Nationwide Lending and Licensing: What Every Private Lender Needs to Know

Melissa Martorella:

Hi everyone. Welcome to today's Geraci webinar. Today we'll be discussing nationwide lending and licensing, what every private lender needs to know. Just a quick housekeeping here. The slides will be available after the webinar, as will an online recording of the presentation. So if you have somebody that missed it or you wanted a copy of the slides, they will be available after the webinar. And then also at the very end we will have a little q and a session. So there should be an option on your screen to ask any questions which we will be able to answer live for you here at the end. So feel free to put any questions that you have there. So my name is Melissa Martorella. I'm an attorney here at Geraci. I'm on the banking and finance team and I basically represent lenders and brokers across the country who are looking to prepare business purpose loans. I advise them on licensing, compliance issues and I'm able to help prepare their loan documents for them and assist with any closing concerns. So basically my expertise if you want to be working in nationwide lending, feel free to reach out to me. I'd be happy to answer any questions.

Tae Kim:

Hi, my name is Tae Kim. I'm an associate attorney here at Geraci. I'm primarily here at the corporate and securities division working with the fund managers and other issuers. We prepare fund documents such as private placement memorandum and other corporate documents including operating agreement and a limited partnership agreement for a lot of our fund managers. As it pertains to the topic we're going to discuss today, our corporate and securities division handle the licensing application process for various states, which we are going to talk about.

Melissa Martorella:

Awesome. So as a big picture here, I'll be doing the first half of this webinar and then Tae will be taking it over for the second half. And then like I said before, we'll be opening it up for some questions. So this first half we will be talking about multi-state mortgage lending. It's pretty regulated. It can be confusing. You have 50 states that deal with plus the federal regulations. So this part of the presentation will kind of guide you through how to originate loans across the country and what resources you might need to guide you through that process. And so the way I've broken it down here is that there are five keys to mortgage lending that you should be looking out for in order to determine whether you can make a loan in a certain state, whether your practices are compliant and whether you might need to reach out to counsel or some other expert in the field for assistance.

So the five keys are down here below the first key that we'll be talking about. We'll deal with federal regulations, state licensing, and foreign registration. Key number two, we'll be going over usury, what that is, any concerns with it. Key number three, we'll be discussing late charges and construction concerns. Key number four, title and closing issues, things to be aware of when you're finally getting ready to close your loan. And then key number five, foreclosure. What happens if your loan goes into default? What are some of the things you should be looking at ahead of time?

So as discussed key number one, we're going to be discussing federal regulations, state licensing, and foreign registration. These are really the items to be looking at to basically say, can I even make this loan to begin with? So big picture on federal regulation as a heads up this webinar is discussing business purpose loans. So if you're going to be making consumer purpose loans, which are loans intended primarily for personal, family, or household use, this webinar or this portion of the webinar is really not for you because what we're doing here is assuming that you are making business purpose loans in all 50 states and guiding you through that process, consumer, consumer purpose loans have a lot of different regulations both on a federal and state level that we're just not going to be discussing here. So that's the big first question here. You're making a business purpose loan, which means it's for business, commercial, or agricultural purposes.

So not for personal family or household use. Big reason that this is the important first step is because business purpose loans are exempt from TILA and RESPA. That's the Truth in Lending Act and the Real Estate Settlement Procedures Act, these two federal statutes have a lot of regulations in them, restrictions on lenders who are making consumer purpose loans, and you are just exempt from those if you end up making business purpose loans. In essence as a lender, if you're making a business purpose loan, you don't have to deal with three things. First, you don't have to deal with verifying the borrower's ability to repay your loan. You should still obviously not. We don't recommend relying on stated income. You should dig in a little bit, especially if it seems like there's some red flags maybe between what the borrower is telling you what their job is versus how much they are earning in that job.

That being said, you don't have to go into the huge analysis to verify their ability to repay. Second, you don't need to deal with issuing trade disclosures. These are under both TILA and RESPA that deal with different closing statements and fees requirements with that. You just don't have to deal with that on business purpose loans. And then finally, RESPA has very particular servicing requirements for loans when they're consumer purpose. And again, you don't need to deal with that for business purpose loans. So that's the big first hurdle here is making sure that these two by banking business purpose loans, you don't have to deal with these big two federal regulations.

Moving on in key number one, we're going to talk about state licensing. So we have this nice map here. I realize that Alaska and Hawaii are not on it. However, they will be green states if that helps you. So basically we've determined you don't need to be licensed on a federal level in order to make a business purpose loan. But what about the different states? So by looking at this map, we have these red states here. There are six of them. They will require a lender to be licensed regardless of the type of collateral securing the loan. So in other words, they don't care if it's commercial property, multifamily, a one to four family, they don't care. You are making a loan secured by real property in their state. You must be licensed and just in case you didn't take geography growing up, I will read off the states here, California, Nevada, Arizona, north and South Dakota, and Vermont.

