A Guide to DRE and DFPI Licensing in CA

Jennifer Young, Esq.:

Welcome everyone. This is Fortra Law's webinar, a guide to DRE and DFPI licensing in California. Today myself, Jennifer Young, and Nicole Moore at Fortra are going to be going over the dos and don'ts and what to look out for for these two licenses that are so very important to California Mortgage Lending. I am Jennifer Young. I'm a partner at Fortra Law. I'm on the corporate and securities team. Our team mainly helps our clients with licensing, the applications, and everything that goes into that, including structuring and compliance, licensing upkeep, strategy, as we'll get into in this webinar. And we also help with fund formation. So any type of securities offerings like debt funds, real estate funds, syndications, all of that good stuff. That would be my team on the corporate and securities team. And with me today, I have the pleasure of doing this with Nicole.

Nicole, do you want to introduce yourself?

Nichole Moore, Esq.:

Yeah, so good morning, everyone, and thanks again for joining us. A litle bit about me. I'm an attorney in Fortress Banking and Finance Department where I primarily work on capital market structures, things like facilities and complex loan purchases. Our department, we draft loan documents, we help clients with entity reviews, licensing and compliance issues. So that's what I do at Fortra. And again, glad to see you all here. I do want to take care of one piece of housekeeping before we get started and jump into the webinar today. So just a really quick legal disclaimer. Today's presentation is offered to you all for educational and informational purposes and nothing here constitutes legal advice. We are attorneys, but we're not necessarily your attorneys yet. And so our discussion does not create an attorney-client relationship between Fortra or anyone who has joined the webinar today. And just remember that the California licensing rules are really highly fact specific and the regulatory landscape continues to evolve.

And so there may be outcomes or details that are not necessarily visible here in this webinar setting. So please be sure to consult your own qualified counsel before you act on any of the information that you hear from us today. And so now that we have that disclaimer out of the way, did you want to add

Jennifer Young, Esq.:

Something? No, I'm just laughing. Leave it to lawyers to put in a whole disclaimer on a webinar.

Nichole Moore, Esq.:

Thank you

Jennifer Young, Esq.:

For sharing with us.

Nichole Moore, Esq.:

You have been informed. Okay. So now that we've gotten that out of the way, here are some things that we're going to discuss over the next hour or so our agenda. Jen, if you can go to the next slide.

Jennifer Young, Esq.:

And before we get started, if you guys have questions, don't use the chat box. Use the Q&A box at the bottom. It looks like somebody did have a question, so we will be answering those at the end of the webinar if time permitted. Otherwise, we'll reach out to you guys to get answers to you.

Nichole Moore, Esq.:

Yeah, thanks. Okay. So first we're going to clarify the difference between a CFL California license or California lender, excuse me, versus a DRE broker. We're going to discuss some of the scopes and the overlap. There are two fundamentally different regulatory tracks in California to make business purpose loans. And so sometimes there's some confusion in the market when it comes to people understanding or what applies to each the DRE broker or the CFL. And so then the DRE oversees the DRE brokers and then the Department of Finance Protection, Jen, please correct me, and innovation. Oversee the licensing for CFL lenders.

Jennifer Young, Esq.:

Yeah, the DFPI.

Nichole Moore, Esq.:

And then also you will qualify for some exemptions such as usery limitations and licensing or issues if you are actually licensed as a broker or CFL lender.

Jennifer Young, Esq.:

Yeah, so this is our agenda. These are the topics we're going to be going through, table funding as well as servicing and loan level compliance for California lending, then we'll end with the fund compliance requirement stuff. All right. So first, big picture.

Nichole Moore, Esq.:

So big picture. So the capabilities of each license. So each license will allow you to lend, broker, originate, arrange, or service business purpose loans in California. Like I mentioned a minute ago, both also provide you with exemptions from USRI. And as I also mentioned, the California DRE governs the DRE brokers and the DFPI governs the California license lenders. Excuse me.

Jennifer Young, Esq.:

Yeah. And the DFPI stands for the Department of Financial Protection and Innovation. So good. Really quickly, we have an MLO bullet here on the slide. MLO endorsements are not required for business purpose lending. They are only required if you are going to be conducting any consumer mortgage lending. So just as a heads-up, and that's California specific. All right, next slide. Okay. So requirements first and foremost, what do you need to do? What do you need to have in order to get your CFL license as compared to the DRE broker's license? The first thing that I want to just mention because this is probably the biggest difference that's not on here. It's the timing issue. The CFL license is taking about nine months or so to get that license approved. The DFPI is wonderful. And by wonderful, I mean wonderfully tedious. They're very, very short-staffed. They've have huge personnel turnovers, so the whole process is just very, very long.

