do. So Mike, if you'd like to send us an email, unless Jen, you want to try to take this one. Well,

Jennifer Young: It sounds like if you're not making final underwriting determination, maybe this is some sort of a service where they are finding loans and maybe brokering it over to you and you're just funding the loan. In any case, if you're funding a loan, you're making loans. And so in general, you'll need a license, but reach out to us and we can chat more about this to better understand your question.

Melissa C. Martorella: Next one, can you bypass all these lender requirements? If you are a JV partner that provides funding for real estate investor? And this sounds like very specific, you probably want to email us to make sure it's okay, but Jen?

Jennifer Young: Yeah, so usually if you're a JV partner, you're providing capital for a jv, this is capital that you're providing in a form of a JV agreement, you have an entity in place, you have roles and responsibilities and you have for the project. It's not really considered a loan because it's capital that you're providing and you're getting a return on it. But depending on the scenario, depending on the JV agreement, if it's just an outright loan for a real estate investor, then generally yes, reach out. We can talk more.

Melissa C. Martorella: Next question here, if you're transitioning from a fund to a sub reit, and we'll be closing those in the REIT entity, does the REIT require the license?

Jennifer Young: Yeah, so generally we like to have our REITs hold the CFL license or license, but you can for the most part, transfer the loans from the fund to the sub reit, do a simple assignment and a launch, have the REIT hold all of the assets. There are potential DRE broker issues that might come into play because for the most part, DRE considers you to be conducting broker activity if you are arranging or selling eight or more loans per year. But that's to the general public. And we've had some discussion with the DRE and they've kind of told us that when it's internal and it's between affiliates, especially with the fund and a reit and the REIT is wholly owned by the fund, it is kind of an affiliate transaction and it's not really to the public type of transaction. So for the most part, you should be okay with just transferring it to the REIT without the REIT being licensed, but there is that potential DRE issue.

Melissa C. Martorella: Awesome. And yeah, in general, if you want to reach out, if you're trying to figure out which entity should be licensed, we can go through that with you and make sure it makes sense.

Jennifer Young: Yeah.

Melissa C. Martorella: Next question. Somebody's seeing in California this big blob that I believe is from one of the licensing code sections ending with, does a trust fund or otherwise irrevocable trust require license to make commercial or one of four family loans in California? So the answer, it depends if you can typically make one loan as a one-off in California, and it's okay, but if you're making more than that, you probably want to either have that loan ran through a broker so that you're not running up on the licensing requirements, or you should probably set up a new entity that then is licensed also to shield you from liability and that kind of thing. Jen, I don't know if you want to talk a little bit More about that.

Jennifer Young: So this is an exemption for CFL licensing, but trust companies is different than an irrevocable trust or a personal trust fund. So I mean, we can always help you evaluate which entity this trust is and whether it does qualify as a trust company

Melissa C. Martorella: Reach out, we can help. Next question, what if the loan is funded by multiple parties that funded an individual as an example is a great question. So this kind of gets into securities as well as licensing where most states have these things called a whole note exemption. So if there is one lender on the loan either being brokered or you're just making it, it's okay. But if you start to have multiple investors on the loan, you now have a securities issue. So in California, for example, if there were two entities that were making a loan, in theory they would both need to be licensed. But now you also have the security question on hand. So an easy way around that is to arrange that loan with a licensed broker and there's an exemption there for up to 10 investors. So complicated question, Jen.

Jennifer Young: Yeah, And a lot of securities compliance issues come to mind here, but generally if that individual is lending with the fund, it will depend on who that individual is and whether or not they're doing their own due diligence. Are they reviewing and analyzing the loan and the transaction themselves or are they relying on the fund or the fund manager to do all the underwriting and diligence? Right? And if there's that reliance, then we should talk and figure out a way to compliantly have this transaction be not violate any securities laws, but definitely something that we should discuss more.