So those require a license regardless of the collateral. There are five more states that would require a license, but they only care if the property is a one to four family residential property. So if you want to make commercial or multi-family loans in these states, they don't care about that. It's only if the property is a one to four family residence. And so those are Oregon, Virginia, Utah, Idaho, and Minnesota. So if you have any of those states, just know that if it's a one to four family, there are some restrictions there. And then finally down here below in this yellowy orange color we have Florida. They have a very interesting requirement here, but basically they only care about you being licensed as a lender if the property is commercial or multifamily and your borrower's an individual, likely you are not lending to an individual on a commercial or multifamily property anyways.

They would likely be holding that in a corporation or LLC. But that being said, if that is the combination that you have in Florida, that is the scenario in which they would require the lender to be licensed. So that's kind of the big picture spread of the country for different licensing requirements. That being said, just because we have a state here that says we require a license, doesn't mean that you can't lend there without a license. There are a lot of exemptions. California for example, if you're an unlicensed lender but you have a licensed California broker arrange that loan for you, then you do not need to be licensed. So there's that. Similarly in Arizona, if the loan is secured by a commercial property and it's for a loan amount of greater than $350,000, you would not need to be licensed there to make that loan.

So there are some exemptions here and there also in particular Utah and Oregon and Idaho, if a licensed broker arranges that loan for you, that's secured by a one to four family, you also would not need to be licensed. So there are a lot of different exemptions here to look out for. So this is not like an end all be all. So what I recommend to you is if you are trying to make a loan in one of those states and you're unsure if you qualify for an exemption, reach out to counsel who can kind of walk you through that particular loan transaction.

And then the last item under key number one, foreign registration. So when you have a lender, you're likely going to be an entity, you're going to be an LLC or a corporation and you're going to be domiciled in a particular state. Foreign registration means if you're going to go to another state and conduct business in that state, does that state require you to register as a foreign entity in that state prior to taking that activity there? It's different depending on what states you're going to be moving into. For example, California exempts lenders, foreign lenders from this registration requirement, they explicitly say if you're just making a loan secured by real property in California, they do not care about you getting registered as a foreign entity. Alabama is silent as to this fact. They do list out some exemptions to foreign registration, but they don't explicitly say just lending means that you're exempt.

So in that case, a prudent lender would probably consider getting registered as a foreign entity prior to lending there. And then you have some weird states. You have Illinois in particular, so if you're a corporation, you must register as a foreign entity before lending in that state. But they exempt LLCs from foreign registration, which is a very weird nuance, but that's what they wanted there. So again, this is one of those other requirements that people don't often think about, but before you start moving into new states, you might be reaching out to council to say, Hey, just want to double check. Do I need to register as a foreign entity before I make this loan in this new state?

So moving on to key number two. So we've determined you don't need to be licensed on a federal level that you either are licensed or you're exempt from licensure or you don't need to be licensed on a state level and we've dealt with foreign registration, so now you're ready to offer some loan terms. So key number two is going to deal with usury. User laws can be traced back to prohibitions on loan sharking. Basically it means what's the highest interest rate that you could charge on any particular loan. This varies across the states. There's no one law that says this is what it is, or business purpose loans are exempt or anything like that. It's another state by state analysis. So you're going to want to look prior to making that loan, you want to make sure that your loan terms are compliant in that state.

So there's a lot of different examples here to give you to illuminate the variety of usury laws that we have in the country. First, for example, in California, USY capped at 10%. It's in our state constitution. However, if you have a loan that's either arranged by a licensed California broker or made by a licensed California lender, then that loan is exempt from usury and you can charge whatever you want. Washington explicitly exempts business purpose loans from usy. So as long as it's clear that that loan is for commercial investment purposes, you are fine. From a usury perspective in Washington, Florida is a little interesting. It caps usury at 18% for loans less than 500,000, but then if the loans more than 500,000, the cap increases to 25%. So that's just another weird little Florida nuance to look out for. And the country kind of mirrors this throughout where they will either have a USY cap but may exempt certain loan transactions or certain licensed parties or they have this kind of fluctuating standard depending on the loan amount at hand.

Another little issue here to look out for is choice of law. So instead of maybe going around figuring out what is user in all 50 states doesn't matter. An easier way to kind of get around this is by utilizing this concept called choice of law. Basically what this says is even though my loan, even though the property is located in Florida, I'm a lender that's licensed in California, so therefore I know that I'm exempt from US in California, so I'm going to govern my loan documents by California law and therefore I'm exempt from usury. Most states will let you do that. For example, Tennessee caps usury at 4% over prime, which is a pretty low rate, but they explicitly allow for another state's law. So they're saying, okay, lender, as long as you have a nexus to the state you're having govern the transaction, we'll let you do that.

