Many lenders in California have a decision to make about what type
of license they should obtain. The two primary licenses are a Department of Real Estate (DRE) license or a California Finance Lenders License (CFLL). Let’s explore the requirements of each and the pros and cons that come with each license type.
A DRE license is a unique and robust license that allows its holder to perform a lot of activities related to real estate. In the confines of lending, it provides a very robust tool belt, but it comes with several restrictions. On the flip side, a CFLL simply permits balance sheet or direct lending, but it is very flexible and comes with very limited restrictions.
For these reasons, qualifying for each respective license is very different.
As you can see, qualifying for a CFLL is a much less burdensome process. In addition to the above – a CFLL license can be obtained by an individual or entity of your choice. However, a DRE Broker’s license is obtained only by individuals and then attached to only one type of business entity – corporations.
USING THE LICENSES – COMPARING THE LICENSES:
As compared to a CFL license, DRE Brokers have a larger toolkit available to them, but these capabilities are not without key restrictions and limitations. CFL licensees are subject to significantly less limitations in their business activities.
With a DRE license, a broker will have several capabilities as it relates to real estate loans. DRE license brokers can arrange, originate, broker, and even arrange funding of real estate loans in CA. It can also arrange the sale of loans to third parties and even act as a third party loan servicer. DRE brokers also have securities exemptions created specifically for them to arrange investments in loans secured by real property.
In comparison, the CFL license is much more limited in its capabilities. The CFL license permits the licensee to lend, but only from its own balance sheet; meaning it must be the lender of record on all loans it originates and funds. In addition, it is limited in its ability to sell loans. Currently, CFL licensees are only allowed to sell loans to “institutional investors” or other CFL licensees. However, this doesn’t mean there aren’t creative solutions to these restrictions.
Below is a brief comparison on the different capabilities and restrictions on both licenses.
As you can see, there are stark differences between the two. Thankfully they are not mutually exclusive. Many lenders will maintain both licenses to ensure they have the full capabilities of both licenses. For lenders who lend directly from their own balance sheet through credit facilities, a fund, or borrowed funds, a CFLL can be essential to expanding their portfolio and freeing themselves of much unneeded regulation.