To start a private lending business, you form a limited liability company or corporation, obtain an EIN, secure the state lending licenses your loan types require (plus NMLS registration if you’ll touch residential mortgages), post any required surety bond, and put a federal compliance stack in place — disclosures, fair-lending procedures, privacy notices, and an AML program — before you fund the first loan. How heavy that stack is depends almost entirely on what you plan to lend against: commercial deals between businesses are lightly regulated, consumer loans carry a real federal load, and residential mortgages carry the heaviest by far.
Skipping steps here is not a paperwork problem. In some states, making unlicensed consumer loans voids the debt entirely or triggers criminal penalties. So the order below matters.
Form the Entity and Get an EIN
File with your state’s Secretary of State to create a separate legal person that will own the loan portfolio, hold the licenses, and absorb the liability. Most small private lenders choose an LLC for its liability protection and management flexibility; a corporation makes more sense if you plan to bring in outside investors or eventually go public, since it offers a share structure and formal board governance.1NCUA. Business Entity Types Either way, filing means Articles of Organization or Articles of Incorporation and a state filing fee.
Do not operate as a sole proprietor. A business that routinely handles six- and seven-figure debts exposes you to lawsuits and regulatory actions that will reach your personal assets if nothing sits between you and the borrower.
Once the state approves the entity, apply to the IRS for an Employer Identification Number.2Internal Revenue Service. Get an Employer Identification Number You need it to open a dedicated business bank account, file tax returns, and hire anyone. Then keep lending money strictly separate from personal accounts. Commingling funds is the fastest way to lose the liability protection you just paid to set up.
Decide What You’re Actually Lending
Three categories, three regulatory worlds:
- Commercial loans between businesses. The lightest touch. Some states exempt commercial loans above a dollar threshold from usury caps altogether.
- Consumer loans — anything for personal, family, or household purposes. Almost always requires a state license and pulls in the full federal consumer-protection framework.
- Residential mortgage loans. Consumer rules plus a separate mortgage-specific layer covering originator licensing, ability-to-repay, high-cost mortgage thresholds, referral fees, and foreclosure timing.
Pick your lane before you shop for licenses, because everything downstream depends on it.
Get Licensed by Your State
Nearly every state requires a license to make consumer loans. Triggers vary: some states require a license after a single consumer loan made for profit, others set thresholds by loan volume or dollar amount. Check with your state’s financial regulatory agency before originating anything.
Most states also require a surety bond as a condition of licensing. Bond amounts range from around $25,000 for low-volume brokers up to $200,000 or more for high-volume lenders, and often scale with your annual origination volume. If your company violates lending laws, the bonding company pays the borrower’s claim and then comes after you for reimbursement.
Add the NMLS Layer if You’ll Do Mortgages
The federal SAFE Act requires that every individual who takes residential mortgage applications or negotiates loan terms in a commercial context register through the Nationwide Multistate Licensing System and obtain a unique identifier. State-licensed loan originators must also complete at least 20 hours of approved pre-licensing education covering federal law, ethics, and nontraditional lending, pass a written test, submit to a criminal background check, and authorize a credit report.3GovInfo. 12 USC 5103 – License or Registration Required The NMLS platform coordinates this process across participating states.4Nationwide Multistate Licensing System. NMLS Reference Guide: About NMLS
A narrow exemption exists for someone financing the sale of their own residence — carrying back a note when you sell your home generally does not trigger SAFE Act licensing because the transaction lacks the commercial context and habitualness the law requires. That exemption shrinks fast once you’re financing properties you never lived in. No federal “de minimis” number of loans exists below which you’re automatically safe. If lending is your business, assume you need the license.
Know Your Usury Cap Before Setting Rates
Every state sets maximum interest rates for at least some categories of loans, and the caps vary dramatically. Some states set a single ceiling for all consumer loans; others use different limits based on loan type, amount, or whether the borrower is a consumer or a business.
The consequences of exceeding the cap depend on the state and can include forfeiture of all interest on the loan, voiding the loan contract entirely, or civil penalties reaching double or treble damages payable to the borrower. Federal law imposes a comparable structure for national banks: a bank that knowingly charges usurious interest forfeits the entire interest on the debt, and a borrower who already paid can sue to recover twice the interest paid.5Office of the Law Revision Counsel. 12 USC 86 – Usurious Interest; Penalty for Taking; Limitations
Research your state’s specific usury statute and any exemptions that apply to your product before you print a rate sheet. This is one of the few mistakes that can retroactively destroy a loan you thought was valid.
Build the Federal Consumer-Lending Stack
Three federal regimes apply to essentially any private lender making consumer loans, regardless of size.