Other states like Florida, Tennessee, that's statutory. It's literally codified in the state statutes. Other states like Florida, this has been decided through case law. So the courts have said, yeah, choice of law as to usy is okay, as long as the lender can show that nexus to the state that's governing the transaction, that's fine. The only issue you have to be aware of here is that there are certain states where they do not allow for choice of law and they do have usury restrictions, which means you would have to comply with that State's laws. The big one to look out for here is Montana. They've done a handful of Montana loans, but it does not seem to be the most popular state. That being said, Montana caps usury at 16% and they do not allow for choice of law and they also incorporate a lot of things that most people don't into their usury analysis.

So it's not just your interest rate, it's also your points. They also incorporate late charges into it even if you haven't assessed them yet and default interest. So there's a lot going into that usury analysis from Montana that quickly will escalate your interest rate to above their usury cap and they don't allow for choice of loss. So they say we want to protect the consumers in state from foreign predatory lenders, and so we're not going to allow for choice of law. So that's just a big issue to look out for there. Generally, choice of law will work across the country, but just to double check, we do recommend you reach out to counsel to make sure the way that you're drafting your documents does make sense and is compliant.

Key number three here we're going to deal with late charges and construction issues. So these are pretty common terms that we would find across the country as far as provisions that we want to incorporate into our loan documents. So late charges, this is basically you want to charge a certain amount because the borrower is late on their payments. This varies across the state says most things in this webinar. However, in general, a 10 day grace period before you assess a late charge as well as a 10% charge on a miss payment is pretty acceptable nationwide. Some states are less strict than that. They'll say five day grace period is fine, or you could charge 15%, but really 10 and 10 is pretty standard across the country. And then this way you don't have to deal with, oh, was that New York loan? Did I give them five days grace or was it 10?

Or you're not having to think throughout, what did I do on that particular loan file? You just know it's your standard practice, you're doing 10 day grace and 10 day late charge. It makes it pretty easy for lenders going forward. Another issue that often happens or often pops up is construction. A lot of people, and this doesn't really mean even ground up construction necessarily, it could also be rehab, little fix and flip loans, not even full blown construction reserves, but construction is a big issue to be thinking about. So mechanics liens are a big issue obviously with construction, and it depends really on the state how much deference the state's laws will give to the mechanics lien claimant. So for example, in New York, mechanics liens are very, very anti lender. They're basically going to go with whoever the contractor is every single time and give them priority over your lien.

So the general practice in New York if you have a construction loan is to split that into two loans. You make a first position loan that deals with any purchase money, any closing fees, things like that that are one time dispersed and done, and then you would also make a second position loan and that will deal with your construction. The idea behind this is then if there is a mechanic's lien, at least your first position lien is secured and you don't lose priority there, even though the mechanic's lien claimant may jump your priority over that second position construction loan. So just an interesting nuance to look out for in New York. Other states have different regulations if it is a construction loan that deal with how the loan is originated and how the funds are loaned out. So in that case, we have California here. If the loan is originated in California by a licensed finance lender, this kind of goes away.

But if the loan is arranged by a licensed broker in California, there are all sorts of additional requirements that you have to deal with Dealing with getting a licensed appraiser to value the property holdbacks in certain amounts will trigger additional requirements. The loans can't be for more than two and a half million dollars. You usually need to have a third party fund control. So there are all sorts of different requirements just because a licensed California broker arranged that loan. So those are just some of the nuances to pick up on with construction. Some states don't care really, most states don't care, but if you are in a state like New York or California, it's good to know what you're walking into before you start making these construction loans there.

Moving on to key number four, title and closing. So we've decided our loan terms are okay, we're good from a licensing standpoint, we've gone to docs, we've drafted everything. We are ready to close this file. So there are a couple things that you want to look out for, and I've kind of broken this down into a three-step process. First one, identify who your closing agent is. So depending on the state, you will either have attorney closers or independent escrows that assist with closing your loan for attorney closers, typically these are more of your East coast states, but New York in particular also stands out where the title company is represented by an attorney and they're preparing a hud. The lender is represented by an attorney and the borrower is represented by an attorney. So you have attorneys everywhere on that closing versus states like California, we use independent escrows.

