To operate as a finance lender or mortgage broker in California, you must meet certain requirements and obtain the proper license. While the licensing process isn't necessarily complicated, it can be intensive. In this article, we will walk you through the steps you need to take to become a licensed finance lender or mortgage broker in California.

What is a California finance lender vs a mortgage broker?

California defines a finance lender as any person or firm engaged in the business of making consumer or commercial loans with a value of more than $500; this includes both secured and unsecured loans.

A finance broker or mortgage broker, on the other hand, is an individual or business that acts as a middleman between borrowers and lenders. Mortgage brokers typically work with multiple lenders and help borrowers find the best loan terms that fit their needs.

Another term that will come up in this industry is a mortgage loan originator (MLO). An MLO is an individual who works for a specific lender and helps borrowers get approved for loans with that lender. CA mortgage loan originators have different licensing requirements than finance lenders and brokers, so we won’t be discussing them in detail here.

What is the California Financing Law?

The California Financing Law (CFL) is the state law that regulates finance lenders and mortgage brokers. The CFL protects consumers from unfair and deceptive business practices. It sets and enforces all California mortgage broker license requirements.

The CFL requires finance lenders and mortgage brokers to be licensed by the California Department of Business Oversight (DBO). Aside from the license itself, the CFL imposes further requirements on licensees, such as maintaining a surety bond and providing disclosures to consumers.

If you’re ever unsure about specific licensing requirements and business practices, you can find the full text of the CFL here.

Who needs a CA Financing Law License?

In California, finance lenders, mortgage brokers, and loan originators must have a license to do business. Finance lenders and mortgage brokers share the same license, the California Financing Law License. Mortgage loan originators, however, must apply for a separate license through the California Department of Financial Protection and Innovation.

In most cases, any person or business who acts as a finance lender or a finance (mortgage) broker, as defined above, needs to have a CA Financing Law License. That includes anyone in the business of making or brokering both consumer and commercial loans, or negotiating or performing any other act as a broker in connection with loans made by a finance lender.

There are a few exceptions to this rule. For example, people already licensed by other regulatory agencies may not need to obtain a separate CA Financing Law License. Also, individuals or businesses who conduct "non-loan" transactions, such as bona fide leases, automobile sales finance contracts, and retail installment sales, are not required to get this license under California Financing Law. You can find other exceptions here. Any person or business, as just mentioned, does not need to apply for a California Financing Law License.

How do I become a licensed finance lender or mortgage broker?

Fortunately, the process of becoming a licensed finance lender or mortgage broker in California is not inherently complicated, but preparing your license application can be a bit time-consuming. Understanding the process before you begin and following these four steps can make the process go much more smoothly.

Step 1: Ensure you meet the prerequisites

First and foremost, there are a number of preliminary requirements you'll need to be sure you've met before you submit your license application. The prerequisites for license applicants are as follows:

• Residential mortgage broker and lending applicants must have a minimum net worth of $250,000 calculated in accordance with Generally Accepted Accounting Principles. All other applicants must have a minimum net worth of $25,000.
• Undergo a criminal background check of the company, its owners, officers, and control persons.
• Have a background absent any criminal history or history of sanctions by any regulatory agency resulting from dishonesty, fraud or deceit.
• Obtain and maintain a surety bond with a minimum bond amount of $25,000. The bond amount varies based on the amount of origination activities conducted by the licensee.

There is no formal education or prior experience required to apply for the California Finance Lender License.

Step 2: Gather Your Documents

Once you determine that you meet the preliminary requirements for licensure, your next step is to gather the additional documents you need to submit with your application. Those documents include:

• A Business Plan that clearly states: 1) the type of license applied for; 2) the business to be conducted by the applicant under this license; and 3) the operating structure the applicant intends to employ.
• Statement of Other Business: a detailed description of the additional activities the applicant intends to engage in, aside from the business of making consumer or commercial loans or negotiating or performing any act as a broker of such loans under the authority of a California Financing Law license.
• A copy of the Fictitious Business Name Statement for each business name to be used in California if the operating name differs from the applicant's legal name.
• An unaudited financial statement dated within 90 days of the date of the application.
• A Certificate of Authority/Good Standing Certificate from the California Secretary of State.
• A Company Organizational Chart/Description that shows and includes a description of the percentage of ownership of all direct and indirect owners.
• A Management Chart displaying the applicant’s divisions, directors, officers, and managers (name and title).
• A complete and detailed explanation with necessary supporting documentation for each yes response to any Disclosure Question on the license application.
• A Customer Authorization for Disclosure of Financial Records Form.
• Proof of an Electronic Surety Bond in the correct amount, furnished and submitted by a surety company authorized to conduct business in California.