The DRE broker's license, on the other hand, is fairly fast. And with it though, you will need an individual broker's license in order to apply for a corporate DRE broker's license. So I'm just going to quickly go down for CFL requirements. There's no education, just like I mentioned with the DRE. You can have the CFL license be a company like your LLC or your S corp or you individually. And typically for us, we see it as an entity that gets their CFL license. There's not an individual that has to have any specific education or experience. You will need to submit fingerprints for a background check if you are applying for a company license in which you are either an owner holding 10% or more equity interest, or you have a managerial role or title. So like a director or an officer or just any individual who has a control and authority over a California lending activity.

The CFL license, if you want to get it, you will need to submit a background check via fingerprints. To get the CFL license, a minimum requirement is also a company net worth of 25,000 and this is for business purpose CFL licenses. So if you're going to do a CFL license and you want to include consumer lending as well, that net worth number is going to be up to 250,000. And then same with the surety bond, 25,000 surety bond for business purpose lending and 250,000 for consumer lending. So keep in mind that we're only focusing on business purpose lending. If you guys have consumer related things, feel free to ask. It's not specifically in our wheelhouse, but we know enough to kind of guide you at least. So that's the CFL license. Basic minimum requirements. I will say that for the license application, they will want to see an org chart and a management chart.

They will want to see a very detailed business plan and they will want all individuals who are either owners, 10% or more or managers to submit fingerprints for a DOJ background check, FBI criminal background check. Okay. The DRE broker license on the other hand is a little bit more easier to get. The corporate broker's license is easier to get so long as you have an individual who has their individual California DRE broker's license. But in order to get an individual broker's license, you need to have certain years of experience as a licensed real estate salesperson. So all in all, even though the CFL license takes nine months or so, if you don't have anyone that has a DRE broker's license individually, this process may take you three or four years because you'll need to have two to three years working under a licensed broker before you can actually sit for the broker exam yourself.

As far as requirements go, not much else is required as far as the company. There's no net worth, there's no surety bond, nothing else except for the person actually having their DRE individual broker's license. So that's a big difference in how to get those licenses at the outset.

Okay. Now we are into entity considerations. So when you're applying for a CFL or a DRE broker's license, the main difference between the two is that for a DRE corporate broker's license, you cannot have an LLC hold that DRE broker's license. It has to be a corporation as a legal entity. I'm not talking about S-Corp tax election status. I'm talking about the actual legal entity. It just cannot be an LLC, only an individual or a corporation. The CFL on the other hand, it can be anything, corporations, LLCs, LPs like a lot of our funds. The important thing though is where you place the license for the CFL license application. The important thing here to think about is that CFL require balance sheet lending and you have to fund those loans off of your balance sheet and you have to the licensed CFL entity has to be listed as the lender of record on all loan docs.

So when we're talking about an org chart of a company of an organization that has multiple entities and you're trying to figure out which entity is best to get the CFL license, you'll want to just focus on which entity has the capital funding these loans, because that's going to be the entity that would most likely be the right applicant for the CFL licensee.

All right. So what can you do with a CFL license? As I mentioned first and foremost, I always put this first because for CFL license it is very, very strict balance sheet lending. If you have a fund and a manager, for example, the fund, because it has the capital pooled at that entity level, the fund is always going to be the one getting its CFL license because a fund is going to be the one that is sending all the loan proceeds to escrow and enclosing the loans in the fund's name as the lender of record. The CFL does, however, allow for more than just loans secured by real estate. So you can make CNI loans, business loans with a CFL license, any types of loans, personal loans, unsecured loans that don't require or don't have anything to do with real estate property, you can use a CFL license.

So you can make loans to small businesses and have those loans secured by the company's assets or equipment or something like that, right? Just giving a business a small loan or something like that. You can deal with a CFL license, not a DRE license. DRE license is real estate only. For CFLs, you can purchase and sell your loans, but there are some nuances when it comes to loan sales. And the main thing that I want you guys to keep in mind is that under a CFL license, if you hold a CFL license, you're technically under that CFL license. You can sell loans as many as you want, but if you sell eight or more loans per year, DRE rules are going to kick in. So remember that Nicole was saying that the CFL license is governed under the DFPI.

The DRE broker license is governed under the DRE and they are two separate regulatory agencies. When the CFL doesn't have any rules to regulate sales of loans, the DRE does. And so it's a weird kind of interplay between the two agencies because while the CFL license, it's not illegal for the CFL licensee. To be selling these loans, the DRE can come in and say, "Hey, look, this is DRE activity. You don't have a DRE license." So that's something to keep in mind. And the threshold there is seven loans or less per year is okay. Loan number eight that you sell, you should consider getting a DRE broker's license or have that loan sell arranged by a DRE broker. Servicing. So you can service loans under your CFL license and mainly this is usually just your own loans that you originate and you hold on your balance sheet.