So we don't, I mean lenders can have attorneys involved in the process, but they're not assisting with obtaining title, coordinating the closing and the signing, recording the documents, issuing a settlement statement. They're not doing any of that, so that's what the escrow would be doing. So it's really important before you move to a new state to understand how does this loan even get closed? That way you're not confused and expecting a party to take a certain action when really it's somebody else that does that in that jurisdiction. Just good to know ahead of time. Step number two here would be to identify the available title policy in the state. So as a general matter, you're going to be wanting to ask for a 2006 extended ALTA policy. That's pretty standard title policy that you're going to want to ask for any relevant endorsements to that for address usury, things like that.

However, certain states either don't issue ALTA policies or they have different endorsements. For example, Texas does not issue ALTA policies. They have Texas title policies and then corresponding Texas endorsements to that title policy. So that's just an interesting thing to look out for. Florida also doesn't offer certain endorsements, especially with regards to covenants and easements. So it's just good to know that ahead of time because while it might be your baseline practice in your state, if you go somewhere else, that might not be true there. And so what we really recommend you do in this case, just so that you're not tripped up at the closing table, waiting to figure out what kind of policy you're going to receive, is to talk to that title agent ahead of time to say, Hey, this is the title policy I'm looking for. These are the endorsements I'm looking for. Do you offer these one and then two, if not, what are the equivalents to those in your state so that I can get them? And then also three, some states, Texas in particular, they'll require a survey before they do certain endorsements. So also gearing that up ahead of time to make sure that you've got certain things in place so that again, at that closing table, you're not waiting on a survey to be completed when everybody's ready to fund a loan.

Last little item here, identify recording procedures and when you receive your title policy, this is just so that you're not confused about when you receive what and how the actual recording and funding and everything occurs in that state. I keep going back to California and New York to give a comparison to them because it pretty well illuminates the differences across the country. But for example, in New York, you receive your title policy upon funding the loan, but they might not record your mortgage for a month or two after the fact, and that's normal in that state versus in California on the day of funding, you typically record the de of trust and then you might not receive your title policy for another month. So it's backwards. So just another helpful little tip or trick to know when you're heading to different states is, Hey, how are my docs recorded? When do I get my title policy? And just knowing that ahead of time so that you're not freaking out that you're missing something or that something wasn't done properly because it's just not what you're used to.

Last little topic here to go over is key number five, and that's foreclosure. So it all happens to everybody. Again, Hawaii's missing from this map. I'm so sorry. But Hawaii will end up being a green state if that helps the people watching the webinar. So it happens unfortunately sometimes, but our loans will go into default and you may have to consider foreclosure among other remedies. Foreclosure timelines vary across the country in the biggest distinction that you're going to have, both from a perspective and also the procedure as whether the state is a deed of trust state or a mortgage state. So the states that I have in blue here are our deed of trust states, and the ones in green are our mortgage states. The biggest distinction and why this is important is because the blue deed of trust states allow for deeds of trust.

And what that means is you can have non-judicial foreclosure to take back the property upon a default. In the green states, our mortgage states, they don't typically allow for nonjudicial foreclosure, which means you'd have to do a judicial foreclosure, meaning there's a lengthier timeline to deal with the actual foreclosure process. Since you need to commence a foreclosure action in the courts, typically in these deeds of trust state or the ones that allow for nonjudicial foreclosure, typically in six months or less, you're going to be able to foreclose on that property, especially if it's uncontested and move on with your life. Either take the property back and sell it or a third party comes in and buys the property and pays you off. So it's pretty short timeline in general. On the other hand, in some of these green mortgage states, that judicial process really just depends on the court's timelines.

So if the courts are backed up in that particular county, you could be waiting a very long time to foreclose on your property. The biggest consideration here, especially from knowing this ahead of time, is if you are lending in one of these mortgage states, you might consider one addressing the equity cushion that you have there. If the property is worth today a hundred thousand dollars and so you're going to lend $75,000, great. But what happens if you're stuck in a drawn out foreclosure proceeding that takes 2, 3, 4 years? Is there enough equity in that property to kind of cover you and any expenses that you have through that time? So that's one thing to look out for. Another thing is potentially thinking about a membership pledge. Basically that would, if you are lending to an entity, you have that entity pledge the interest of that entity to you as a lender, and rather than foreclosing on the property right away, you can foreclose on that membership pledge, which is done via a UCC filing.

So you do that quick UCC sale, it takes about a month or two, and then you actually take ownership of the entity that owns the property. You would still need to foreclose in order to get clean title, but at least you're in control of the property at that time. So that's another option to be thinking about here, but that's it. So those are our five keys looking all the way from different state regulations to underwriting considerations in the unfortunate case default and foreclosure. I'm going to turn it over to Tae now. He's going to be talking to you In the event that you decide that you need to get licensed in one of these states or you're looking into licensing, he's going to be talking to you about some of the considerations dealing with that. So take it away tey.

