This is your 2022 update on state-by-state requirements to transact a business purpose, private loan.

What is probably most surprising about needing a mortgage license to transact business purpose loans is private lender perception. Private lenders who make loans in states that require a license generally assume all states require a license. Similarly, private lenders who operate in states that do not require a license assume they can make loans anywhere in the country without being licensed. Both perceptions are incorrect.

Safe Act and Federal Law

First, let’s clear up a big misconception, specifically that federal law governs licensing. Many lenders believe that if the collateral securing a loan is a 1-4 family residential property, they must be licensed as an NMLS loan originator. The root of this misunderstanding is a misunderstanding of the SAFE Act and how it applies.

In response to the financial crisis of 2008 and the rampant mortgage fraud that occurred prior, Congress passed the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). The SAFE Act required all states to enact legislation that would require the licensure of any person who “takes a residential mortgage loan application” or “offers or negotiates terms of a residential mortgage loan for compensation or gain.”

Under the SAFE Act, a residential mortgage loan is defined as “any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling…” In plain English, this means that any person who takes a loan application or negotiates the terms of a consumer loan secured by a 1-4 family residential property must be licensed as a mortgage loan originator (MLO) in the state where the mortgage property is located.

The definition above was set out as a floor of regulation. What that means is that all states must require an MLO license if the person is involved with consumer loans secured by dwellings. However, states are free to enact legislation that is more restrictive should they choose to do so, and many did.

State Law Definitions

Under the Safe Act, all consumer loans secured by dwellings require a license, but what about business purpose loans? To answer this question, you must look at the definition of a “mortgage loan originator” and “mortgage lender” in the state statutes. Each state can define who is considered an MLO and/or mortgage lender.

The following examples illustrate the differences.

Example 1:

Colorado. An MLO is defined as an individual who takes a residential mortgage loan application or negotiates a residential mortgage loan.

Similarly, a “mortgage company” is defined as a person who takes residential loan applications or negotiates a residential mortgage loan.

Here, the definition of a “residential mortgage loan” means, in part, a loan that is (a) primarily for personal, family, or household use, and (b) secured by 1-4 family dwelling.

Therefore, in Colorado, a mortgage lender does not need to be licensed to make, take an application, or negotiate a business purpose loan.

Example 2:

Oregon. An MLO is defined as an individual who (a) takes an application for a residential mortgage loan, or (b) offers or negotiates terms for a residential mortgage loan.

At first glance, you may assume you do not need to be licensed to negotiate a business purpose loan because the definition in Oregon is basically the same as it is in Colorado. However, the definition of “residential mortgage loan” is a loan that is secured by a 1-4 family property. Oregon does not require the loan be primarily for personal, family, or household use, only that the collateral is a 1-4 family residential property to require a license to originate the loan.

Which States Have Restrictions for Business Purpose Mortgage Lenders?

A total of 18 states have some form of restriction on business purpose mortgage lenders.

• License necessary to originate all business purpose loans. The most restrictive states require a license to originate business purpose loans regardless of collateral type. For example, in these states, you could be financing a 100-story office building and would still need to be licensed as a mortgage lender to make a loan. These states are Arizona, California, Nevada, North Dakota, South Dakota, and Vermont (if the loan is less than $1 million).
• License necessary to originate a business purpose loan if the collateral is the primary residence of the borrower. First, mortgage lenders are often surprised they can make a business purpose loan secured by the primary residence of the borrower. Mortgage lenders often refer to business purpose loans as “non-owner occupied” loans. But, occupancy is not the most important issue to determine licensing or other consumer-related laws and, in fact, is generally irrelevant. However, for licensing purposes, the following states would require a license to make a business purpose loan if the property is secured by the primary residence of the borrower: Iowa, Kansas, and Washington.
• License necessary to make a business purpose loan secured by 1-4 family residential property. A few states follow Oregon’s statutory scheme in which they require a license to originate a business purpose loan if the collateral securing the loan is a 1-4 family residential property. These states are Georgia (if borrower is a natural person) Utah, Oregon, Minnesota, and Idaho.
• Other restrictions. Then there are a few states that have random rules for licensing. For example, in Rhode Island, if the loan is made to a natural person and is less than $25,000, then a license would be necessary to make a loan. These states have some form of licensing- and/or registration-related issue: Alabama, Florida, North Carolina, and Virginia.

Potential Exemptions to Mortgage Lender Licensing

Even if a license is required to originate or make a business purpose loan, there may be a few relevant exceptions or exemptions available to the mortgage lender. For example, Arizona exempts loans secured by multifamily properties in excess of five units or commercial real estate if the loan amount is greater than $250,000.

Additionally, there are often de minimis exceptions that permit a mortgage lender to make a few loans in the state without being subject to a license. For example, South Dakota permits a mortgage lender to make up to five loans as long as the collateral is multifamily or commercial and the aggregate loan amounts do not exceed $4 million in a 12-month period.

Finally, there are often wholesale mortgage lender exemptions that permit an unlicensed lender to make a loan in the state as long as there is a licensed broker who originates the loan. For example, California permits a licensed real estate broker to originate a loan to an unlicensed mortgage lender.

Other Issues Outside of Licensing

• Brokering and servicing. This overview only covers mortgage lending. States often cover mortgage brokering and loan servicing in different statutes, and you must look to the state statutes to determine whether a mortgage broker license is required even if a mortgage lender license is not. For example, the state of New York does require a real estate broker license to broker business purpose loans even though a mortgage lender is not licensed to make or originate a business purpose loan.
• Foreign registration. In addition to mortgage lender licensing, most corporations and LLCs are required to conduct a foreign registration in any state they transact business in. The good news is that most states exempt mortgage lenders from foreign registration requirements because they want to attract capital to flow through their states.
• Other registration requirements. Even if a mortgage lender is not required to obtain a license to make a business purpose loan, the state may require some other form of registration. For example, in North Carolina a mortgage lender does not require a license to make business purpose loans; however, if a lender makes less than $1 million of loans in the prior calendar year, they must file with the North Carolina secretary of state a disclosure statement and either a copy of a surety bond or a notification that a trust account has been established.

Do Your Homework

Before making a mortgage loan, all lenders must understand the state licensing laws in the state in which they intend to lend. The good news is there are 32 states (and the District of Columbia) which do not require a mortgage lender license to make business purpose loans, regardless of the collateral securing the loan. Even in the 18 other states, there can be large exemptions and otherwise limited application to licensing.