These are loans that you can service all day long. There are some additional loans that you may be able to service, but we'll get into that later because that would be considered third party servicing and there's a little bit more nuance to that. The last important thing is brokering. A CFL license does allow you to broker to other lenders, but the very, very, very big catch there is that these lenders have to have their CFL license as well. So if you are a brokering under your CFL license, you are only allowed to broker to other CFL licensed lenders. That is a big one that you guys need to keep in mind. It gets a lot of people in trouble when they don't know this. Okay. Take it away, Nicole.

Nichole Moore, Esq.:

Thanks, Jen. So Jen touched on some of the things that I'm going to touch on here with regard to DRE broker brokering. So a DRE broker has the authority they're able to originate and arrange or broker loans funded by unlicensed lenders. They're also able to sell and service real property loans if they have a servicing license. Jen just mentioned that a very misunderstood concept in California private lending is that in order is the rule that arranging eight or more loans in a calendar year triggers the DRE broker licensing requirements. And so there are exceptions and aggregation rules that matter and how you actually monitor the activity across your affiliates and other individuals also matter. So again, to piggyback off what Jen just said, if you're operating anywhere near eight loans a year in California, you really should be tracking this deliberately and also just reach out an attorney to assist you, to an attorney to assist you if you feel like you're pushing close to that limit.

So brokering for unlicensed lenders that ... So when a DRE brokers a loan for an unlicensed lender, there are mandatory disclosures that have to be made. And in this sense, the broker's taken on really a heightened regulatory responsibility for each transaction. So the disclosures include a mortgage loan disclosure statement. This is like RE885 or RE882 for other loans and I apologize, but REA5, those are for interest only in one to four single family loans. There's also the hazard insurance disclosure, the ECOA appraisal disclosure, borrower authorizations, the Patriot Act disclosures, and there are multiple disclosures with regard to insurance and non-discrimination. Then you also want to make sure that you're providing the real estate A67 fair lending disclosure. Pardon me. These are disclosures that are to be given to the borrower and including a privacy policy. Investor disclosures include the lender purchase disclosure statement and addendum.

You have waivers of investor waivers of appraisal, securities, disclosures, and investor representations. And then there's also an investor questionnaire that's the RE870.

And so you just want to make sure that all of your disclosures are being sent out with regard to each of these loans. Servicing under the DRE. So their written service agreements typically are required and there are specific recordkeeping obligations to go with them. But as I mentioned before, unless there's an exception, an exception, a DRE broker typically needs a servicing license for all property types and all loan types in California. The last bullet point coming to construction lending under the Business and Professions Code Section 10232. 3, and I'm just going to give a very high level overview of construction lending and DRE broker limitations because this could be a webinar in and of itself. Actually, I think it has been. So first, the DRE does impose LTV limits on construction and rehab loans when a broker is selling or arranging it for a third party lender.

The limits don't apply if the broker is making the loan for its own account or holding it to maturity typically and the ceilings may vary by property type and they're often measured by the current market value. Secondly, the DRE kind of provides a workaround for construction and rehab loans with holdbacks. So you can use the after completed or the ARV value for projects for the LTD purposes, but only if there's a specific set of safeguards in place. And so full funding into escrow, closing is one of those. Typically, you need a detailed draw schedule, a USPAP compliant appraisal, some contingency place, and there's also a $2.5 million loan cap. For holdbacks above $100,000, you also need an independent neutral third-party escrow holder and independent verification for each draw. So there's one practical note for everyone wondering about whether a CFL license can sidestep these rules.

Not really. Again, with how ... Excuse me. Jen mentioned a CFL licensee can't sell more than seven loans to non-institutional investors. And so once you hit that eighth loan, your DRE broker licensing requirements are triggered. And so the full funding requirements that I mentioned above, they will all come back into play. So Jen, I think next, I don't know if we switched this screen, but I think you're going to talk to us a litle bit about loan level compliance as well or third-party servicing.

Jennifer Young, Esq.:

Yeah. And we'll summarize these construction. We have loan limits under the DRE rules a little bit too during their loan level compliance. Okay. So let's quickly talk about servicing for third parties. Obviously with your DRE license or your CFL license, you can service your own loans. The bigger question now is always with third party servicing and what is considered a third party loan that you're servicing? This is any loan that you are not holding yourself or you've originated and holding yourself. If you are, again, going back to the fund and manager example, if the fund has an SPV under it and that SPV may be like a subread or maybe a borrower for some sort of warehouse line, if that entity is holding its own loans, the fund itself with the CFL license cannot service those SPV loans because those are not its own loans.That becomes a third party loan.