Tae Kim:

Thank you, Melissa, for that presentation. Okay, so now that you have gone through the analysis and I've determined that a license is required, then we have to go through the application process in and of itself and the state in which you intend to lend. There are pre-licensing requirements, which we're going to discuss here today. So as Melissa just discussed and her presentation that under the federal regulation A MLO or a mortgage loan originator license is not required from a federal perspective. However, some of these states where each state has its own unique requirements and on a general basis, you're required to have two sets of licenses here when you're lending in the states we just discussed. And those are one, an mortgage loan originator license or an MLO license and a mortgage lender license. These go generally hand in hand. And without an MLO, you can't acquire a mortgage lender license.

On the other hand, without a mortgage lender license, an MLO generally cannot conduct its own business by himself. And so really at the end of the day, it's a state by state analysis. And so be sure to check with us in terms of the more nuances as to the application process. But generally licenses here are filed through the NMLS web portal. So we first have to ask, what is a mortgage loan originator? So a definition here on a broad general perspective is that a mortgage loan originator is an individual who for compensation or gain or in the expectation of such compensation or gain, takes a mortgage, known application, offers or negotiates terms of a mortgage, known or performs loan origination or brokering services on behalf of a borrower. So a general requirement here for an MLO application, that individual must complete a form MU four through the NMLS web portal, complete 20 to 30 hours of NMLS approved education, and most states require two to four hours on state specific laws except for Utah, which requires 15 hours and pass some combination of federal and state tests, including the national and safe test. So other requirements that we have here to file for an MLO is to complete a criminal background check, submit a credit report, obtain company sponsorship answer, and explain disclosure questions and submit an employment history.

And here are state specific requirements to note when we're filing for an application as an MLO, for example, in Idaho and North Dakota, we have to provide explanations for derogatory credit accounts along with a proof of payments that the payments are being made or have been made and that this derogatory credit report has been resolved. In Vermont, you must provide certain licensure and good standing as an MLO in the state in which the applicant lives other states here to consider, for example, in Minnesota that MLO must provide evidence that that MLO is covered by a cty bond. And as I stated before, for Utah, you need a 15 hours of Utah approved pre-licensure education agreement, pre-licensure education. And for Virginia, you must provide documentation of financial responsibility, typically credit report, and must obtain an individual ER bond.

So now that we just talked about MLO, we also have to talk about what and or what is a mortgage lender. So here's a general definition of what a mortgage lender is. Is that for compensation or gain or in the expectation of compensation or gain directly or indirectly, makes issues, commitments, negotiates, places, assistant placements, fines or offers to do negotiating, placing, and other components as that of a mortgage loan holds itself out as being able to make mortgage loan using its own money or offers to sell or sells real estate paper or accepts funds for investment in real estate. Paper names vary per state. Some states call it mortgage lenders, some states call it mortgage banker, some states call it mortgage company and others mortgage entity. But those on a substantive basis in and of itself, this is a general definition of that, of a mortgage lender.

So here's some general requirements for application process. For a mortgage lender license, you have to have an entity name. Of course, it's an entity that's applying for that mortgage lender license. Typically in the form of proof for articles of organization or certificate of formation, you have to provide registered agent and a qualified individual must be present. Disclosure is required including a background information, proof of good standing and a business plan, organizational chart and management chart. Other requirements that we do need to submit for that's application as a mortgage lender includes financial statements and some states require audited financial statements, which we'll discuss shortly. And here we have a control person is basically as we stated, as a qualifying individual that has an MLO license but with a certain more experience. So a control person requires generally out of the five years, they require a three years of lending activity that they have an experience that defines or delineates as that of a lending activity.

So what really does a lending activity mean? So in certain states they state that a lending activity means underwriting loans, negotiating loans secured by real estate interest or originating loans to secure by this real estate interest. Some states do allow credit for real estate industry experience that does not pertain to a non-ending activities in a form of a partial credit for in terms of experience. So some of the experiences are being an escrow officer, a loan processor, real estate broker, title officer, a real estate appraiser or the like. So for example, in Oregon, they take these real estate industry related, but non lending activities experience as a credit that is partial typically a third of one year. So for example, if you have three years experience as an escrow officer out of the five, they take that and calculate it as being one year or being one third of the lending activities.

So you also need a certi bond and you also have to submit NMLS forms, typically MU one and MU two. Again, states vary depending on what forms you require. And so here's some state specific requirements to note as a mortgage lender application. In Arizona mortgage broker and mortgage banker license, they do require submission at MLSA slight requirement difference is that of a responsible individual. One thing another to note here in Arizona that it must be physically located in Arizona, so you have to submit a copy of a fully executed lease in the company's name and you also have to provide a detailed business plan. And marketing strategies as well as internal audit structure also audited financial statements from CPAs required for Arizona. So in Nevada effective 2020 mortgage broker or mortgage lender, those terminology has been combined to that of a mortgage company. But in terms of substance, there hasn't been that much of a change. It's really more of combining in terms of efficiency. Nevada also requires a fully executed lease. You need to have a principal place of business or a physical location in the state of Nevada to be able to lend, and you also have to provide a local business license in the place where you are lending.

