Thankfully, only a handful of states require a license to lend or to broker or service a loan, but when a license is required, strict compliance is absolutely essential. Failure to comply can result in being prohibited from lending, brokering, or servicing in that state, a significant penalty. This article will explain general licensing applicability, common exceptions, and specific examples of less common exceptions and requirements.
Why and When is Licensing Required
For the relative few states that require a license to lend, or broker or service a loan, the requirement becomes applicable when doing business in that state. Unlike making a choice over the law governing the loan documents, which can help avoid state law issues like usury, prepayment penalties, late fees, and default interest – licensing is applicable whenever business is done within that particular state; specifically, whenever the subject property is located within that state.
For example, if the borrower is from Kansas, and the Lender is from New Jersey, and the broker is from New Mexico, and the servicer is from Texas – all states that would otherwise not require a license for these activities on business purpose loans – if the property is in California, a license is required for the lender, the broker, and the servicer to engage in these activities because they are being conducted within California, regardless of the law that governs the loan documents generally.
While most states that require a license for one of these activities usually requires it for all of them, it is not always the case, and the circumstances that provide for exceptions to licensing can vary amongst the license types in each state – detailed attention must be paid before first engaging in business in these states.
Exceptions Generally
Many states have a one-off or occasional-business exception, allowing a lender, broker, or servicer to engage in these activities as long as it is only once or perhaps a few times within a calendar year, or the activity is only incidental to some other business being conducted.
Still others have exceptions for the type of property – such as when the property is 5 residential units or more, or is otherwise truly commercial in nature. For some, the exception turns on whether the property is going to be occupied by a resident, at least during the term of the loan. In others, it matters whether the borrower is an induvial rather than a business entity.
In addition to these exceptions, some states go further to provide that regardless of other exceptions that may apply, a broad lending-license exception may be available if the loan was brokered (arranged, negotiated) by a licensed broker within that state.
Specific Examples
California famously has a robust system of licensing for lenders, brokers, and servicers. Just as famously, perhaps, is the broad exception for lenders afforded by the use of a licensed brokers, and an equally broad exception for servicers either servicing only a few loans (such as small, unlicensed lenders originating through a broker) or a licensed lender servicing their own loans.
Arizona also has a brokered-loan exception to a lender’s license, as does Nevada. However, both of these exceptions come with additional stipulations, and Nevada in particular has a significantly narrow needle to thread in order to take advantage of the exception. The utmost care should be taken whenever deciding to rely upon a licensing exception; make sure that the loan scenario and the nature of the parties involved do not cause a disqualification.
Obtaining a License
In order to avoid the limitations and headaches of utilizing an exception to licensing, many opt to bite the bullet and get licensed. Doing so is relatively straightforward, but it can take several months in most instances, and there can be daunting requirements, occasionally including a physical presence within a state, the “brick and mortar” requirement. Paperwork, background checks, and fees are par for the course. An experienced attorney should be consulted before making any license application decision.
Concluding Thoughts
State licensing requirements are strict in their application, and the regulators who administer them are strict in their enforcement. Loss of the ability to carry out business in a certain state, even temporarily, can have a devastating financial impact. The attorneys at Geraci LLP are well versed in these issues; attorneys in the Banking and Finance department can determine whether a license is needed in a particular state, and attorneys in the Corporate and Securities department can assist in the application process to obtain a new license. Reach out to us with any questions you may have.