California Finance Lender vs a Mortgage Broker: What’s the Difference?

According to the California Department of Financial Protection and Innovation, a finance lender is a person or entity involved in providing commercial or consumer loans worth over $500. The loans they offer can be secured (requiring collateral) or unsecured (no collateral).

Mortgage brokers, also referred to as finance brokers, serve as middlemen for borrowers and lenders. They usually work with a variety of lenders. Because of this, they can help borrowers secure the most suitable loan terms for their needs.

Additionally, you will often hear the term mortgage loan originator, or MLO. MLOs are professionals who work for a single lender. Like mortgage brokers, they help people secure loans from the lender they’re working for. Since they have different California licensing requirements, we won’t talk about them in detail here.

Model of a house with a judge's gavel in the background

Understanding the California Financing Law

The California Financing Law (CFL) governs all finance lenders and mortgage brokers in the state. The main purpose of this state law is to protect consumers from discriminatory or fraudulent business practices. It also establishes and ensures compliance with the necessary licensing requirements for California-based mortgage brokers.

Under the CFL, finance lenders and mortgage brokers in California should have a license from the California Department of Business Oversight (DBO). With the license, they also need to meet other requirements, such as giving consumer disclosures and having a surety bond.

If you have questions or concerns about any business practices or licensing requirements, you can access the complete CFL document here.

Who Should Get a California Financing Law License?

To do business in California, finance lenders, mortgage brokers, and loan originators should have a license. Both finance lenders and mortgage brokers require the California Financing Law License. On the other hand, mortgage loan originators need a separate license from the California Department of Financial Protection and Innovation.

Entities or individuals involved in finance lending or mortgage brokering—as defined earlier—must hold a CA Financing Law License. This requirement applies to those who are issuing or negotiating commercial and consumer loans. This also applies to those involved in negotiating terms or other broker-related activities in relation to loans provided by finance lenders.

However, there are instances where this requirement isn’t applicable.

For instance, if people are already licensed by a different regulatory agency, they don’t need to get a separate CA Financing Law License. Another example is when people or businesses perform “non-loan transactions,” such as automobile sales finance contracts, bona fide leases, and retail installment sales contracts.

If you want to know more about these exceptions, read this.

Signing a contract with a mortgage broker

How To Become a Licensed Finance Lender or Mortgage Broker

Fortunately, it’s not entirely difficult to become a licensed finance lender or mortgage broker in California. The primary hurdle is preparing your application, which can be time-consuming, but knowing the process can help!

Below is a four-step guide to becoming a licensed finance lender or mortgage broker in California:

Step 1: Meet the Preliminary Requirements

You don’t need a formal education or previous experience to apply for a California Finance Lender License. However, you do need to meet certain preliminary requirements, such as the following:

  • Lending and residential mortgage broker applicants must have a net worth of at least $250,000, which should comply with Generally Accepted Accounting Principles (GAAP). The rest of the other applicants should have a minimum net worth of $25,000.
  • Ensure that the company, its owners, control persons, and officers undergo a criminal background check.
  • Ensure you don’t have a criminal record or sanctions from any regulatory agency due to dishonesty, deceit, or fraud.
  • Applicants need to acquire and maintain a surety bond with a minimum amount of $25,000. The exact bond amount varies. It’s usually based on the number of loan origination activities performed by the licensee.

Step 2: Prepare Additional Documents

After confirming you meet the initial requirements for licensure, your next step is to gather the following additional documents:

  • A well-defined business plan outlining these three items: (1) the license type applied for, (2) the business activities that are going to be carried out under the license, and (3) the operational structure of the business.
  • A Statement of Other Business: This document gives a comprehensive explanation of activities or side businesses the applicant plans to participate in. These activities are usually outside the scope of the applicant’s main business, which is lending or brokering loans under the California Financing Law license.
  • Fictitious Business Name (FBN) Statement: California requires this public record for every business name if the operating name doesn’t match the applicant’s legal name.
  • A copy of a Certificate of Authority or a Good Standing Certificate from the California Secretary of State.
  • A copy of the Customer Authorization for Disclosure of Financial Records form.
  • An unaudited financial statement issued within 90 days of the application date.
  • A management chart showing the directors, divisions, officers, and managers (including names and titles).
  • An organizational chart or description detailing the ownership percentage of both direct and indirect owners.
  • A record of a complete and detailed explanation, including all the necessary supporting documentation for every “yes” answer to any Disclosure Question on the license application.
  • A verified electronic proof of the bond (with the accurate bond amount) from a surety company licensed to operate in California.

Do you still have questions? Check out this checklist to get more information about the necessary documents listed above.

Handshake symbolizing the completion of a real estate transaction

Step 3: Get a Finance Lender Bond

The California Finance Lender Bond is known by different names, including finance broker bond, loan originator license bond, mortgage broker license bond, and mortgage broker bond. Whatever name it goes by, the fact remains that all California finance lenders and mortgage brokers need one as part of the licensing requirement.

