No single license covers buying notes across the US. Whether you need one depends on the state, the kind of loan, and what you do with the note once you own it. Loans on a home the borrower lives in draw the most regulation, so start your checking there.
Why the answer changes from deal to deal
A note is a debt, and debts answer to more than one regulator. Each state writes its own rules for mortgage lending, loan servicing and debt collection, and federal consumer rules sit on top of those. Few of them were drafted with a private investor buying one seller-financed note in mind, which leaves you to work out which ones reach you.
Two investors can buy what looks like the same note and get different answers, because the properties sit in different states or because one of them plans to collect the payments personally.
The facts an attorney will ask about
| Fact about the deal | Why a regulator may care |
|---|---|
| What secures the note | Consumer protection rules concentrate on loans secured by an owner-occupied home. A note on land, commercial property or a business may fall under different rules or fewer of them. |
| Where the property and the borrower are | The state where the property sits is the first one to check. Your home state may have a say as well. |
| Whether the note is paying | Some debt collection rules are drawn around debts that were already in default when they changed hands. |
| What you do after closing | Holding a note is one activity. Collecting payments, sending notices and working out a default are others, and may be regulated separately. |
| How often you buy | Some states treat an occasional purchase differently from being in the business of buying loans. |
These rows are prompts for a conversation with an attorney. They list what to raise, and none of them states the law in any state.
Owning, servicing and originating
A license for one of these activities says nothing about the other two, so keep them apart when you ask. Owning means you hold an existing note and receive the money. Servicing is the day-to-day handling of the loan: collecting the payments, keeping the ledger and talking to the borrower. Originating is making a new loan to a borrower. Buying a note that already exists is a different act from originating one, though rewriting its terms heavily can raise the question again.
If you pay a company to do what a loan servicer does for a note investor, ask which licenses it holds for the state in question. That covers the collection side of the loan and leaves open whether the owner of the note needs a license or registration there too.
If you plan to find notes for other buyers
Finding a note for someone else and taking a fee is brokering, and brokering may fall under a different set of rules from investing your own money. Ask separately whether you need a license to broker notes, and begin with what to check in your state.
Questions to put to the attorney
Ask before your first purchase, while the answer can still change what you buy. Take the facts of the actual note to an attorney who works with mortgage loans in the state where the property sits.
- Does this state require a license or registration to buy or hold this type of loan?
- Does the answer change if the home is owner-occupied, or if the note is behind on payments when I buy it?
- If I use a licensed servicer, what am I still responsible for as the owner?
- Does it matter whether I buy in my own name, through a company or through a retirement account?
- What changes if I buy more notes in this state later?
Keep the answer with the file
Licensing is one part of due diligence, the checking you do before you fund, and it sits beside title and payment history on the list in the guide for note investors. Once you know which states and note types you can hold, tell us when you join the buyer list, so the notes we send you are ones you could buy.
Write down what the attorney tells you and store it with the note’s documents. When you look at a note in a second state, ask the same questions again, because an answer for one state does not carry over to the next.
Related questions
Does using a licensed servicer mean I do not need a license myself?
Not automatically. A servicer's license covers the servicer's own work, such as collecting payments and contacting the borrower. Whether the owner of the loan also needs a license or registration is a separate question that depends on the state and the loan type. Ask an attorney in the state where the property sits.
Is the rule the same for a note on land as for a note on a house?
It may not be. Consumer lending rules concentrate on loans secured by a home the borrower lives in, so a note on vacant land, commercial property or a business can fall under different rules. The details vary by state, so have the specific note checked before you buy.
Which state's rules apply if I live in one state and the property is in another?
Generally the state where the property and borrower are located is the one to check first, though your home state can matter too. This is one reason to get advice on each new state you buy in.