Do I Need a License to Broker Notes?

note broker licenseI get a lot of email.

And the topic we are going to cover in this article is a question that I get asked on a weekly basis – a lot of you have been asking about the licensing requirements in your State.

We have created a spreadsheet of the current licensing requirement for each State which we will be updating on a regular basis.

But before we get to the spreadsheet let me share with you an email I got about license requirements for note brokering.

Hi Brecht,
I really appreciate your follow up and your product. I made a decision that this is something that I want to do. I plan on signing up and getting started, however, I hit a little snag and wondered if you could give me some advise. I am an auctioneer and also a real estate broker in Massachusetts. Currently my license is with Keller Williams Realty. Upon speaking to Keller Williams, I was told that I would not be allowed to broker notes and keep my real estate license with them. The reason they gave was that I would be a facilitator and the E/O insurance would not cover me. I found a small brokerage house in Downtown Boston who is willing to let me broker notes. But they are unsure of the role of the Brokerage house would play in the transaction as well. I guess the question is, do I even need a license to broker notes? I am serious about this, as I already have three investors you want to purchase notes, all within the 1-5 million dollar range.
Thank you so much for your help.
[removed]

Your real estate license has nothing to do whatsoever with you brokering notes.

The reason they gave was that I would be a facilitator and the E/O insurance would not cover me.

This statement sounds like it is coming from someone uninformed and afraid. This is a classic CYA.

You would not be a facilitator as the trading of mortgages is not covered under the Massachusetts real estate licensing system (I am or was a licensed broker in MA, CT, NH and a licensed auctioneer in MA + RI). So while it may be true that the E&O wouldn’t cover your activities it is also true that one thing has nothing to do with the other.

You can associate with KW and they don’t have to have any involvement with your note brokering whatsoever. It can be your side business. Obviously you don’t want to use their name, office address, website, or anything else of theirs in your note business, simply do not involve them.

I’ve spoken at length with a number of professionals about this. There is a certain set that will claim that notes amount to a security and you need a securities license but I have not read or heard of anyone being prosecuted by the SEC (if you do then let me know in the comments).

One thing I know for sure is that this does not in any way fall under your real estate license or that of your broker – it aint real estate – it is paper. As long as you’re not mentioning Keller Williams as being a part of that business you should be in the clear.

If you would like a quick check on the licenses required in your state, below is a spreadsheet of the latest licensing requirements we could find for each state

This in no way applies to originating mortgages and you should check with a local attorney before making important business decisions with potential legal implications.

I’m not a lawyer and not giving legal advice.

But I hope this helps.

PS: If You have any information on the licensing required in your State that isn’t in the spreadsheet,please leave a comment below and we will update it as soon as possible.

34 thoughts on “Do I Need a License to Broker Notes?”

  1. I was a successful Mortgage Broker in the State of NY, if you originate mortgages; you need to register with the Banking Department of State of NY.

    If you originate Mortgage note, so long as the number of mortgage notes originate
    is under 5 annually as private owner, you are clear to so. Anything over five, you may need to get a Mortgage Banker’s License; of course there are other ways to get around it, but you need to consult with your attorney.

    Other states will have different requirements, consult with legal professionals in you state, just to be sure.

    If you buy and sell notes, there may not have any restriction, just like there is no restriction on how many houses you can buy.

    Reply
  2. If you have a contract to buy a note (or a portfolio of specific notes), then you can assign your interest to a 3rd party assignee for an assignment fee. The devil is in the details. If there is ever a question raised about whether you are principal party to the contract or a 3rd party broker, then you must be able to prove that you have the capacity to close the deal on your own resources. That will show that you are a legitimate principal party. You may include a “financing clause” (3rd party hypothecate lender) in the contract, because that pertains to your capacity to close. You cannot include a contingency “subject to finding a 3rd party assignee”, because that changes your contractual duty from a principal buyer to a broker who finds a principal buyer. The contract is not considered legally binding until all contingencies are satisfied or removed.

    Earnest money (EMD) deposit is only required when the contract specifically states that it is required (i.e., both parties specifically agree to EMD), and it may be provided by either seller or buyer. The seller providing EMD is for selling a private party seller-financed note, because note buyers will often discover defects in the private note or the seller may renege (after continuing to “shop” the note and getting a better offer). The EMD covers the note buyer’s due diligence costs for a failed transaction.

    So, don’t “broker” a note. Instead, sign a contract to buy the note, prove your capacity to close, and then assign your principal interest to a 3rd party assignee for an assignment fee.

    Two cents worth. Your mileage may vary.

    Reply
    • You should check with your local agencies about licensing and this is not legal advice but most states require licensing to originate residential mortgages not to purchase and own them or trade existing mortgages.

      Reply
    • I don’t know of any banks lending on note acquisitions. There are some private lenders who will loan 50% LTV on the right commercial debt. There are other ways to borrow in order to invest however.

      Reply
  3. All states I or an attorney have researched allow a minimum, usually under 3 or 5 where you don’t need a license or you can get an exemption. This is a result of the Dodd Frank law that essentially prohibited seller financed notes and that amendment was strongly lobbied for by the big banks. So the states have created laws to protect consumers from us bad investors. But research each state. All states realized there needed to be a small number that you could originate or service. The comment was that the law prohibited your grandmother from selling her house and taking back a note or notes to have retirement monthly income. The state laws may be similar but are not exactly the same.

    Reply
  4. 2 things, our attorney says we will need a license in Georgia as mortgage licensee & can’t qualify under the exemption, and in Maryland, we were forced to get a debt collectors license, and there is recent case law that might overturn that.

    Reply
  5. Great list – we’ve been looking at how alternative countries manage their licencing compared to Australia where it’s all handled at the federal level.

    Reply
  6. Hello, I’m a licensed real estate broker in California but do NOT have the NMLS # ID for lenders. I’ve never ever brokered a note and am not sure if my current shop would even allow me to do that. However, does my real estate brokers license allow me to broker notes? In addition, my main reason for signing up was to be able to list and sell REO properties so brokering notes was never even on my radar but if I’m able to establish strong relationships with banks, why not offer this service as well if it helps them.

    Reply
    • Hi Cyrus, We don’t want to offer opinions as to licensing we’re just providing the data that we’ve collected. We can’t offer any legal opinions. Our understanding is that a real estate license is sufficient.

      Reply
  7. I’m interested in this topic as well. Were you able to find out if brokering existing notes between principals requires a license in Ohio?

    Reply

Leave a Comment