Definition of Finance Lender Bond

A finance lender bond is a type of surety bond, more specifically, a license and permit bond. The California Finance Lender Bond is for people or businesses that want to secure a California Financing Law License.

This bond serves the following purposes:

  • Prevent consumers from losing money due to unethical business practices.
  • Shifts the financial risk from the licensing agency to the company that writes the surety bond and, ultimately, the principal on the bond (the licensee).

Unlike insurance, a finance lender surety bond doesn’t protect the finance lender or mortgage broker. Instead, it protects their clients.

For instance, suppose a client suffers a financial loss because of the wrongdoing of a finance lender or their staff. The injured party can recover damages through the lender’s bond by initiating a claim against the bond.

After verification, the surety will reimburse the claimant up to the bond’s limit. However, the finance lender or mortgage broker is responsible for compensating the surety company for the costs of disbursements, as well as extra costs and fees incurred by the surety.

How Much Bond Coverage Do I Need?

The bond amount of a mortgage broker, mortgage lender, or mortgage lender and broker bond is typically determined by the dollar value of loans issued in the previous year. We’ve outlined this below.

  • $25,000 Bond: This is required for new businesses and mortgage brokers with total loans amounting to under $1 million.
  • $50,000 Bond: This is required for businesses that have a loan amount ranging from $1 million to $50 million.
  • $100,000 Bond: This is required for businesses that have a loan amount ranging from $50 million and $500 million.
  • $200,000 Bond: This is required for businesses that have a loan amount worth more than $500 million.

For other finance lenders, brokers, and program administrators (responsible for managing brokering or lending programs), they only need to purchase a $25,000 surety bond. This bond must be issued by a company that’s legally licensed to operate in California.

What Is the Cost of a California Finance Lender Bond?

Keep in mind that you don’t need to pay the full bond amount all at once. The cost of your bond depends on a variety of factors, such as your industry experience, the required bond amount, and most importantly, your credit score.

An optimal applicant with an excellent credit score and sufficient finances may find annual premiums for as little as 1% of their required bond amount. But if you want to know the exact cost of your bond, it’s a great idea to contact BOSS Bonds today to get your free quote.

Attorney reviewing a contract with a client

Step 4: Submit Your Completed Application

Finally, you can submit your California Financing Law License application after you’ve paid for your surety bond and gathered the required documents (e.g., fingerprints and a background check).

For those seeking a Financing Law License, the California Department of Business Oversight (DBO) requires them to send their applications to the Nationwide Multistate Licensing System (NMLS).

The application process consists of two main forms:

1. Company (MU1) Form

The Company (MU1) Form, also called Form MU1, serves as an application for the license. The form and all changes to it should be filled out by someone with authorization.

The authorized person must meet the following qualifications:

  • Has provided an Individual Form (MU2); or
  • Has been authorized to confirm the validity of the filing by another person who has already filed a Form MU2.

2. NMLS Individual (MU2) Form

Every executive officer, control person, qualifying individual, and direct or indirect owners of the company (10% or more) is required to submit a copy of this form.

Before submitting, make sure all pages and sections of the form are complete. In addition to the form, you should also send your supporting documents through the Nationwide Mortgage Licensing System (NMLS) portal.

You can also submit your requirements by mail to the DBO. However, they should arrive within five days after submitting your application online. In most cases, your surety company takes care of electronically filing finance lender bonds or mortgage broker bonds with the NMLS on your behalf.

Payment of Necessary Fees

As of 2022, these are the license fees you need to pay to process your application:

  • NMLS Initial Processing Fee: $100
  • CA-DFPI Application Fee: $200
  • CA-DFPI Assessment Fee: $100

Do you still have concerns about licensing fees or need assistance with your application? Get in touch with the California Department of Business Oversight.

Apply For Your Bond Today!

We think it’s safe to say that you already probably have a good idea of how to get a license as a finance lender and mortgage broker in California. Now, let’s take it one step further to get you bonded by completing our brief online application. Don’t worry, it’s free and the credit check is a soft inquiry, so it won’t hurt your score.

And if you ever need assistance with the bonding process, feel free to give us a call at 800-361-1720.

Key Takeaways

  • Individuals or businesses that plan to be finance lenders or mortgage brokers in California should have a California Financing Law License.
  • This license is necessary for any entity involved in creating or facilitating loans for consumers or businesses. It also applies to those engaged in other activities connected to loans provided by a finance lender.
  • The process of becoming a licensed finance lender or mortgage broker in California can be summarized in four steps: satisfy the preliminary requirements, collect all necessary documents, buy a California Finance Lender Bond, and submit a complete online license application.
  • California-based finance lenders and mortgage brokers should buy and maintain a CA Finance Lender Bond as part of the licensing process. The exact amount of the bond will vary, usually based on the total loans provided in the previous year.
  • To get an accurate calculation of your bond premium, apply for a free quote online with BOSS Bonds today.