So Vermont has a very voluminous state specific requirements. Some of the highlights here that I wanted to make sure that you have at note, audited financial statements for the last two years. Company staffing and internal policies, sample documents that are going to be used during business hours including loan documents and you allow trust account examination, and if you're using a line of credit, you have to show agreements or certain documentation of that line of credit. And in Minnesota workers' compensation insurance, if there are employees as well as company staffing and internal policies. And in Utah, you have to provide a notarized letter on company letterhead authorizing the qualified person that we just discussed to use the company name. So typically an owner of the company president or director has to submit a notarized letter to the state indicating that this qualified person is authorized on behalf of the company to conduct lending activities.

And in Virginia you have to provide a detailed business plan including compensation, number of employees, solicitation and otherwise. And you also have to submit $200,000 evidence of $200,000 in either cash line of credit to conduct business as a lender. So other licenses that you also may want to consider besides the mortgage lender license is a broker license in some states do not or will not make distinction such as Nevada, a license to buy, hold and enforce a loan, a license to sell a loan, loan servicer, or a license to own mortgage servicing rights or MSRs.

Okay, so California has a very unique type of license that you may know. California finance lender license is very specific and unique to that of account California. So in California you generally require a license for any person that wishes to make or broker loans to borrowers. In California, however, with a CFL license, a lender may make a business purpose loan that is more than $5,000 and is either unsecured or secured by real estate or other assets. The license may be issued as a lender, a broker, or both. So general CFL license requirements for the application, you have to complete A CFL license application. And in there you're going to have what they call an SIQ or statement of identity and questionnaire, an execution page, and other ancillary documents including organizational chart, proof of absurdity bond, and you have to complete fingerprint including LifeScan or if you're out of state manual fingerprint and you have to have a net worth of $25,000.

However, besides these types of requirements, you don't necessarily have to have a qualifying individual or other stringent requirement that is, for example, experience or that of an education. So CFL license advantages, for example, an application for A CFL license does not require that the listed qualifying individual meets such stringent experience or education requirements. CFL licensees do not have many restrictions in construction loans other than the fact that they must use their own capital to fund new construction. A CFL licensee is not subject to state usury laws. So tying this back to what Melissa stated about usury, a choice of law provision that is included in that. The loan documents, you can use a California for example, that pertains to a Tennessee loan provided that you do have Nexus, which in this case you do because you have a CFL license. So CFL license, there are limitations as to what you can do or cannot do. A CFL license is primarily that use that of an originator or funding the loan in California. So A CFL licensee must obtain a bond of not less than $25,000 in a net worth of $25,000 for business purpose loans. And here are some additional and more stringent restrictions under A CFL license. A company can only broker and sell loans to another CFL lender and institutions and A CFL licensee can only service loans they have sold to institution or another CFL licensee.

So that's that. Thank you very much. And go ahead Melissa.

Melissa Martorella:

Sure. So we'll be looking at some questions here to see if there were any live questions. And I know that we had a few from before the webinar that we'll be going over as well. But as you see on the screen here, we have two conferences coming up that we want to plug a little bit. So the first one is the American Association of Private Lenders Conference that's taking place this week, November 7th through ninth tey and I will both be there. So if you have any follow-up questions, want to meet us in person after this awesome webinar, we would be happy to do that. Also, we'll be speaking on several panels while we're there and then several other team members that we have will also be at the conference. Nima Dog Bandon will be speaking on a few panels. Kevin Kim the same. And then also Ruby Keys will be speaking from Geraci.

We'll also have several other team members there, and we will be at Booth 4 1 3 if you want to come by, meet everyone. See your heroes here of the lending webinar. So yeah, so that's the AAPL conference, not Apple, AAPL that's coming up this week. In addition, below here we have our Innovate 2020 conference. This is one that JU Rossi hosts. It's going to be here in Orange County on February 20 to 21. More details about this conference will be forthcoming, but save those dates now so that you can make sure that you can attend the Innovate Conference. Oh, I have to click here. So if you have any questions, our contact info is here. Feel free to reach out directly to us. We'd be happy to answer any questions that you have about lending licensing or how to get a license. That being said, we do have some questions now.

