Do hard money lenders need to be licensed?

If your business provides hard money loans, it may be subject to licensing and other laws.

What is a “hard money” lender?

A hard money lender typically provides short-term loans to individuals looking to finance residential or commercial transactions. The funds often enable the borrower to raise money quickly, though at a higher cost than with a traditional lender, until the borrower can acquire conventional financing for the property.

Lenders of hard money tend to be financing companies, individual investors, and investment groups.

What is a “hard money” loan?

A “hard money loan” is a type of loan that is backed by a hard asset, usually real property. Unlike traditional loans that rely on the creditworthiness of the borrower, hard money lenders consider the merits of the investment and use that as collateral. 

The interest rate on a hard money loan is generally higher than on a traditional loan. And because the hard money loan relies on collateral rather than the creditworthiness of the borrower, the investment period is shorter. The terms of these loans are also flexible and negotiated between the lender and borrower.

Real property is not the only form of collateral for a hard money loan. Other hard assets can be secured, such as vehicles, machinery, equipment, and even precious metals.

Hard money lending rules and regulations

Unlike the compliance landscape for traditional mortgage lenders, the rules and regulations governing hard money lending are less well-defined.

Because these loans are often made privately between investor and borrower, many lenders assume that these loans are exempt from federal and state laws and regulations. This is problematic since regulators are increasingly turning a close eye to these activities.

To determine what laws apply to your investment venture, find out if the loan is subject to the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). Both impose significant compliance obligations on mortgage lenders. You could face stiff penalties if you mistakenly categorize the loan as exempt. States have their own rules for hard money lenders, including usury laws that limit interest rates, and licensing and disclosure requirements. Lending laws and regulations can vary significantly by state.

Note: It’s important that you have the right policies and procedures in place and correctly document the loan’s purpose and applicable regulatory requirements.

What are the licensing requirements for hard money lenders?

Certain states require that hard money lenders obtain a license to operate. The licensing agency is often the Department of Banking and Finance, Financial Services, or Real Estate. In some states, to obtain a license to engage in hard money lending, one individual associated with the loan must have a real estate broker’s license. Additional licensing requirements may be needed on a state-by-state basis.

Since requirements vary by state, research the licensing requirements wherever you operate.

When can you lend money without a license?

The answer depends on the state in which you make the hard loan. As a private lender, you must comply with each state’s usury and banking laws, and the rates you can charge are regulated. Furthermore, some states will not let you lend a certain amount without a license.

Becoming a hard money lender: Pros and cons

One of the big motivators for becoming a hard money lender is that it enables firms, individuals, and investors to participate in the real estate market, and make potential gains, without purchasing property. Hard money lenders can also expect a good rate of return compared to bank investments or bonds.

However, there are drawbacks. A big risk is that the borrower fails to make repayments on the loan. While you can seize the real estate asset pledged as collateral, you will still have to deal with the hassle of filing a lawsuit against the borrower and an uncertain outcome.

Becoming a hard money lender also requires significant capital. You need a lot of cash to make the loan and ensure you have sufficient cash flow to cover associated expenses.

Hard money lending is best suited to individuals with a knowledge of real estate and investment strategies, and a high degree of risk tolerance. However, that risk can be minimized by proper evaluation of the borrower and the property value.

How to become a hard money lender

If you are interested in becoming a hard money lender, you will need to follow a few getting started basics:

• Determine your business structure (LLC, S-corporation, corporation, etc.)
• Establish your business and register it with the appropriate authorities
• Understand state-specific requirements before lending in a new state
• Obtain the right tax registrations and licenses and permits
• Determine your preferred lending focus
• Network to find potential investments or use a peer-to-peer lending platform

Tips on running a hard money lending business

To be successful, bear these tips in mind:

• Have a passion and expertise for real estate. You must also stay informed of market conditions, investment strategies, and anything else that impacts the real estate market.
• Find a good lawyer. Lending laws and contracts are complex, so it’s important to work with an experienced real estate attorney.
• Ensure proper documentation. As a hard money lender, be sure to document everything you agree to with a borrower. Work with your lawyer to develop watertight contracts and terms.
• Have a clear understanding of hard money lending laws. Usury and licensing laws vary by state, so find out what’s applicable and be sure to maintain and renew your licenses as required. Licensing also adds credibility to your venture. Consider registering with the Nationwide Multistate Licensing System and Registry (NMLS). NMLS maintains an online registry of licensed mortgage, consumer finance, debt, and money services companies and individuals. Registration provides legitimacy to a business. Licensing through NMLS may also be a requirement for certain loans. In many cases, these involve residential property-secured loans and consumer-purpose loans. 

CT Corporation can help

Outsourcing business registration and license research, applications, management, and renewals can help you take the pressure off internal resources. By working with a full-service management provider who specializes in the efficient processing of hard money lender licenses and general business licenses, you can free up your time to focus on starting and growing your business while ensuring you keep up with changing compliance requirements.

For more information on CT Corporation services and how we can streamline your business licensing, contact a CT Corporation business license specialist.