Truth in Lending (Regulation Z)
Before a borrower signs a closed-end consumer loan, you must disclose the annual percentage rate, the finance charge as a dollar amount, the amount financed, the total of payments, and the full payment schedule.6Consumer Financial Protection Bureau. Regulation Z 1026.18 – Content of Disclosures Variable-rate loans require an explanation of what can trigger a rate increase, any caps, and what a change means for the borrower’s payments. Mortgages add the Loan Estimate and Closing Disclosure forms.
Equal Credit Opportunity Act
The ECOA prohibits discrimination in any aspect of a credit transaction based on race, color, religion, national origin, sex, marital status, age (for applicants old enough to contract), receipt of public assistance income, or the applicant’s exercise of rights under consumer credit protection laws.7Office of the Law Revision Counsel. 15 USC 1691 – Scope of Prohibition It applies to every lender, not just banks. When you deny a loan or offer worse terms, you must give the applicant written adverse-action notice within 30 days, including the specific reasons or instructions for requesting them.8eCFR. 12 CFR Part 202 – Equal Credit Opportunity Act (Regulation B)
Military Lending Act
If any borrower is an active-duty servicemember or a dependent, the MLA caps the all-in Military Annual Percentage Rate at 36%, including not just interest but finance charges, credit insurance premiums, and fees for add-on products.9Office of the Law Revision Counsel. 10 USC 987 – Terms of Consumer Credit Extended to Members and Dependents: Limitations The MLA also bans prepayment penalties and mandatory arbitration clauses on covered loans, and violations can void the loan agreement. You need a reliable way to identify covered borrowers before closing.
The Extra Mortgage Layer
Lending against people’s homes pulls in rules that don’t apply to unsecured consumer loans or commercial deals.
Ability to Repay
Dodd-Frank requires a reasonable, good-faith determination that the borrower can actually repay. You must evaluate at least eight factors — including income, employment, mortgage payment, other simultaneous loans, taxes and insurance, existing debts, debt-to-income or residual income, and credit history — and verify them with reliable third-party records like tax returns, pay stubs, and bank statements rather than the borrower’s word.10Federal Register. Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z)
Getting this wrong is punishing. A borrower can sue to recover all finance charges and fees paid on the loan, plus actual damages and attorney fees. A borrower in foreclosure can raise an ability-to-repay violation as a defense with no time limit, offsetting up to three years of finance charges and fees against the balance owed.10Federal Register. Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z) Most private mortgage lenders underestimate this exposure.
HOEPA High-Cost Thresholds
The Home Ownership and Equity Protection Act tags certain expensive loans as “high-cost mortgages” and bans balloon payments, prepayment penalties, and most fees financed into the loan on those loans. A first-lien mortgage becomes high-cost if its APR exceeds the average prime offer rate by 6.5 percentage points or more. For 2026, a loan is also high-cost if its points and fees exceed 5% of the total loan amount (for loans of $27,592 or more), or exceed the lesser of $1,380 or 8% of the total loan amount (for loans below $27,592).11Federal Register. Truth in Lending (Regulation Z) Annual Threshold Adjustments (Credit Cards, HOEPA, and Qualified Mortgages) Private lenders charging premium rates can drift into HOEPA territory without noticing.
RESPA and Referral Fees
RESPA bars anyone involved in a federally related mortgage loan from paying or accepting referral fees or kickbacks for settlement services. A pattern of payments tied to referral volume is enough evidence; no written agreement is required. Violations carry fines up to $10,000 and up to one year in prison per occurrence.12Office of the Law Revision Counsel. 12 USC 2607 – Prohibition Against Kickbacks and Unearned Fees You can pay employees and agents for services they actually performed, but paying a real estate agent purely for sending you borrowers crosses the line.
The 120-Day Foreclosure Rule
You cannot start foreclosure on a residential mortgage until the borrower is more than 120 days delinquent.13eCFR. 12 CFR 1024.41 – Loss Mitigation Procedures If the borrower submits a complete loss mitigation application before you file the first foreclosure notice, you must evaluate it and respond within 30 days before proceeding. These rules apply to any entity servicing the loan, including you if you keep servicing in-house.
AML Program, Customer Identification, and Privacy Notices
Non-bank residential mortgage lenders and originators must maintain a written anti-money laundering program under FinCEN rules. Four mandatory pieces: internal policies and controls tailored to your money-laundering risks, a designated compliance officer, ongoing staff training, and independent testing to verify the program works.14Financial Crimes Enforcement Network. Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Residential Mortgage Lenders and Originators Senior management must approve the program, and it has to cover brokers or agents working on your behalf.