If you still have questions, this checklist provides more detailed information regarding the required documents listed above.

Step 3: Obtain a California Finance Lender Bond

In California, all finance lenders and mortgage brokers must obtain a California Finance Lender Bond—also called a mortgage broker license bond, loan originator license bond, finance broker bond, or mortgage broker bond—as part of the licensing process.

What is a finance lender bond?

A finance lender bond is a surety bond, specifically a license and permit bond. In general, license and permit bonds are designed to (1) protect consumers from financial losses caused by dishonest or fraudulent business practices and (2) transfer financial risk from the licensing entity (typically a government entity) to the surety company that writes the bond. The California Finance Lender Bond is a bond specifically for people or businesses that want to obtain their California Financing Law License.

A finance lender surety bond differs from insurance in that it does not protect the finance lender or mortgage broker but rather their clients. For example, say a consumer incurs financial loss due to the misconduct of the finance lender, their agents, or their employees; this bond ensures the consumer can get reimbursed by filing a claim against the lender/broker’s bond. If the surety finds the claim valid, they will compensate the injured party up to the bond amount. However, the principal is financially responsible for reimbursing the surety company for any claims paid out, plus additional fees and expenses incurred.

What size bond do I need?

A mortgage lender, mortgage broker, or mortgage lender and broker must post a surety bond with the bond amount based on the dollar amount of loans made in the prior year, as listed below.

• $25,000 Bond: Required for new mortgage brokers and businesses with total loans under $1 million.
• $50,000 Bond: Required for businesses with total loans between $1 million and $50 million.
• $100,000 Bond: Required for businesses with total loans between $50 million and $500 million.
• $200,000 Bond: Required for businesses with total loans over $500 million.

In contrast, all other finance lenders and brokers, and program administrators are only required to post a surety bond of $25,000. The surety bond must be issued by a company licensed to do business in California.

How much does a California Finance Lender Bond cost?

If the bond amounts listed above make your eyes pop a bit, remember—you do not pay the full bond amount upfront. Instead, the cost of your bond will be based on several factors, including your required bond amount, how many years of experience you have within the industry, and—most importantly—your credit score.

Annual bond premiums can start as low as 1% of your required bond amount if you have strong financials and optimal credit. But the best way to know how much you will pay for your bond is to contact South Coast Surety for your free quote.

Step 4: Complete and Submit Your Application

Once you have your surety bond and required documents, including a background check and fingerprints, you are ready to complete and submit your California Financing Law License application.

The California Department of Business Oversight (DBO) requires applications for anyone seeking a Financing Law License to be filed through the Nationwide Multistate Licensing System (NMLS).

There are two primary forms in the application:

1.) Company Form MU1: This form serves as the application for the license itself. The attestation of the Company Form (MU1) and all amendments to the MU1 must be completed by a duly authorized individual who has, either:

• Submitted an Individual Form (MU2); or
• Has been delegated to attest to the filing by an individual who has submitted a Form MU2.

2.) NMLS Individual Form MU2: A copy of this form must be submitted for each executive officer, control person, qualifying individual, and individual direct or indirect 10 percent or more owner.

You must submit all sections and pages of the form, along with your supporting documents, through the NMLS portal when possible. You may also mail documents to the DBO, but they must be received no later than five days after the application is submitted online.

Surety bonds for mortgage brokers and finance lenders are typically filed electronically with the NMLS on your behalf by the surety company that writes your bond.

License Fee

One of the final steps of completing your application is to pay the necessary fees. There are several license fees you must submit with your application. These include the following (as of 2022):

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

If you still have questions about the licensing process, or need help completing your application, contact the California Department of Business Oversight.

Get Started Today!

Now that you understand the licensing process for mortgage brokers and finance lenders in California, it's time to get started. Get your free bond quote by filling out our short online application. And if at any point you have questions about the bonding process, give us a call at (800) 361-1720 or email us at apps@southcoastsurety.com.

Key Takeaways

• In California, finance lenders and mortgage brokers must have a California Financing Law License to operate legally.
• This license is required for anyone in the business of making or brokering both consumer and commercial loans, or negotiating or performing any other act as a broker in connection with loans made by a finance lender.
• There are four main steps to becoming a licensed finance lender or mortgage broker in California: meet the licensing prerequisites, gather the required documents, obtain a California Finance Lender Bond, and submit the completed license application online.
• In California, all finance lenders and mortgage brokers must get and maintain a <em>CA Finance Lender Bond</em> as part of the licensing process. The bond amount will vary depending on the total amount of loans made in the prior year.
• The best way to know your exact bond premium amount is to apply for a free quote online with South Coast Surety.