Becoming a private money lender means getting the state license that matches the loans you want to make, following the federal consumer-protection rules that apply to those loans, documenting each deal so it will hold up in court, and reporting the interest you earn to the IRS. How heavy the regulation gets depends on what you lend against. Residential mortgages carry the most rules. Business-purpose loans carry the fewest. Everything else sits somewhere in between.
Decide What Kind of Lender You Want to Be
The rules that apply to you flow from the type of loan, not from the word “lender.” Three broad categories cover most private lending:
- Loans secured by residential real estate (mortgages, hard money against a home, bridge loans on a house).
- Consumer loans not secured by a dwelling (personal loans, signature loans, auto loans).
- Business-purpose loans (commercial real estate, equipment financing, working capital).
Pick one lane before you look at licenses. A single license rarely covers all three, and the disclosure rules that govern a consumer mortgage do not apply the same way to a loan you make to an LLC for inventory.
Get the Right License
For loans secured by residential real estate, the federal SAFE Act requires mortgage loan originators to register through the Nationwide Multistate Licensing System and obtain a unique identifier that stays with them throughout their career.1eCFR. 12 CFR Part 1007 – SAFE Mortgage Licensing Act Federal Registration of Residential Mortgage Loan Originators A loan originator under the SAFE Act is someone who takes residential mortgage applications and negotiates loan terms for compensation, so not every private lender automatically falls into this category.2Office of the Law Revision Counsel. 12 US Code 5102 – Definitions
There is a de minimis exception, but it is narrower than most people assume. It only applies to employees of banks, savings associations, and credit unions who originated five or fewer residential mortgage loans in the past 12 months.1eCFR. 12 CFR Part 1007 – SAFE Mortgage Licensing Act Federal Registration of Residential Mortgage Loan Originators Independent private lenders don’t qualify. Seller-financed transactions have their own separate exemptions under Regulation Z, generally allowing up to three financed property sales per year under certain conditions.
For non-mortgage lending, most states require a consumer finance or money lender license issued by the state’s Department of Banking or Department of Financial Services. Application fees run roughly from $30 to over $500 depending on the state and license type. These licenses are entirely separate from NMLS registration and carry their own renewal cycles and examination schedules.
Skipping the license is expensive. Operating without one exposes you to administrative fines that reach $50,000 per violation in some states, and courts may declare your loan contracts unenforceable. Once you move past occasional lending, forming an LLC or corporation separates your personal assets from the business and satisfies the entity requirements many states impose on licensed lenders.
If You Plan to Use Other People’s Money
Funding your loans with capital from outside investors adds a layer of federal securities law on top of everything else. Pooling investor funds to make loans generally creates a security, so you must either register the offering with the SEC or qualify for an exemption. The most common path is Regulation D, which lets you raise unlimited capital under Rule 506 from accredited investors without full SEC registration.3U.S. Securities and Exchange Commission. Private Placements Under Regulation D Smaller offerings under Rule 504 cap out at $10 million in any 12-month period. Ignoring securities law is one of the fastest ways for a growing lending business to attract SEC enforcement.
Know Your State’s Interest Rate Cap
Every state caps the interest rate a lender can charge, and blowing past that cap can cost you more than the excess. Depending on the state, you can lose the right to collect any interest at all, and in some places extreme overcharges are treated as felonies.
The limits vary considerably. Some states set unlicensed personal-loan ceilings as low as 6% to 10%, while licensed lenders making commercial loans may charge 18% to 25% or higher. The cap that applies to a specific loan turns on loan amount, loan purpose, and your licensing status. A rate that is perfectly legal for a licensed commercial lender making a $500,000 business loan can violate usury law when applied to a $5,000 personal loan from an unlicensed individual.
Look up the specific usury statute in every state where you plan to lend before you set your rate. Do this once per state and keep the citation in your file.
Federal Rules That Apply to Your Loans
Truth in Lending Disclosures
The Truth in Lending Act and its implementing regulation, Regulation Z, require lenders to give borrowers specific written disclosures spelling out the true cost of a loan. The rules apply to creditors who regularly extend consumer credit. The official commentary sets that threshold at more than five transactions per year for dwelling-secured loans, or more than 25 per year for other consumer credit. Under those numbers, Regulation Z may not technically bind you, but following its disclosure framework still protects you if a dispute reaches court.
