Private lending offers significant opportunities for investors to finance real estate projects, small businesses, and other ventures outside traditional banking channels. However, private lenders must navigate a complex web of state and federal licensing laws to operate legally and avoid costly penalties.
At Geraci LLP, we specialize in advising private lenders nationwide. This article outlines the fundamental licensing requirements private lenders should know to stay compliant and protect their investments.
What Is a Private Lending License?
A private lending license is a legal authorization—often issued by state regulatory agencies—that allows individuals or entities to originate, service, or manage loans. Unlike traditional banks, private lenders often operate under different regulatory standards but may still be subject to licensing requirements depending on the state and the type of lending.
Why Licensing Matters for Private Lenders
Operating without the required license can lead to:
- Civil penalties and fines
- Criminal prosecution in some jurisdictions
- Loan agreements being declared void or unenforceable
- Increased scrutiny from regulators and investors
- Damage to reputation and business viability
Ensuring proper licensing protects private lenders, their borrowers, and their investors.
Federal vs. State Licensing Requirements
- Federal Law: Private lenders are generally not subject to federal licensing but must comply with federal lending laws such as the Truth in Lending Act (TILA), Equal Credit Opportunity Act (ECOA), and anti-money laundering regulations.
- State Law: Most licensing requirements come from state laws, which vary widely. States regulate who can originate loans, the types of loans permitted, and licensing for loan servicing or collection.
Common Licensing Requirements by State
Here is a summary of licensing rules affecting private lenders in key states:
California
- Requires a California Finance Lenders License (CFLL) for many private lenders under the California Department of Financial Protection and Innovation (DFPI).
- The CFLL covers activities such as loan origination, servicing, and brokering.
- Applicants must meet net worth requirements, provide detailed disclosures, and undergo background checks.
New York
- Private lenders often must obtain a Mortgage Banker License or a Mortgage Broker License from the New York State Department of Financial Services (NYDFS).
- Strict regulations on loan servicing and advertising also apply.
Texas
- The Texas Finance Code governs private lending licensing.
- Certain types of lenders may need a Mortgage Banker License or must comply with Texas lending laws including interest rate caps.
Florida
- Requires a Consumer Finance License for many private lending activities through the Florida Office of Financial Regulation (OFR).
- Licensees must maintain minimum financial standards and comply with consumer protection laws.
Other States
- Licensing requirements vary significantly. Some states like Arizona and Nevada have less burdensome licensing but still regulate lending activities to protect consumers.
- States such as Illinois and Massachusetts enforce strict licensing, registration, and reporting obligations.
Exemptions and Special Cases
Certain private lenders may qualify for exemptions, such as:
- Lending to a limited number of qualified investors
- Loans secured by real property for business or investment purposes
- Loans made without the use of public advertising or solicitation
However, exemptions are narrow and must be carefully evaluated with legal counsel.
How Geraci LLP Supports Private Lenders with Licensing
Navigating licensing requirements is challenging due to varying state laws and regulatory complexity. Geraci LLP assists private lenders by:
- Assessing your lending activities to determine licensing needs
- Preparing and submitting license applications and renewals
- Advising on compliance with federal and state lending laws
- Drafting and reviewing loan documents to ensure enforceability
- Handling regulatory audits or enforcement actions
Our expertise helps you maintain full compliance and build a sustainable lending business.
Don’t Overlook Licensing Obligations
Licensing is a foundational aspect of legally operating as a private lender. Understanding and complying with applicable laws protects your business, your borrowers, and your investors from significant risks.
If you’re considering entering the private lending market or expanding your lending operations, consult with Geraci LLP. Our experienced attorneys provide the guidance and legal support necessary to keep your lending activities fully compliant.