Melissa C. Martorella: Next one, by brokering, do you mean selling or does it also include if you're providing whole note investing to investors? It can be both. So you could broker a loan sale, so a loan that has already funded, you could broker that to help sell the loan or it could be just originating the loan as well. So in California, I could be making a loan to Jen, but I'm not licensed. And so I grab a third party who is a licensed broker and they arrange that loan transaction and then it would be compliant in California. So there's that. And then similarly, say I made a loan and I want to sell it to Jen, but I'm not licensed and Jen's not licensed. You could have a broker help sell the loan from me to Jen, and that would help that as well. So it depends on what you're doing there. Next question. What license does Illinois require for business lending? Illinois does not require a license to lend. They do require one to broker. So if you need help with that, Jen could help you out there.

Jennifer Young: Yeah, and that's another, so I mentioned that 50 states survey for licensing requirements, that's something that you want to probably consider if there's, especially if there's other states too, you can get them per state just to take a look at specifically what those states require depending on what type of activity you're intending to conduct. Awesome.

Melissa C. Martorella: And then the next question here, my fund is not licensed. I'm a California real estate broker and I'll be using my license broker. Can I get my brokerage company license in other states and broker to the fund as I'm doing in California? Again, it depends. So in California that's a great way of doing it. You have a lender entity that's unlicensed, but you're using a California real estate broker license to arrange all of the loans that would be compliant in California. And then in theory, you as that broker could get licensed in other states, but whether a broker needs a license or not depends. And then other states sometimes have that exemption like California does, where you can use a license broker and not need a lender to be licensed, but other ones don't have that. So it just really depends on where you're looking to go. So I would reach out to us with where you're looking to start lending or brokering and we can let you know if you need to get that entity license or if that structure is okay in that state.

Jennifer Young: Yeah, email me, Chris, we can chat more and talk about the other states You're thinking about

Melissa C. Martorella: This one. Can the brick and mortar requirements for office location and employee and state by be satisfied by a shared office or employee service?

Jennifer Young: Yeah, it depends on the state, but employee service probably not because for example, the Nevada and Arizona requirements, they need the employee to be a W2 of the company. But let's talk Chris,

Melissa C. Martorella: A lot of questions for Jen.

Jennifer Young: Yeah.

Melissa C. Martorella: Next one. I thought that the NMLS licensing is only for consumer purpose loan, not business purpose loan.

Jennifer Young: No. So the N MLS licensing part for MLO when it comes to the DRE aspect is only for consumer purpose, but all these lender brokers, maybe even servicer licensing applications and licensing compliance after the fact that this all takes place on NMLS. And this transition happened I think two years ago. So now that if you want to apply for a license for any of these lender licenses, you have to have an NMLS account. It doesn't mean that it's only for consumer purpose

Melissa C. Martorella: For majority. For the licensing, is this all for residential or is this also for units, commercial construction, strip malls, et cetera? So again, it depends. So states like California we care no matter what the kind of property it is. But then if you go back to that map and you'll see it, other states only care if it's a one to four other states only if it's an owner occupied one to four. So it really depends on what it's, it's all dealing with business purpose loans, commercial loans, investment purpose loans, but the collateral does matter and some states like California just care about it all.

Melissa C. Martorella: How much is the 50 state survey you mentioned for licensing compliance? And it depends. If you want the whole thing, it's pretty expensive, but usually what I do is I recommend I talk to people and we'll figure out what are you looking for? What states are you looking into? Do you already have a license, for example? So you already have dealt with that, but maybe you have certain questions related to specific points and we can sell just those portions to you. So reach out if you want to email me, Richard, I can go through that with you and make sure that we're not overcharging you and actually getting you the information that you need.

Do the same issues apply if the loan is being made in California, but we are using an out-of-state property as additional collateral only? Great question. So this is basically saying we are in California, you've got a lender in California, you have a piece of collateral in Massachusetts, and you want to govern the loan by California law. In that case, in theory, you should probably then have either California finance lender license or a DRE license, not for making the loan because Massachusetts doesn't care. You don't need to be licensed in Massachusetts. But if you're governing it by California law, then to get the usury exemption, you would need the licensing there. So in that scenario, you might want to look to the state where the property is located to see does the state require a license? And then similarly if it does or does not figure that out, but then also from a usury perspective, if it's friendly towards usury, Massachusetts is then you can just govern it by Massachusetts law. But if it's not and say you need to use your home state as the state to get a USY exemption, then you might have to consider licensing there. But this is a really complex issue, so feel free to reach out to me and I can walk you through that scenario.

