California Note Brokering Licensing Issue

If you are considering buying and selling seller financed notes secured by real estate you may want to do a little research on any regulations or licensing requirements your particular state may require.  Of the very few states that have any regulations at all, regulatory agencies are starting to crack down on non-complying or unlicensed note brokers. One such state is California and since that is the state I work out of I did some current up to date research and got some very surprising answers as you will read below. 

Between February 19, 2008 and April 24, 2008 I exchanged emails and spoke to over the phone Gary Sibner, the Managing Deputy Commissioner III with the California Department of Real Estate in the Mortgage Loan Activities Unit. I’ve been trying for months to get a straight answer about the licensing requirements for note brokers in and out of the state of California for quite some time and I think this article will finally give you some clarity. It may not be what you want to hear but it is fact. 

Although they would not put anything in writing the answers and information below are taken from various emails and conversations with Gary Sibner. Mr. Sibner stated that, “…the DRE does not provide written opinions except under Article 5 of the Real Estate Law (Sections 10230, et. Seq.) And this subject does not fall within Article 5…” 

So he went on to explain Section 10131.1 of the Business and Professions Code deals with persons acting as a principal, which is using their own funds. Persons acting as brokers, and not as principals, are not covered by that section of the law. Section 10131(d) and (e) also provide for the licensing requirement of those who broker real estate secured notes. Also, a California Attorney General's Opinion covered the issue of "with the public" to include financial institutions. The location for that is 68 Op. Gen. 286 (Opinion No. 84-903) October 23, 1985; to Mr. Sibner’s knowledge, that opinion is still effective. 

We have always gone by the guideline that an individual is allowed to broker 7 notes per year in California, and then you have to have your Real Estate Broker’s license. Well, that’s not exactly the case.  If you purchase the notes for your own account to hold them you can buy as many as you want per year and you would not need to be licensed. If you purchase notes for yourself and then subsequently resell those notes the next day or at a later date you are allowed to do seven of those transactions per year and then you will be required to have your Real Estate Broker’s license. 

Here it is - If you solicit for and broker notes to institutional, individual or private investors, in or out of the state of California you are required to have either a Real Estate Sales Agents license that is hanging under a supervising Real Estate Broker OR your own RE Broker’s license. Even for just one note.  I then asked Mr. Sibner some pointed questions to be sure there is no gray area moving forward, the questions and answers follow:

Can an individual in CA solicit individuals who are holding notes secured
by CA real estate without a CA RE Brokers license? NO – Business and Professions Code 10130 

Can an individual in CA solicit for and broker notes where the property
securing the note is outside of CA without a CA RE Brokers license? NO. 

Can an individual from out of the state solicit individuals who are holding
notes secured by CA real estate?   NO. 

If an individual in CA brokers notes to institutional corporate investors
and not to individual investors do they need a CA RE Broker's license?
YES. 

If an individual in CA refers notes to institutional corporate investors
and not to individual investors for a referral fee do the need a CA RE
Broker's license?

NO 

However, there is a narrow “finder’s” exemption that if the referrer or “finder” did NOT solict nor engage in negotiation with the note holder they can earn a fee without a CA RE Broker’s license.  Be careful, read the words.  If we are in the business of note brokering and note buying then we will be soliciting note holders and thus, again, we would need to have a CA RE Broker’s license. 

If an individual lives in CA can they broker 7 notes a year before they
need a CA RE Broker's License? NO - Business and Professions Code 10131.1 – unless bought as a principal using your own money.  Mr. Sibner also stressed that you must be using your own money for the 7 notes rule to apply. Meaning you cannot go around this rule by just doing double documents and putting the note in your name for a day then assigning it over to the actual end note buyer the next. 

If an individual does not live in CA can they broker an unlimited amount of
CA notes or the same 7 notes a year secured by CA real estate before they
need, if at all, a CA RE Broker's License?

NO – the same regulations apply – if you are brokering a note in California and you live out of state you must have a CA Real Estate Broker’s license or a CA Real estate Agent’s license hanging under a supervising CA Real Estate Broker.  If you are buying them for your own account to hold them for the entire term you can buy as many California notes as you want without a license. 

If an individual in another state brokers notes to an out of state
institutional investor but the property is in CA, do they need a CA RE Brokers license? And does the 7 notes in year apply to them as well? YES. 

What are the ramifications or penalties if someone is caught doing this
business without a license for the above scenarios? For note brokers in CA?  For out of state note brokers? Etc. 

They will be served a Desist and Refrain Order.  If it is not followed and another Desist and Refrain Order is served it would be brought to the attention of the CA state Attorney General and could be prosecuted by the California Attorney General’s office as a misdemeanor. 

So let me sum it up for you.  If you are in the business already or if you are new to the business and just starting out and you are going to be buying every single note for yourself with your own money and never resell them then you do not need a CA Real Estate Broker’s License to do so.  However, if you will be soliciting for and brokering notes inside or outside of California, whether you live in California or not, you must have a CA Real Estate Agents license hanging under a supervising CA RE Broker OR have a CA RE Broker’s license yourself. 

On a more positive note, Mr. Sibner did mention the fact that in the 15+ years he has been with the CA DRE they do get calls from individuals asking about the licensing requirements for a note broker.  However, he stated, they rarely get calls from note buyers or note sellers complaining of fraud, misrepresentation or negligence.  I guess the entire ethics and integrity of the note business is doing well, let’s keep it up. 

Jeff Armstrong of Armstrong Capital, your favorite Master Buyer, has been in the cash flow industry since 1991.  He is a licensed CA RE Broker specializing in seller financed notes he can be reached at 818-865-2322 or by email at info@armstrongcapital.com. For advanced training opportunities, to learn more or to obtain a quote visit www.armstrongcapital.com. 

("Reprinted and used with Permission of the Author - 7-2009")