And so it gets a little bit tedious there when you have an org chart with multiple entities and different entities are holding different loans. The DRE, on the other hand, the DRE can service any entity's loans, all third party loans all day, every day. So it is a very useful license to have if you are going to be doing a lot of third party servicing.

The CFL retain servicing. So retaining servicing is allowed under the CFL license. You are allowed to service your own loans or loans that you've sold to another institutional investor. And these institutional investors, it's a very, very, very narrow definition and not a lot of entities will qualify because these are usually banks or credit unions or insurance companies, public companies. Those are the institutional investors defined under California's CFL roles. Otherwise, CFLs, you just think of it as being able to service its own CFL licensees loans. Affiliate servicing is where it gets a little bit more nuanced because this is where the DPI is a little bit gray in it. And my specific example that I wanted to bring up here is a fund and a manager. The fund technically is the one that has a CFL license so it can service its own loans, but how funds are really set up is that there is no people sitting at the fund entity level.

All the people, the personnel, they're at the manager entity level. And so in this case, if the CFL licensee, the fund wants to service its own loans, it can do so, but there's nobody to do it. So how do we make that work? The manager entity would act as an agent for the fund, servicing the funds loans as an agent for the fund. So it's a little bit nuanced there, but there is a way to get around that and that's usually how funds with CFLs service their own loans technically.

All right, table funding, everybody's favorite.

Nichole Moore, Esq.:

Oh yeah, table funding, everybody's favorite. So I think everyone is pretty much aware and if you're not, table funding is not allowed and it's not permitted in California. I really want to be clear about what it means when we say table funding, because sometimes this is somewhat loosely translated in our industry. When we say table funding, what we're talking about is a structure where there's an unlicensed lender or there's a party that's originating a loan in name only and there's a funder that simultaneously closes and takes the assignment at the table. So effectively or essentially you're using someone else's license somewhat as a pass-through and California doesn't allow that. So the DFPI and the courts have consistently treated the funder not the name lender on the note as the true lender for licensing purposes. So what does that mean? What can you do? How can we actually structure these in these cases?

And so some workarounds we've seen are participation interest, hypothications and unrecorded assignments. This includes structures such as master loan purchase agreements or MLPAs, facility structures and other similar arrangements are tools that we sometimes see used as alternatives to table funding in California. And each of these options has its own risk profile. So for example, participations can work, but the participation has to actually be a true participation and not just a disguised assignment. Hypothications can also work, but then you also have to think about the collateral mechanics. Those really matter when it boils down to it. And for hypothecations, these are typically loans that are backed by the business's assets while the borrower keeps using the same assets day-to-day. The lender there with the high qualification tends to manage the risk by limiting how much can be borrowed based on the asset and keeping safeguards in place to take more control if something happens or goes left.

And then with unrecorded assignments, whether it's the MLPA or a facility or any other structure, an unrecorded assignment can carry a risk because the regulatory may look through the paperwork to really determine who's actually making the loan. So these are things that you really want to be careful with when you're considering table funding alternatives in the state of California. There's some other paths such as REITs and SPVs. They're very common in the private lending space, but just be careful because affiliation really has to be real. So if you're using an affiliate such as a SPB or REIT, it has to be real. It has to be properly documented. Our corporate and securities team is very good at setting up these types of funding vehicles and the operating mechanics really have to match on paper the structure what is actually happening in the deal. So the bottom line with PayPal funding, sorry, table funding is it really isn't a clever workaround to get around licensing in California to originate through someone else's license, but there are ways that you can do this if you're buying loans that are truly independent and originated by a licensed lender.

I don't know if you have anything to add?

Jennifer Young, Esq.:

Nope, you got everything.

Nichole Moore, Esq.:

Loan level compliance, I think that's neat. Okay. So we've talked about licensing at the entities levels. We're going to talk about licensing on the loan by loan rules that govern business purpose loans in California. So we're going to start with the DRE. So for one to four units, owner-occupied units, there's a 10-day grace period before you can charge a late fee. Now you can extend it and make it 15 days or 20 days, but you cannot assess a late charge before the 10-day period in California. I think as we mentioned before, absent a DRE broker's license or absent a CFL lender's license, you can ... I'm sorry, the maximum late charge period is 10%, so this applies to either license. No charges are permitted on balloon payments either. And so secondly, we mentioned before for construction and rehab loans, this goes back to the BNP 10232.3 rules that we covered.