For a standard closed-end consumer loan, the disclosures include the annual percentage rate, the finance charge in dollars, the amount financed, the total of payments the borrower will make over the life of the loan, and the payment schedule showing the number, amount, and timing of each payment. All of it has to reach the borrower before the loan closes.4Consumer Financial Protection Bureau. 12 CFR 1026.18 – Content of Disclosures
Botching those disclosures carries real exposure. Under 15 USC 1640, a borrower can sue for actual damages plus statutory damages of twice the finance charge. For closed-end credit secured by real property, statutory damages range from $400 to $4,000. For open-end credit not secured by real property, the range is $500 to $5,000. The borrower also recovers attorney’s fees and court costs.5Office of the Law Revision Counsel. 15 US Code 1640 – Civil Liability
Loans made primarily for business, commercial, or agricultural purposes are exempt from Regulation Z, along with certain high-dollar consumer loans not secured by real property or a principal dwelling.6eCFR. 12 CFR 1026.3 – Exempt Transactions If you lend only to businesses, TILA is off your list. State licensing and usury laws still apply.
Fair Lending and Adverse Action Notices
The Equal Credit Opportunity Act applies to every creditor, including a private individual making a handful of loans a year. You cannot deny a loan, charge a higher rate, or impose different terms based on race, color, religion, national origin, sex, marital status, or age, as long as the applicant can legally enter a contract. Denying credit because the applicant’s income comes from a public assistance program is also prohibited.7Office of the Law Revision Counsel. 15 US Code 1691 – Scope of Prohibition
Sound underwriting is still allowed. You can decline a loan because income is too low, debt is too high, or the collateral doesn’t cover the amount requested. Base decisions on financial factors, not personal characteristics.
If you pull a credit report and then deny the application or offer worse terms, you owe the applicant an adverse action notice. It must include the name, address, and phone number of the credit bureau that supplied the report, a statement that the bureau itself did not make the lending decision, and notice that the applicant can request a free copy of the report within 60 days and dispute any inaccurate information.8Federal Trade Commission. Using Consumer Reports for Credit Decisions – Adverse Action and Risk-Based Pricing Notices
Keep records of credit applications and everything you used to evaluate them for 25 months after you notify the applicant of your decision. For business credit applications, the retention period drops to 12 months.9eCFR. 12 CFR 1002.12 – Record Retention The file should include the application, the credit report, your underwriting notes, and the adverse action notice if you denied.
Write a Loan Agreement That Will Hold Up
The loan agreement is the document a court reads if the deal goes sideways, so precision here matters more than anywhere else. Before drafting, verify the borrower’s identity with government-issued photo ID and review their credit history. Credentialed subscribers pull reports directly from a bureau; smaller lenders use a third-party screening service.
At a minimum the agreement should cover:
- The exact principal amount.
- The interest rate, whether fixed or variable, and whether interest accrues as simple or compound.
- The payment schedule, including due dates, amounts, and acceptable payment methods.
- Late fees, and any grace period before they apply.
- Prepayment terms, including whether the borrower can pay early without penalty.
- Default provisions, meaning what triggers a default and what remedies you have, such as acceleration of the full balance and repossession of collateral.
If the loan is secured, describe the collateral precisely enough that a court could identify it without ambiguity. For a vehicle, include make, model, year, and vehicle identification number. For real estate, use the legal description from the property deed, not just the street address. Vague collateral descriptions are the single most common drafting mistake private lenders make, and they give borrowers an opening to challenge your lien.
Standard promissory note templates from online legal document services and state bar association websites give you a reasonable starting framework for straightforward loans. For any loan above $10,000 or secured by real estate, paying an attorney to review the draft is worth the cost. An unenforceable clause costs more than the legal fee you saved.
Sign, Fund, and Record the Loan
Both parties should sign in each other’s presence, with each receiving a complete copy of the executed documents. Notarizing signatures adds independent identity verification that helps if the borrower later denies signing. Notary fees typically run $2 to $15 per signature.
Electronic signatures are legally valid under the federal E-SIGN Act, but only if the borrower gives informed consent first. Before signing electronically, the borrower must receive a clear statement of their right to receive paper documents, the process for withdrawing consent, and the hardware or software needed to access electronic records.10National Credit Union Administration. Electronic Signatures in Global and National Commerce Act (E-Sign Act) For loans secured by real property, the lender must maintain a single authoritative electronic copy that is unique, identifiable, and unalterable.
