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Modern technology and enterprising companies are creating an environment where lending opportunities are no longer just local. One of the most common questions I receive from clients is whether they can lend outside of the state they operate in. However, there are a few questions and considerations that a lender or broker should know before lending out of state.
What licenses are necessary when lending or brokering?
One of the most common misconceptions is that private money loans (loans which are for business purposes) are exempt from licensing requirements in every state. In certain states, this may be true, but the answer lies in the statutes and regulations of each and every state.
A state by state analysis is helpful to demonstrate how different each state can be:
►Nevada. Nevada is one of the most stringent states regarding licensing requirements. In Nevada a license is necessary to: (1) purchase loans secured by any real property, (2) make loans secured by any real property, and (3) act as a broker to a borrower or an investor for a loan secured by any real property. Nevada does not distinguish between business purpose loans and consumer loans, nor does it make any qualification for commercial or residential property.
►Colorado. In direct contrast to Nevada, Colorado only requires a license if the loan transaction involves a “residential mortgage loan”, which Colorado defines as a consumer purpose loan which is secured by a 1-4 family residential property. So long as the lender or broker is strictly making or brokering business purpose loans (loans which are not for personal, family or household purposes), no license will be required to make or broker loans in Colorado.
►Florida. Florida is a hybrid between Nevada and Colorado. A lender may make a business purpose loan so long as the lender is an “institutional investor” and the borrower is not an individual. An institutional investor includes an accredited investor.
These three states provide a small sample of how different the regulators in each state treat mortgage lending and emphasize the importance of understanding the statutes and regulations in each state prior to lending or brokering there.
Beyond mortgage broker and lender licensing, one has to be cognizant of ancillary activities which may also require a license; for example loan servicing. Loan servicing can become even more complicated because even if a state does provide for a mortgage servicing license, a mortgage servicer may be considered a “debt collector” and require a debt collection license, especially if the servicer is servicing defaulted loans.
Other than licensing, a lender or broker should also consider whether their company is required to register with the state as a foreign company conducting business in the state. However, many states exempt lenders from this requirement.
Can I use my preexisting loan documents when lending out of state?
No. Every single state has a different procedure to allow for the mechanism of foreclosure. States like California, Texas, and Mississippi utilize a Deed of Trust and allow for foreclosure without the use of the courts, in a process known as a non-judicial foreclosure sale. Conversely states like New York, Delaware, and Oklahoma all utilize a Mortgage security instrument instead of a Deed of Trust. New York and Delaware generally require the use of the judicial process to foreclose, whereas Oklahoma permits judicial and non-judicial foreclosures. At a minimum, the appropriate method of foreclosure must be accurately reflected in loan documents for each state in which a party is lending.
This issue becomes even more complicated when the loan is a construction loan or the lender intends on holding back loan funds at the outset of the transaction. For example, certain loans brokered by a licensed broker in California must follow stringent guidelines, which may include depositing the holdback funds with a third party funds control agent. In New York, a purchase money loan with a construction holdback is commonly split between a first and a second loan to protect the acquisition money from being subject to attack by potential mechanics lien claimants.
Beyond the issues of foreclosure and construction funds, many states are nuanced and require special provisions for certain loan terms. For example, states like California and Florida require clear disclosures regarding balloon payment loans. Georgia requires loans secured by 1-4 family residential property to include a foreclosure disclosure. Additionally, most states vary concerning their regulation of maximum late charges, grace periods and maximum rates of interest.
►Advertising. Nevada, California and Oregon and other states which are highly regulated, lenders need to be particularly careful about their advertisements. Our law firm has interacted with numerous regulators nationwide who notified our clients of improper advertisements. Regulators in highly regulated states strictly construe what it means to “hold oneself out” as being able to make loans and will require lenders to become licensed. Simply stating a lender makes “loans in all 50 states” or showing photos of loans closed in states which require a license could cause scrutiny with certain state regulators.
►Closing Process. When making loans across the country you must become proficient in understanding the closing procedures. By way of example, in certain states title companies issue preliminary title reports while in other states title companies prepare title commitments. States such as California and Washington utilize licensed escrow companies to facilitate loan closings whereas states like New York and Florida almost exclusively use licensed attorneys as closing agents. There are even local customs that can change within a state. For example, Southern California often uses a separate escrow company which has no affiliation to the title company to act as settlement agent and Northern California almost exclusively uses title companies as the only settlement agent.
►Foreclosure. A major consideration for lenders thinking of entering into different states should be the time and expense required to foreclose. It is important to understand which states allow for a non-judicial foreclosure process which tends to be less expensive and more efficient, and those states which require the use of the courts to foreclose, which can take much longer and increase foreclosure costs. States like New York, New Jersey, Florida, Hawaii, and Illinois which are all judicial foreclosure states can take two to three years to foreclose on average. Whereas in states like Texas, California, Delaware and New Hampshire, the process generally takes less than six months.
Lending in multiple states can be exciting and lucrative especially if you are located in a highly competitive and saturated lending market like California. While this article is not meant to be an exhaustive list of questions and considerations, it has hopefully provided you with a snapshot of some pertinent issues to consider.
Nema Daghbandan of Irvine. Calif.-based Geraci Law Firm’s practice encompasses all facets of real estate transactions representing lenders and brokers, including loan documents for commercial, residential, construction, multi-family, servicing agreements, spread agreements, assignments (of all types), leases, lien releases, procurement agreements, intercreditor agreements and subordination agreements throughout the country. Daghbandan also leads the firm’s non-judicial foreclosure practice and advises clients on all default related matters. Daghbandan has closed hundreds of millions of dollars in loans throughout the country. Nema may be reached by e-mail at email@example.com.