There's a $2.5 million cap full funding into escrow at closing and you want to make sure you have a neutral escrow agent to handle the undispersed funds and you want to make sure that you are paying attention to the LTD limits. And the reason why I'm flagging this here is because construction loans and rehab loans is where we tend to see the highest concentration of loan level errors, both in how the loan is structured at closing and sometimes how the disbursement process is handled after closing.

Jennifer Young, Esq.:

So I will say that for those lenders who typically do a lot of construction and rehab loans and aren't able to use ARV, the CFL license is usually the option that they go with because they don't have these types of limitations on construction rehab loans that they make.

Nichole Moore, Esq.:

Typically, there are no loan level caps for CFL lenders. So this part is where really you have a lot of flexibility if you have a CFL license. There are fewer, like Jen just mentioned, there are fewer limits than if you only have a hold of DRE broker's license. But that being said, generally no caps is not the same, it's no rules. So you still want to make sure that even with your CFL license, you are following the rules and requirements that are set out for CFL lenders. And then lastly, there's usury. And so this is one where people get very comfortable and they also get wrong sometimes. So So a CFL originated or a DRE made a Rover loan. Those are typically exempt from usury limits in California, but there is some exposure that arises when you're dealing with an unlicensed lender or if a transaction falls outside of an exception.

So you also want to make sure that you are considering fees and points in addition to the actual loan interest rate on the note. Awesome.

Jennifer Young, Esq.:

All right. The last part, compliance requirements. This is everyone's favorite too. The CFL license is pretty easy. The hard part of it is getting that license going through the motions, dealing with the DFPI during the application process. Once that's done, the CFL reporting requirements are pretty easy. It's very straightforward and I'm only talking about business purpose mortgage loans. If we're doing any consumer lendings, then this goes all out the door. But for the CFLs, generally big picture first, you have to file for ... And everything happens in the NMLS. So quarterly MCRs are going to be required to be completed in NMLS. There's going to be an annual CFL assessment fee and CFL renewal. That is not in NMLS. That is going to be directly from the DFPI. And this is a DFPI fee that's based on your prior year's CFL activity compared to all CFL activities from all licensed CFL lenders in California.

So it's a pro rata type of fee that's calculated. This fee is going to be due every year by, I think, end of October. And then there's an NMLS renewal. This applies across the board to anybody that has a license and an NMLS account. And these are due by the end of the year. It's just an NMLS fee to use their platform basically for storing their docs and storing their info. It's a pretty nominal fee. I think it's like 250 bucks or so. But the big important reporting, compliance reporting that you need to do for a CFL license is the annual CFL report. This is due by March 15th every year. This is the only report filing that if you do not do, they will revoke your license. It's a pretty comprehensive kind of loan tape license filing. They just want confirmation that your ownership remains the same or let them know if there's any changes.

Same with management structure, same with business plan. And they kind of want to know all the information about the company and the types of loans that it's done in California under the CFL license, outside of the CFL license, so maybe under a DRE broker's license, and also other states, lending activity in other states. So it's a quite comprehensive report that's due that is due every year by March 15th. And if you do not do it, that is a big problem and they will revoke your license. So big thing to keep in mind.

That's basically it for CFO reporting. The quarterly MCRs for business purpose loans, if you don't touch consumer loans, you can just put in zero across the board every quarter, or the DFPI has actually told us that you can ignore it because it's an NMLS system thing that pushes out these MCR requirements for business purpose loans. But if you ignore it, it's going to stay on your task dashboard as a task to be completed. So sometimes our clients get a little bit annoyed and they just want to see it cleared off. So for business purpose, MCRs can be all zeros for each quarter. DRE reporting requirements. Take

Nichole Moore, Esq.:

It away now. Yeah. So DRE reporting requirements are a little bit different. So they're threshold broker requirements as well as multi-beneficiary broker requirements. And in either case, you are still obligated to file an annual business activity report within 90 days at the end of the fiscal year. Unless you make or arrange a service one or more loans secured by real estate, a one to four or multi-lender, you're not required to complete a large portion of the business activity report. For threshold brokers, there is the RE 853. This is the threshold notification. This is the initial notification that has to be filed within 30 days of meeting with any of the threshold criteria. If there's any material change to reporting, you also need to file this form at the change in the fiscal year, or if you say, for example, you change your company name. There's a quarterly trust fund reporting requirement.