Tae Kim:

So Rex Oliver had a question here. We generally use a JV structure with a borrower to avoid all the licensing requirement. Is this still viable? We only do commercial loans above $10 million. Mainly development loans, 70 to 80% of our pipeline. So this appears that we may have to speak a little bit more about this in terms of the structure of the JV with that of a borrower on a general basis. Commercial loans, depending on the states where you are lending, it may or may not require licensing, but generally majority of the states do not. So give us a call or you can email us and we can certainly discuss further.

Melissa Martorella:

We have another question here from Robert Presswood. His question was, we would like to partner with a broker in Nevada. We have a relationship with a broker in Arizona where we fund their California loans and they fund our Arizona loans. We would like to form the same relationship with a Nevada broker. So to kind of break this down in California, if you are an unlicensed lender, you can use a California broker to arrange that loan and you're good to go in the state of California, no issue there. Arizona. If you are an out of state lender and you use an in-state Arizona licensed broker to arrange the loan, you are also okay to do that there. So that scenario and with those very particular details, do you work? Nevada unfortunately does not have a similar exemption. So if you are an unlicensed lender wanting to make a loan in Nevada, there are very few licensing exemptions in the state of Nevada and unfortunately having a licensed Nevada broker arrange that loan is not one of the exemptions.

So Nevada is definitely the toughest state that we have from a licensing perspective. So unfortunately that would not be an exemption in the state of Nevada. Another question here from Carlene and Brian, what are the lending and licensing requirements for New York, New Jersey and Florida? So we talked about Florida a little bit. So if you have an individual borrower and the property is commercial or multifamily, then you would need to be licensed. Otherwise no license required. In Florida, New Jersey, there is no license requirement for a business purpose loan. New York for lenders, you do not need to be licensed. However, if you are going to be paying a broker on a New York property or a New York loan, that broker must be licensed in the state of New York. So that's a little nuanced in New York there.

Tae Kim:

Okay, so I apologize if I'm going butcher this name. Metul by Patel says, how do I get license to lend money? I think we've gone through a couple of the application process and requirements regarding the licensing application process. Where do I get money to lend? So you can either sell finance or you can get investors to get the money to lend with you to lend to make loans. So give us a call. I can certainly walk through the structuring in terms of the corporate structure to be able to make this transaction.

Melissa Martorella:

Some other questions that we have, most of them are anonymous, but we'll follow up here. They popped up throughout the webinar. First, will you send me the PowerPoint following this? Yes, we will have a blast that goes out later letting you guys know that one, the recorded copy of the webinar is online. And then two, if you reach out to either of us via email, we'll be able to connect you with Rebecca on our team who will be able to send you a copy of the PowerPoint. Next question, is a 10% late charge in California widely accepted with the courts and case law or is 5% better? So in California, if you arrange a loan using a licensed broker, that is the limitation is that you can charge 10% and generally they will let you be less strict depending if it was arranged by a California finance lender or some other type of loan. But 10% in California is perfectly acceptable. Do any states recognize the terms private lender or hard money lender? And then going off of that, is there any legal difference in the eyes of the law? No.

So basically when you're looking at the definitions in each state and the regulations to determine whether a license would be necessary, unfortunately, most states don't even make a distinction between who you are as a lender. They're not really saying, oh, somebody who's a non-bank lender or somebody who's a private money lender or a hard money lender that's just not going to be in the statutes as far as determining whether a license is required, they're going to be looking at it as far as property type. They're going to look at it, maybe the purpose of the loan, they'll distinguish between consumer and business purpose loans, and then sometimes it's simply just tied to the type of property and they say, if it's secured by a 1 to 4 family, you need a license. And they don't talk about who's funding that loan, the purpose for that loan or anything like that. Another question, what states can you do my loan docs in? We can prepare loan docs in all 50 states. So if you are trying to make a loan in Alaska, for example, we could help you out there. We could help you in California, we can help you anywhere. So if you have any questions about either compliance or drafting the documents, we can definitely assist you.

Tae Kim:

So how does California define an institution for a CFL? So typically on a layman's term, it'll be banks, financial institutions who are able to purchase these loans or to be brokered by pursuant to the CFL California Finance Licensing law. It says here, what states can you do my licenses in? We can do licenses for all 11 states that require, is it 12 or 11 states? That requires licensing including California, Nevada, Arizona, Vermont, south North and South Dakota, and other states.

Melissa Martorella:

Another question here is the AAPL certified private lender, associate CPLA certification useful? Assume I'm starting from scratch and know nothing. Yes, and yours truly will be teaching part of the course. So it's a really great course. It starts the day before the AAPL conference and it really walks you through underwriting techniques, tips and tricks for navigating different markets. I'll be teaching a portion of the class for about an hour and a half that really goes into depth even more than this panel or this webinar did about different licensing issues that you need to be looking out for, documentation issues, everything. So it's definitely very helpful and if you are starting from scratch, don't know a lot and kind of want to see what to do as a lender, it's definitely a great class for you. And then Tae will also be teaching a portion of that class. Would you like to talk about what you'll be teaching?

