Regulatory Compliance and Licensing for Private Lending

Most states require a mortgage lending license for anyone making more than a certain number of loans per year (typically 1-5). Some states exempt individual lenders making loans from their own funds for commercial or investment purposes. The NMLS (Nationwide Multistate Licensing System) is the standard licensing platform. Key exemptions include business-purpose loans (many states), loans to entities rather than individuals (some states), and single-state operations below volume thresholds. However, exemptions are state-specific and change frequently—legal counsel is essential before beginning a private lending operation.

Usury laws cap the maximum interest rate that can be charged on a loan. These vary dramatically by state: some states have no usury limits for commercial loans, while others cap rates at 10-18% with specific exemptions. Common exemptions include commercial-purpose loans, loans to LLCs or corporations, and loans above a certain dollar threshold. Violating usury laws can result in severe penalties including loan voiding, forfeiture of all interest, treble damages, and criminal prosecution in some jurisdictions. Hard money lenders must structure loans within their state's usury framework or qualify for an applicable exemption.

The Dodd-Frank Act's Ability-to-Repay (ATR) rule and Qualified Mortgage (QM) standards apply to consumer-purpose residential loans but generally exempt business-purpose loans. For private lenders, the key distinction is loan purpose: a loan to acquire or renovate a property that will be held as an investment (business purpose) is exempt from ATR/QM. A loan to purchase or refinance a primary residence is not exempt, regardless of the lender type. Documenting the business purpose at origination—through a business purpose affidavit signed by the borrower—is essential for maintaining the exemption.