This falls under RE 854, 855, and 856. These are all due within 30 days after the end of the first three fiscal quarters. So there's also, in addition to that, there's a trust fund non-accountability report that falls under REA54. And so you need to use that if you don't accept any trust funds during the applicable reporting period. Under REA 55, that's also the trust fund status report and there's a trust fund bank account reconciliation report form that are due if you've accepted any trust funds during the reporting period. And then finally, for threshold brokers, there's also the annual trust reporting that is due within 90 days after the end of the fiscal year under RE854. If there's a non-accountability report, you can file that if you didn't accept any trust funds during that year. And then there's the CPA annual trust account review that also must be filed.

That's an independent CPA review. For multi-beneficiary brokers, again, there's the initial notification that's RE860 that must be filed within 30 days of meeting any of the threshold criteria. And again, you have to file material change to reporting and also a cancellation of reporting must be filed within 30 days if you're no longer meeting the threshold criteria. Under RE852, there's a quarterly multi-lender trust accounts report that has to be prepared by independent CPA and that's also due within 30 days after the end of your first three fiscal quarters. And then finally, the annual trust funding report that I mentioned above or mentioned previously under the threshold broker reporting requirements, that's also due within 90 days after the end of your fiscal year. And then you also must file the independent CPA annual trust account as well.

Jennifer Young, Esq.:

All right. We got through it. So that was a gist of all the materials that we wanted to present. We wanted to leave some room for questions as well. So we'll get to that. But before we get to those questions, we wanted to surprise you guys with a special conference discount. So all of you attendees who are on this webinar today, this is a discount code for our up and coming Fortra conference in Newport Beach, August 25th and 26th. That's coming up. It's in about three months now. So feel free to use this discount code. We will verify that you actually registered if you're going to use this code, good luck trying to share it. But yeah, that's great. All right. So I think one of the larger reasons for a lot of people joining is being able to ask those questions. So let me pull up these questions that we got.

Nicole, can you see these?

It's all right. I'll just answer them. Okay. The first question. Dealing with a fabulous DFPI, I have a contact name of the person, email and their phone number. When the person does respond, they are fabulous. However, it can take two months plus to respond if they respond. I'm reluctant to ask for their manager in fear of taking them off. Suggestions. Great question. Yes, they are so slow to respond. They take anywhere from four to six weeks if you're lucky to review your deficiencies, review your responses and take a look at whatever it is that they've asked you to change or update. And it is very, very maddening, at least for me and my team.

A couple years ago we got very aggressive with our follow-ups and that seemed to make them a little bit mad. So we've decided to put in an internal process on our end to just do a kind of a week or two week check-in. I don't know that I would ask their manager. I do think that this actually happens a lot. I know that a lot of our clients who are dealing with license applications, CFL license applications themselves have tried to even show up at the offices and this does not bode well. Be patient is my suggestion. If you have a lot of deficiencies, make sure that you are answering all of them all at once. Don't piecemeal your responses. That's just going to extend everything longer. They're not going to come in and see, oh, they answered one of 10 deficiency responses. Let's take care of that one first.

That's not how it's going to work. They're not going to review it until every single one is completed and responded to. So save yourself some time and just kind of spend the time putting together a thoughtful deficiency response letter and be patient, unfortunately. If you do want to try asking for a manager, you'll probably get the same couple of ladies who are very, very much inundated. So I don't know that that would be the best route to go, but happy to chat and see where you are in your process to see if there's anything that we can help with expediting the whole application process.

Next. So within a fund that has a CFL license for an LLC, if an investor has 10% or more of the fund's assets under management, does that investor need approval status by the DFPI? And if so, what is needed? Yeah, this is a great question. A lot of our funds, fund entity applicants will have, or at least at the outset, larger investors who hold maybe 10 or 20% of the whole total funds equity. The DFPI has historically been very good about understanding the fund structure and how the investors or owners in the funds are not technically control people because they don't have meaningful voting rights. They don't really have any say in how the funds lending activities occur and they understand that these investors really just hold an economic interest only. And so that's the key. If they only hold an economic interest and it's a fund structure, the DAPI will usually be okay with certain investors who hold more than 10%, although they might come back and oftentimes they will asking for identification, maybe just the name or the entity name.

And if it's like an entity, they might want to see that broken down even further just to compare the ultimate individual owners across the board at the fund level. But other than that, I've not yet seen any fund investor a true passive economic interest only fund investor have to go through the fingerprinting process and to get a FBI background check done. So being able to explain that to the DFPI is going to be very, very important for you to do to avoid your investors having to go through creating an NMLS account and going through background checks. Happy to talk through this with you if you want a second pair of eyes to review your ownership structure and deal with the DFPI if you need.