Fund the loan through a method that creates a verifiable record. A bank wire transfer or cashier’s check proves that the money left your account and reached the borrower. Wire transfers cost roughly $20 to $50 and deliver immediately with a clear electronic trail. Keep every receipt and confirmation. If a borrower later claims they never received the funds, that documentation is your defense. Release funds only after all documents are fully signed and distributed.
Recording Your Security Interest
Filing public notice of your lien is what gives it priority over other creditors. An unfiled security interest is essentially invisible. Another lender can extend credit against the same collateral, file first, and take priority over your claim.
For personal property such as equipment, inventory, or vehicles, file a UCC-1 financing statement with the Secretary of State in the state where the borrower is located. Filing fees for a standard UCC-1 generally range from $12 to $40, depending on the state and whether you file online or on paper. UCC filings expire after five years unless you file a continuation statement beforehand.
For real estate collateral, record a deed of trust or mortgage at the county recorder’s office where the property is located. Recording fees vary by jurisdiction and commonly fall between $50 and $150 per document. The recorder stamps the document with the date and time of filing, and that timestamp establishes your priority against later-filed liens.
A properly recorded security interest also protects you if the borrower files for bankruptcy. Secured creditors get paid from the collateral before unsecured creditors see anything. Without the filing, you are treated as unsecured, standing in line behind everyone who did the paperwork.
For real estate loans, a lender’s title insurance policy adds another layer of protection. It covers defects in the property’s title that existed before your mortgage was recorded, such as undisclosed liens, forged documents in the chain of title, or boundary disputes. The policy protects only the lender’s loan amount, not the borrower’s equity in the property.11Consumer Financial Protection Bureau. What Is Lenders Title Insurance
Report the Interest to the IRS
Interest income from private lending is taxable, and the IRS expects you to report it on your own return and through information returns sent to borrowers.
If you receive $600 or more in mortgage interest from an individual borrower during the year as part of your trade or business, file Form 1098 with the IRS and provide a copy to the borrower.12Internal Revenue Service. Instructions for Form 1098 The $600 threshold applies separately to each mortgage. For interest you pay out to investors who fund your lending operation, issue Form 1099-INT to anyone who received $10 or more in interest during the year.13Internal Revenue Service. About Form 1099-INT Interest Income
Charging no interest, or a rate below market, doesn’t let you sidestep these rules. Under 26 USC 7872, the IRS treats below-market loans as if the lender received interest at the applicable federal rate, even though no cash actually changed hands. The forgone interest is treated as transferred from lender to borrower (as a gift, compensation, or dividend depending on the relationship) and then retransferred back to the lender as interest income.14Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
Two exceptions soften the rule for smaller loans. Gift loans between individuals where the total outstanding balance stays at or below $10,000 are exempt from the imputed interest rules entirely, provided the money is not used to purchase income-producing assets. For loans between $10,001 and $100,000, the imputed interest is capped at the borrower’s net investment income for the year. If the borrower has no investment income, no interest is imputed.14Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
What to Do When a Borrower Defaults
Your options when payments stop depend on how well you documented and recorded the loan.
For unsecured loans, recovery runs through the court system. You file a lawsuit, obtain a judgment, and then pursue collection through wage garnishment or asset seizure depending on what the borrower has. Court filing fees for debt collection cases vary by jurisdiction and amount at stake, commonly ranging from $15 to $350.
For loans secured by personal property, your UCC filing and security agreement give you the right to repossess the collateral after default. Most states require you to provide the borrower with notice and to sell the repossessed property in a commercially reasonable manner. You can’t dump a $50,000 piece of equipment at auction for $5,000 just to close the file.
Real estate foreclosure carries the heaviest regulatory burden. Federal rules bar starting the foreclosure process until the borrower is more than 120 days delinquent. If the borrower submits a complete loss mitigation application requesting a loan modification or other alternative, the servicer must evaluate the borrower for all available options within 30 days and cannot move forward with foreclosure while that review is pending.15eCFR. 12 CFR 1024.41 – Loss Mitigation Procedures These federal protections apply to mortgage servicers covered by RESPA. If you’re servicing a small portfolio yourself, check whether your state imposes similar waiting periods and notice requirements before starting any foreclosure.
Whatever the collateral, the strength of your original documentation decides how enforcement goes. A clear default provision, a properly recorded lien, and copies of every signed document and funding record are the difference between straightforward collection and a long fight in which the borrower challenges every element of the deal.