Alongside the AML program, run a Customer Identification Program on every borrower: collect name, date of birth, address, and a government-issued identification number (typically a Social Security number for U.S. persons) before funding.15eCFR. 31 CFR 1020.220 – Customer Identification Program Requirements for Banks
As a financial institution, you must also give borrowers a Gramm-Leach-Bliley privacy notice describing what personal information you collect, who you share it with, and how they can opt out of sharing with unaffiliated third parties.16Office of the Law Revision Counsel. 15 USC 6802 – Obligations With Respect to Disclosures of Personal Information The opt-out mechanism has to be reasonable, meaning a toll-free number or a check-box form rather than a written letter requirement, and borrowers generally get at least 30 days after the initial notice to exercise it. Sharing with service providers who help process the loan, and disclosures required by law, are exceptions.
Document the Loan and Perfect Your Collateral
Your core loan file needs a promissory note stating principal, interest rate, repayment schedule, late-fee terms, default triggers, and the lender’s remedies on default. Secured loans add a security instrument: a mortgage or deed of trust for real property, a security agreement for personal property. Have these drafted or reviewed by an attorney who knows your state’s lending laws. A poorly worded default clause or an unenforceable late-fee provision can undermine the entire agreement when you need to collect.
For loans secured by personal property, the Uniform Commercial Code governs your claim to the collateral. A security interest becomes enforceable once the borrower has signed a security agreement describing the collateral, you’ve given value by funding the loan, and the borrower has rights in the property.17Cornell Law School. Uniform Commercial Code 9-203 – Attachment and Enforceability of Security Interest To establish priority over other creditors, you also have to perfect the interest, which usually means filing a UCC-1 financing statement with the appropriate state office.18Cornell Law School. Uniform Commercial Code 9-310 – When Filing Required to Perfect Security Interest An unperfected security interest loses to almost anyone else with a claim to the same collateral, including a bankruptcy trustee. Loans secured by real property get recorded as a mortgage or deed of trust with the county recorder’s office under your state’s recording statutes.
Build standardized templates for TILA disclosures, ECOA adverse action notices, and your GLBA privacy notice into the origination workflow from day one. Retrofitting compliance after your first regulatory inquiry is far more expensive than building it in. Keep every loan file for at least five years — RESPA requires that recordkeeping period for settlement-related documents, and many state regulators expect the same or longer.19eCFR. 12 CFR 1024.14 – Prohibition Against Kickbacks and Unearned Fees
If You’re Pooling Investor Money, Add Securities Compliance
Lending your own money keeps securities law out of the picture. The moment you pool capital from outside investors, you’re likely selling securities and need a registration exemption. Most private lending funds use Regulation D.
Rule 506(b) lets you raise an unlimited amount from an unlimited number of accredited investors plus up to 35 non-accredited investors who are financially sophisticated enough to evaluate the investment, but you cannot use general advertising or solicitation to find them.20U.S. Securities and Exchange Commission. Exempt Offerings – Private Placements Rule 506(b) Rule 506(c) removes the advertising restriction but requires that every purchaser be accredited, and you must take reasonable steps to verify accredited status — reviewing tax returns, bank statements, or obtaining written confirmation from a CPA or attorney.21eCFR. 17 CFR 230.506 – Exemption for Limited Offers and Sales
An individual qualifies as accredited with net worth above $1 million excluding a primary residence, or income above $200,000 individually ($300,000 with a spouse or partner) for the prior two years with a reasonable expectation of the same in the current year.22U.S. Securities and Exchange Commission. Accredited Investors Under either rule, file a Form D notice with the SEC within 15 days of the first sale of securities.20U.S. Securities and Exchange Commission. Exempt Offerings – Private Placements Rule 506(b) Missing the filing, or accepting a single non-accredited investor in a 506(c) offering, can blow the exemption, expose you to SEC enforcement, and give every investor a rescission right.
Keeping the Business in Good Standing
Launch is the starting line. Most states require annual reports and franchise taxes to keep the entity in good standing, and letting either lapse can dissolve your liability protection without warning. Lending licenses typically require annual renewal, continuing education for licensed individuals, and periodic reports to state regulators on loan volume, complaints, and financial condition.
At the federal level, keep NMLS registration current if you originate mortgages, update the AML program as your product mix changes, and watch threshold adjustments. The HOEPA and qualified mortgage dollar triggers are recalculated every January. An annual compliance audit, even an informal one, is worth the cost. The lenders who run into serious trouble are rarely the ones who set out to break rules. They’re the ones who set up compliance once, stopped paying attention, and didn’t notice when the rules moved.