Okay. Next one, sorry. You mentioned us as a CFL lender can sell up to seven loans, but when we get to loan eight, can you talk about the proper mechanics regarding us as a CFL lender hiring a DRE broker to sell that eighth loan? Yeah, so typically I like to suggest having, if you have somebody that is a DRE broker in your org chart or a DRE broker that you work closely with, having them just as an operational kind of policy and procedure, every time you're selling loans under that CFL license, you have that DRE broker kind of arrange that sale for you. And so they're listed as a DRE broker on the loan sale on all of those transactions, but that's basically what you need to do. So if you don't and you need to hire somebody, all they need to do is be the broker of record on this transaction on the sale transaction and put their DRE broker license down.

And there's not really much more to it than that. I mean, Nicole, do you have anything to add there?

Nichole Moore, Esq.:

No.

Jennifer Young, Esq.:

Yeah. Okay. Ah, I'm going to give this into Nicole. Does White Label refer to table funding therefore illegal in California?

Nichole Moore, Esq.:

Yeah, so that's actually a good question. White labeling does not equal table funding and it is not illegal. So there's a nuance there. So white labeling is similar to table funding except that with table funding, the loan originator is going to name themselves as the lender on the loan documents, but the lender then funds not the loan originator. And so what will happen is that with table funding and assignment from the loan originator to the lender will usually happen concurrently as the loan is being funded. Conversely, with white labeling, which is more similar to wholesale lending, except the borrower is often unaware that the lender and the loan originator are not affiliated. So with white labeling, the lender usually is going to uses a funding entity with a generic name to help guides that the loan originator is actually funding the loan. So you can white label in California, but it's not the same as table funding at all.

Jennifer Young, Esq.:

And keep in mind, if you are white labeling, I see it as brokering. But in California, the only thing that's allowed in California is if you're going to broker a loan and you're not funding it yourself, you need to have a license because the funder has to be the lender and the lender has to be the lender of record on the loan docs. So that has to be the same entity.That's the only thing that's allowed in California. You can have another party broker to this lender funder, but the lender funder has to be the same entity and the loan proceeds have to come from its own balance sheet. So if you have a warehouse line ... Yeah, the balance sheet. So if you're a warehouse line, obviously you're fine because you have that the loan proceeds hit your balance sheet. If you're getting funds from somewhere else, it needs to hit your balance sheet first and you cannot use another third party to send to escrow those loan proceeds.

It has to come from you, your entity, your CFL licensed entity.

Nichole Moore, Esq.:

And so if you're funding at the table, as we say, it won't hit your balance sheet. So typically what we'll see is sometimes it'll be a couple hours and this goes back to some of the mechanics that I discussed earlier with facilities or repurchase agreements. So maybe it'll be a day or so, but like Jen said, it has to actually hit your balance sheet so it shows that those funds are coming from you and not coming from a third party.

Jennifer Young, Esq.:

Next question, Jeff. Self-directed IRAs and 401 plans are trust. Can these get licensed as CFLs? No, they cannot. I could have answered that live. I mean typed it. Hello. Are you aware of any companies, individuals that offer the services of a designated broker to maintain a DRE license or recommendations of how to find a qualifying designated broker? Okay. So no, unfortunately, to answer your question, short answer, no. The responsible broker. So in order to have your company, your corporation, first of all, license and apply for that DRE corporate broker's license, you need to have a responsible broker and this designated responsible broker is the one who's basically giving their own individual DRE broker's license to hang up for the corporation to use. So then the whole brokerage is really getting a license based on this individual's license. In California, this has been a huge question for me and my team to ask if there's anybody out there.

We don't know and I don't believe that there are services who provide this because they ultimately will need to be an officer of the corporation. That's one of the requirements. So for a DRE broker, corporate broker license, you have to have a California physical office, you have to have a California individual license with their California broker's license listed as a responsible or designated broker and this individual designated broker has to be appointed as an officer of the corporation. So when you hire somebody like that who you don't really know, it doesn't really provide comfort, I guess, to a lot of our clients, nor do we recommend or advise just listing somebody, third party as somebody who you don't know very well as an officer of your corporation. And it's not to say that it's not doable, but if you do that, I would put all the bells and whistles in your bylaws and your resolutions limiting this officer's authority to act on behalf of the corporation.

But generally speaking, if they are an officer of the corporation to the public, they're going to appear to have all the agency required to buy in the corporation so that gets a little bit non-safe, I guess is the word.