What about requirements in Kentucky for servicing? If you're putting together whole notes for your investors, where I keep the origination fee, take a spread, but the investors the name on record for loans. I don't know whether this means licensing, if it's related to fees, you can charge that kind of thing. If you want to reach out, we can draft agreements related to this and we can also walk through the licensing and compliance side of that as we do that for you. You definitely should have an agreement in place with your investors and that kind of thing for the servicing strip. So if you want to reach out to me, my team can help draft that for you.

This person is an unlicensed direct lender, going to fund a deal through a broker in Oregon. It's a commercial facility. Do I need to be licensed the broker's license? I don't believe so. Based on these facts, it sounds like you're good to go in Oregon. If you want to reach out and confirm with me and we can talk it through a little bit. But based on what you said here, it seems like you probably do not need to be licensed in Oregon to do that. Next question is it's a business purpose loan not secured by a 1 0 4 family dwelling in California. Do you need an NMLS license? No, but you would need either a California finance lender license or the DRE license to make this loan in California.

Jennifer Young: An NMLS is not a license, just to be clear. It's a platform and it's a designation for MLO for consumer.

Melissa C. Martorella: Next question. Do you have any guidance on which states require an attorney to prepare loan documents versus states where the lender can prepare them? I know South Carolina requires an attorney review. Great question. There are several. I know Texas is one of them and I believe it's Alabama or Miss Mississippi, maybe both of them also requires it. If you reach out to us, we can definitely give you a guide as far as this. Can a California real estate agent make commercial loans without a lender's license, I would need to see the licensing info. So Michael, if you'd like to email me, they need to be licensed as a broker in California. So if you want to send me their information, I can kind of look through that and let, if that's okay, or if you would need to get this loan arranged by somebody else. I think

Jennifer Young: We're out of time.

Melissa C. Martorella: We have until 1230.

Jennifer Young: Oh, okay. Nice.

Melissa C. Martorella: So we have a couple more questions. We'll try to get through them fast though. So in general, which state is the easiest to get in without complicated requirements as a lender? Feel free to reach out. But that said, I think a lot of East Coast states are much easier as far as that initial map that I showed you that had all the colors. A lot of the East coast states, northeast, even Midwest states really don't have much for licensing, at least for lenders. But then like I said, that's only one part of this conversation. You also have to think about usury and other requirements. So a state that might appear to be easy based on its face, it doesn't require a license, might actually be extremely difficult because it puts other requirements in place. So reach out to us if you have any ideas about where you're thinking about lending and we can kind of walk through that.

If we intend to service only our loans using a sub-servicer, will our lending license in most states allow us to service loans as well? Also, if we're only doing business purpose loans in a few states, will we need to get a license or register to service loans in those states? Again, it depends. Some states that lender license will say you can self-service and you don't need a separate license for that. Other states will require a separate servicing license even if you are servicing your own loan. So reach out to us and Jen can help with that too if you end up needing that servicer license. Next question. I think this is for Jen. If a company can't provide a positive net worth for a state that requires it, is there any workaround?

Jennifer Young: Unfortunately, That's one of the minimum requirements if the state requires it. So for California, if you aren't able to show them minimum net worth, then you're not able to meet one of the minimum requirements for that application workaround. A lot of times it's if you're a fund, the manager can probably transfer some capital to help meet that requirement, but it really depends. And without understanding more of your org chart, it's hard for me to say. So feel free to email me and we can chat more. Next

Melissa C. Martorella: One also for you, Jen, if transitioning from a fund to a subrate and we'll be closing loans in the REIT entity, does the REIT require the license?

Jennifer Young: Yeah, so we just talked about this generally, yes, but from a fund to their sub that's wholly owned by the fund, it should be okay. There is that small DRE potential issue, but for the most part because it's wholly owned by the fund and it would not be considered a loan to the public. And so the DRE issue likely won't apply here. Most of the time it's generally fine for funds to transfer their loans to the REIT to hold.

