California is one of the most regulated real estate and lending environments in the country. Brokers who arrange or refer private lending transactions—especially hard money loans secured by real estate—must comply with both state lending laws and real estate licensing rules.
A mistake isn’t just inconvenient.
It can cost:
- Your DRE license
- Your commission
- Your referral partnerships
- Your client relationships
The good news: Compliance isn’t complicated once you understand the essentials. And when you operate cleanly, private lenders (including firms like Lending Bee) will prioritize your deals, trust your submissions, and want to work with you again.
This guide outlines the key compliance rules brokers must follow when arranging hard money loans in California.
1. Know Your Licensing Boundaries
California treats mortgage activities differently depending on your license type:
A. DRE-Licensed Real Estate Broker (CalDRE License)
You may:
✔ Arrange hard money loans secured by real estate
✔ Collect commissions/fees for arranging private financing
✔ Represent borrowers and/or lenders in loan negotiations
You may NOT:
✖ Make or service loans yourself unless you also hold the correct lending authority
B. DFPI (Department of Financial Protection & Innovation) License
If you represent private lenders frequently—or originate loans on their behalf—you may need a lending license.
California has two primary pathways:
- California Finance Lenders Law (CFLL) license
- Residential Mortgage Lender/Servicer (CRML) license
Most hard money brokers operate under a DRE license only—but only when they act strictly as a broker, not a lender.
2. Always Disclose Your Role and Compensation
California requires full transparency when you broker or refer a private loan.
You must disclose:
✔ Your role
Are you representing the borrower, the lender, or both?
✔ Your compensation
This includes:
- Points
- Referral fees
- Yield spread premiums
- Any “processing” or “transaction” fees
- Compensation paid by lender OR borrower
You must provide written disclosure before the borrower signs any binding loan agreement.
Failing to disclose compensation is one of the top causes of DRE disciplinary actions involving private lending.
3. Use Written Broker Agreements—Always
Verbal agreements are not compliant.
Brokers must use written agreements including:
- Borrower representation agreement (outlines your duties and fees)
- Mortgage Loan Disclosure Statement (MLDS) for DRE licensees
- Dual agency consent if representing both sides
Many private lenders (including Lending Bee) require brokers to submit disclosure documentation before issuing a term sheet. This protects everyone.
4. Understand California’s Usury Laws (and Exceptions)
California caps interest rates on private-party loans unless an exemption applies.
The good news:
Most hard money loans arranged by brokers are exempt from usury limitations if properly structured under one of the following:
✔ Broker-arranged exemption
If a DRE-licensed broker arranges the loan, and the lender is a private individual or entity, the loan is exempt from usury.
✔ Loans made by DFPI-licensed finance lenders
These lenders can legally exceed the state’s usury ceiling.
✔ Corporate lending exemption
Loans made to or from corporations may fall under additional exemptions.
Compliance tip:
Never quote rates or terms that could violate usury rules without confirming the lender’s exemption status.
5. Advertising Rules: Stay Clean and Transparent
If you advertise private loans or hard money products in California, you must follow strict guidelines:
The following MUST be included:
- Your name and DRE license number
- Whether you act as a broker and/or referral source
- That the loan is secured by real estate
You may NOT:
- Promise guaranteed approvals
- Misrepresent interest rates
- Claim affiliation with government programs
- Hide your compensation or relationship with the lender
Example of compliant advertising:
“We connect investors with private financing options through licensed California private lenders. Loans arranged by a California Real Estate Broker. DRE #01234567.”
6. Review Loan Documents Before Your Borrower Signs
You are not required to provide legal advice—but you are expected to understand the documents well enough to answer basic questions and protect your client from obvious issues.
Review the following:
- Loan estimate or term sheet
- Deed of trust
- Promissory note
- Disclosures (MLDS, TIL-style disclosures where applicable)
- Escrow instructions
- Broker fee agreements
A reputable private lender like Lending Bee will provide transparent terms and is open to clarifying any clause for you or your client.
7. Ensure the Loan Makes Sense for the Borrower
This is where ethical compliance meets practical underwriting.
California expects brokers to act competently and responsibly.
Before submitting a file, confirm:
- The borrower understands interest-only payments
- They can cover holding costs (taxes, insurance, utilities)
- The exit strategy is reasonable
- Rehab budgets are supported by contractor bids
- ARV estimates are not exaggerated
- The borrower is not being pushed into an unsuitable product
Submitting unrealistic loans harms your reputation with lenders and exposes you to complaints.
Brokers who prequalify properly move to the top of Lending Bee’s priority queue because their deals are clean, honest, and fundable.
8. Protect Borrower Funds & Avoid Steering
Two major compliance traps:
✖ Holding borrower funds in your personal/business account
Always send deposits directly to escrow or the lender if required.
✖ Steering borrowers to lenders for higher compensation
California law prohibits “improper influence,” meaning you must recommend lenders based on:
- Speed
- Transparency
- Likelihood of funding
- Product suitability
Not just the largest commission.
This is exactly why many brokers partner with Lending Bee: the lender’s predictable structure and funding certainty make the recommendation fundamentally in the borrower’s best interest.
9. Recordkeeping Requirements
DRE requires brokers to keep transaction records for three years, including:
- Agreements
- Advertising
- Emails
- MLDS forms
- Lender or borrower disclosures
- Notes from material conversations
In an audit, you must be able to show exactly how you carried out your duties.
10. Work Only With Reputable Private Lenders
This is one of the simplest compliance tips—and one of the most powerful.
Partner with lenders who:
- Are licensed
- Provide transparent terms
- Issue clear disclosures
- Offer fast, consistent communication
- Have strong track records in California
This protects your clients, your license, and your reputation.
Lending Bee works closely with brokers to ensure all required disclosures and borrower protections are met, keeping transactions clean and compliant.
Wrapping up
Compliance isn’t paperwork—it’s protection.
California brokers who understand private lending rules:
- Close more deals
- Avoid legal issues
- Build stronger lender relationships
- Convert more repeat clients
By working with a transparent, experienced private lender like Lending Bee, you can streamline each file, reduce compliance friction, and present clean, fundable deals that close fast.
Compliance elevates your value as a broker. And in the private lending space, professionalism is the advantage that sets you apart.
Sources you want to read:
These sources comply with your requirement to avoid competitor links and use reputable, non-promotional sites:
- California Department of Real Estate – Broker Compliance & Licensing
https://www.dre.ca.gov/Licensees/ - California DFPI – California Financing Law & Mortgage Lending Oversight
https://dfpi.ca.gov/california-financing-law/ - Rocket Mortgage – Proof of Funds Guide (for borrower verification)
https://www.rocketmortgage.com/learn/proof-of-funds - Nolo – Overview of California Usury Laws
https://www.nolo.com/legal-encyclopedia/california-usury-laws.html - Consumer Financial Protection Bureau (CFPB) – Mortgage Disclosure Rules
https://www.consumerfinance.gov/mortgage-rule/