Let me know if you have any other questions about that. Happy to chat with you offline. Okay. If we are using Dairy Brokers to sell the loans, what other documents we have to provide to show that the sale is brokered by a DRE licensee? So I mean, Nicole, I'll defer this to you, but my understanding is during loan sales, it's a loan sale. It's not really a brokering that's happening. The licensee can arrange that loan sale. And so on the transaction documents, it'd be listed as the broker of record who's arranging this transaction. But documentation-wise, additionally for the DRE licensee, I don't believe that there are any for loan sales.

Nichole Moore, Esq.:

No, usually it's your DRE license number may be listed somewhere in the loan documents. Maybe you may have a purchaser who wants to see your DRE license or they want to see that you're active or something, but I'm not aware of any actual documentation that's required.

Jennifer Young, Esq.:

Okay. This looks like a follow-up from the previous question. Just to clarify, the hypothetical company has a DRE license already, but struggling with succession planning as a current designated broker is retiring. Yeah. Okay. Thanks for the info. Yeah, so same thing. I mean, if you guys are planning for succession, if there's somebody else at the company who has their salesperson's license, maybe have them sit for and get their broker's license. I would keep it close, whoever that individual is by virtue of having to appoint them as an officer of the corporation. Okay. Is the assignment of loans from CFL-licensed subsidiary re-entity to a CFL-licensed parent entity also subject to eight loans limit? Technically, yes. The rule is the sale or transfer of eight or more loans to the public and we actually have asked the DRE to provide guidance on what the public means even if they're parent and subs or affiliate entities, it sounded like they're not going to treat that as strictly as selling to the public.

So what we advise is that it's a negligible risk, but it is still a risk, although it's theoretical. Operationally speaking, we haven't seen issues that come up within parent to subreach sales and assignments. That's pretty common.

Okay. Oh, okay. Second to last question from JR. I have a one-person C-Corp, a DRE, California DRE license, and my California broker's license. Okay. I make small loans to flippers with the Corp. Corp collects the monthly payments. Is there some written servicing agreement that is required between my Corp and the borrower? Haven't heard of this. The loans are not any owner occupants. So I think he's asking about whether a formal servicing agreement is required between the DRE corporate DRE broker and the borrower.

Nichole Moore, Esq.:

They have a servicing ... Are you a licensed servicer?

Jennifer Young, Esq.:

Yeah, the DRE broker you're allowed to service. I don't know that there's an actual formal written servicing agreement that is absolutely required for every servicing arrangement. Number two, are there LTV limits? I haven't heard of that. So the LTV limits, I'm taking a guess now at your question. The LTV limits that Nicole was bringing up is specifically for- Construction loans. Mortgage loans. Mortgage loans that are construction or rehab loans made under the DRE broker's license. If you're making a DRE loan that is a construction or rehab loan, there are LTV limitations that come into play and so long as I think you're not using ARV and you're using LTVs, you have these limitations. And on top of those limitations, there's also that 2.5 total loan cap, 2.5 million total loan cap, fully funded to escrow, all of those requirements.

Nichole Moore, Esq.:

There's some other requirements too, but if you reach out, we can provide those to you along.

Jennifer Young, Esq.:

Yeah. And then is there some annual report due? Haven't heard of that. I'm assuming that this is for your California GRE broker's license. Nicole, I think you went over all the reports that were-

Nichole Moore, Esq.:

Yeah, so there is an annual report due, I believe it's 90 days after the fiscal year ends, but if you reach out, I can provide you more information.

Jennifer Young, Esq.:

Awesome. Last question. Are you able to help define and understand what qualifies as an institutional investor for purchasing loans by a CFL lender? Would a private equity debt fund that is a business activity making loans and buying, selling loans, qualify as institutional investor, let's say, 506D? No. So these typical mortgage debt funds, 506C, reg D, 506 B or C I think is the fund that you're talking about. These are just funds. The institutional investor definition under California is really, really strict and very few entities are actually considered institutional investors and really quickly off the top of my head, I just remember it being banks, credit unions, insurance companies, public companies that are traded on a public exchange and then some pension funds that are worth 15, 20 million or something like that or more. If you want to send me an email, I can send you the definition very easily, feel free to do that.

All right. Okay. So I think that was the last question that we had and that is perfect timing. We are right at the end of the webinar allotted time. So we want to just thank you all for joining. I hope you found this very helpful. Obviously this was a very big picture webinar and there's a lot of nuances there. A lot of these questions that you guys have are very fact specific too. So if you guys have specific scenarios you want us to kind of evaluate for you, feel free to reach out, send us an email. Our emails are here on the screen, happy to chat and help you analyze and evaluate your situation. Thank you guys. Have a wonderful Wednesday and rest of your week and we look forward to hearing and hopefully seeing you guys at our next conference. Bye.