Tae Kim:

Sure. I'll be teaching on the security side that talks about the difference between a mortgage fund or mortgage pool versus a multi beneficiary or a whole loan investments. There are nuances in the federal as well as state exemption laws that pertains to these types of investments as well as the structure. And so we can certainly discuss further about that.

Melissa Martorella:

So next question here, regarding business purpose loans, is there any type of disclosures that need to be sent to the client such as a right to receive appraisal, borrowers authorization, privacy policy, et cetera? So yes, and a lot of these are federal requirements. So as we discussed at the beginning, if you're making business purpose loan, you're exempt from the two big ones. You're exempt from tila and RESPA and all of those regulations, but you still have to deal with other disclosures. So the eCOA right to receive an appraisal, anti-discrimination, dealing with disclosing your privacy policy and getting a borrower's consent to run credit, those types of things. So if you want an in-depth discussion of that, I know that I did another webinar on this with nema, can't remember what it was called. I think it was called the Consumer Purpose or the Consumer Laws that apply to Business Purpose Loans.

It'll be on our website and we'll make sure that we make a reference to that as well so that you guys can look at that as well because it goes in depth about the different kinds of disclosures or laws that you'll need to deal with there. Another question about sending out the slides, yes, we'll be sent out. Please send an email, we will send it to you. Next question. If you are lending in a state that does not require licensing, is there any benefit to obtaining a license or is it actually a liability? So it's an interesting question. In some states, I mean there might be the benefit. So for example, in Tennessee, if you're a licensed lender in that state, you'd be exempt from that usury restriction. So that 4% OverPrime deal there. And assuming you don't have the ability to use a different state's law, maybe you're located in Tennessee, so you can't actually show a nexus to a different state to get around usury.

That might be something that you consider As far as the actually a liability side, I mean it just depends. So in California for example, you really might want a license if you're a lender, a licensed California finance lender, there's an annual report that you have to do about the loans that you did, but otherwise there's not really much there. On the other hand, if you were to become a licensed broker in California, there are a ton of requirements that you'd have to deal with. So it really depends on what you're doing, and I think this is Shane Sauer that asked the question, if you guys want to follow up with us directly, I think this probably is a bigger discussion as far as what you're intending to do, your business practices where you want to lend that kind of thing to determine whether that license actually makes sense.

As mentioned in the webinar, is it okay for a California lender to also get the entity membership in case of default in place of foreclosing? So this was a little brief mention about also including a membership pledge as part of your loan document package. Basically what that does is the borrower or really the members comprising that borrower entity will pledge their interest in the entity as additional security for your loan. So in the event of a default, you can foreclose on that entity pledge or that ownership pledge via a UCC sale, which typically takes much less time. So that way you actually own the LLC that owns the property, and that way you can actually take control of the property, deal with anything that's happening there right up front instead of waiting for a lengthy foreclosure process. However, most states, the title companies will actually require you to then foreclose on the property, basically foreclose on yourself just to make sure that you have clean title to the property at the end of the day. Another question here about table funding in Nevada, I actually don't believe table funding is permissible in Nevada, but that is something I would have to follow up with. Most states have restrictions on table funding and I believe Nevada is one that does not permit table funding structure.

When a California broker funds alone do the loan docs need to specify that the deal is being arranged by a broker. We recommend this just in case there's any litigation down the line and the borrower is trying to claim that it wasn't originated properly and it's a consumer and all this other nonsense. If you put in there that the California broker arranged the loan, it's helpful to have this in the documents just so that it's clear that it was originated properly within the state and in our loan documents when we do prepare them, we put this in the documents.

Tae Kim:

So it says here, does Geraci offer a fee-based service to help my company obtain a state license as well as MLO license for myself, then monitor for annual renewals for CEs and bonds? Yes, we absolutely do. Please give us a call and I'll be more than happy to walk through the service scope of service as well as the costs involved with these licenses.

Melissa Martorella:

And then it looks like our last question here, do non-owner occupied one to four family houses loan secured by that kind of property? Do those require RESPA disclosures? So RESPA is only going to apply to consumer purpose loans. So if you are making a business purpose loan transaction, you do not need to worry about the RESPA disclosures. But that's it. I think those are all the questions that we have. If you have any other questions, again, our contact info is right there. Feel free to reach out to us directly. We're happy to answer any questions. And again, look for a follow-up email dealing with all of the slides for today's webinar as well as the online version in case you want to send it to anybody. Thank you so much.

Tae Kim:

Thank you.