Melissa C. Martorella: But in general though, for new loans that you were making, if the named lender will be the reit, then that REIT should probably be licensed unless you're using a broker to then arrange that loan. Or depending on the state, I'm just assuming California here, but depending on the state that then might need to be licensed to do new loans

Jennifer Young: To completely avoid the DRE issues, just have a DRE broker arrange that transfer from the fund to the separate.

Melissa C. Martorella: Is there an out-of-state licensing issue? If you're licensed in California and the loan's being made in California, but you're using an out-of-state property as additional collateral, do you need to be licensed in the other state just to use the additional collateral? It's a great question. I would generally say yes. There are some limited exemptions to this where you can talk about primary collateral and that kind of thing. I don't like it because you likely still have to deal with a regulator who doesn't understand that that's not the primary collateral for the loan and it was something else. So if for example, you're making the loan in California, you're licensed here and you're good to go, but you want to tack on a property in Nevada, Nevada has strict licensing, you should probably make sure that you are also licensed in Nevada to do that thing. There may be an exemption available, feel free to reach out and we could talk to you about that. But in general, any collateral that you have, make sure you are licensed in that state to have the loan secure that property.

If you have a fund that's not licensed and does not originate, but it just purchases loans from a licensed lender as an investor, does the California fund need to have a CFL or other license? So again, probably need more information. Feel free to reach out to me and Jen, need to figure out where the loans are located. Depending on the state, you might need a license to purchase loans or hold loans. So reach out to us to figure out what requirements might be in place there to confirm. From a compliance standpoint, the lender licensing is not required in Arizona and California. If licensed mortgage brokers indicated on the closing docks in California, yes. So if you have a licensed DRE broker, then that lender does not need to be licensed. Arizona is a little different because the lender cannot have contacts in Arizona, so that lender cannot be located in Arizona for that exception to apply. And there are some limitations on it with loan size and that kind of thing. So for the Arizona side, reach out to me and I'm happy to walk you through that to make sure that you do qualify under this exemption.

Jennifer Young: Yeah, I think there has to be over 250,000 and residential property.

Melissa C. Martorella: This one's for you Jen. Say the Q1 nine eight sunsets, can the debt fund using the sub turn into a regulated investment company? This might be to follow up on, but

Jennifer Young: Yeah, On that. But if it's sunset and it just means that that's one of that 20% is not going to be applicable or you won't be able to use that as a tax play. But let's talk more I, I'm not super familiar with the turning it into RICI dunno what that means. It won't turn into anything.

Melissa C. Martorella: Reach out to us. I think this one's more complicated than a webinar question. Unfortunately the 50 state survey at cost or free tools from Giro. So it's something that we use. If you have just one-off questions and that kind of thing, we can use it. Or if it's related to a loan transaction that we are drafting, then there's no cost for us to tell you. But if it's something where if you're emailing me and you're like, Hey, I have this loan scenario in Utah, I am going to use that to answer your questions and probably bill you hourly for that kind of work. So it's not really something that's free. But if it were something as well that you wanted to purchase everything about Utah, then that's for purchase as well. It's a tool that we use in-house to advise, but it's not generally something that we just give away for free. There's a lot of research and maintenance that goes into it.

If you make a loan in another state and you realize the wrong state law was used after the loan closes, can you change the state law afterwards? You should be able to. You want to do a modification. If you want to reach out to us, we can look at it and see how full blown this modification needs to be and how I would document that and making sure that you've used the right state law. So feel free to reach out. But in general you can change anything after the loan closes so long as your borrower is going to agree to it and just we can draft that via modification agreement.

What is the difference for licensing between the DRE and the office for business oversight? If you're brokering or setting up financing for a private party lender to loan to an individual, what do you recommend? Again, this is going to depend on your business practices. Jen can probably walk you through this better, but in general, if you are making your own loan or you have a fund that is raising money from people to then be the named lender, it might make sense to be ACL especially and use the DBO or the DFPI license there, especially if you're doing construction loans, that kind of thing. But if you are just brokering these loans, so you're not the named lender but you are putting lenders on a loan to a borrower, then you might need the DRE one. That might make more sense, but again, depends on your structure and what you're doing. So reach out to us and we can make sure you get the proper entity license.

Jennifer Young: Yeah, happy to walk you through the difference.

Melissa C. Martorella: I read a case in Rhode Island, the spec build went fine. Lender was charging Dutch interest for the term of the loan. Borrower sued judge granted a quiet title and lender lost a hundred percent of, well, have you heard of this before? Rhode Island does have strict user requirements, so I'm wondering if that's what you are wondering there. I believe it's 16% but includes various fees and points and interest and Dutch interest and that kind of thing. If you'd like to reach out to us, we can probably walk you through it in detail. If you have a Rhode Island loan that you're looking into, any special considerations for Michigan? I live in California, but looking to lend there personal research, I would need a license to lend a business purpose loan. You do not need a license to lend in Michigan, but if you do need one for brokering. And then also if there may be other considerations at play too. So feel free to reach out to us and we can make sure you do that correctly. I have a California real estate broker license and also an NMLS license that hangs with a lender that only offers mortgage consumer loans. We decided to open a separate company to do construction bridge loans. Can I have my N ML S license on both companies? How would you recommend going about this? I would be the principal for the new company offering construction bridge loans. I think, again, I don't think this is an appropriate webinar question, but in general the NMLS license wouldn't be something that you would need to hang with your company. But if you have the DRE license, you could put it with that company as the DRE broker. But this is probably a lot more complicated than this question. And I have several follow ups that I'd like to ask. So Dennis, if you would like to email me and Jen, we would love to talk to you about this.

Jennifer Young: Great

Melissa C. Martorella: Question. What is the difference between a commercial purpose loan and a business purpose loan? I have another webinar on this, so feel free we will link you to that. But in general, the question you need to ask before you do anything, what is the bar we're using the money for? If they're using the money to purchase an investment property, do rehab it on an investment property, build an investment property. Maybe it's a loan to fund their business. I dunno, they have a tough quarter and they wanted to deal with payroll or something. I don't know if it's for a business or investment purpose. Very clearly rehab on a rental property that they own. That is a business purpose loan versus a consumer purpose loan. If it's a loan to purchase the house that person's going to live in for rehab on the house that that person lives in to pay medical debt for that person.

Student loan debt, things like that. That is consumer, personal, family or household views. That is a consumer purpose loan. So as long as you're making a business purpose loan, all of this applies if you're making consumer purpose loans. Totally different analysis here and I'm happy to talk to you more about it if needed. For someone residing in California, starting out as a private money lender for short-term slip and buy hold loans for property in Pennsylvania or California, is there any kind of licensing required? This would be low volume, maybe three to four a year in California? Absolutely. You should get licensed probably as a CFL because of the construction requirements here in California. If you did it as a broker. So Jen is your best friend now. She'll help you get that license together.

And then Pennsylvania, off the top of my head, you don't need a license to blend, but I believe you might need one for brokering. So probably in inapplicable. But if you want to talk to us, Pennsylvania is interesting because they do have other loan requirements about where parties are signing and that kind of thing. So if you want to reach out, I can also help there. I keep thinking there's only four more and then we get more questions. In California, if the commercial mortgage loan is brokered by a licensed broker, can the mortgage note then be sold to an irrevocable trust that does not hold the DRE broker license? Yes. You could also just put that trust as the lender on the loan and have the broker arrange the loan to that lender. You could do that or say a different lender owned that loan and then they wanted to sell it to the trust. You could have the DRA broker arrange the sale to that trust. So feel free to reach out to me and we can talk about how you're structuring this, but you don't necessarily have to sell it after the fact based on at least what you're saying here.

Does Illinois require license for brokering loans to investors? The loan is closing my company name. If the license is required, what license is required for the program in general? Yes. Illinois will require a license to broker loans, so you should reach out to Jen and she can help you get a broker license in Illinois. Last one. I'm going to tell you to reach out to me, what is the cost to get the in-house survey for New Jersey, Florida, Pennsylvania, and Georgia. Come talk to me, goose. I'm happy to sell it to you, but I also want to make sure that I give you the correct quote. So reach out to me and we can talk about that. And with that there are no more open questions. Thank you all so much it.

You have my contact info and Jen, we're happy to answer your questions.

Jennifer Young: Have a great day and rest of your week everybody.

Melissa C. Martorella: Thank you. Happy holidays.

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