To become a private lender, you decide whether you’ll make consumer loans or business-purpose loans, obtain the federal registration or state license that your loan type requires, draft compliant loan documents, and operate inside the consumer-protection, usury, anti-money-laundering, and tax rules that apply to your category. The consumer-versus-business distinction is the first decision you make, because it determines how heavy every other obligation on this list will be.
Start by Choosing Consumer or Business-Purpose Lending
Under Regulation Z, consumer credit means credit extended to a natural person primarily for personal, family, or household purposes. Business, commercial, agricultural, and organizational loans are exempt from Regulation Z’s disclosure and underwriting requirements entirely.1Consumer Financial Protection Bureau. Comment for 1026.3 – Exempt Transactions
That one line of regulation shapes the rest of your business. Make consumer mortgage loans and you take on the full Truth in Lending Act, the ability-to-repay rule, the right of rescission on certain transactions, and RESPA’s servicing requirements. Fund only business-purpose loans — fix-and-flip projects, commercial acquisitions, bridge loans to LLCs — and most of those obligations fall away. This is why most private lenders in the hard-money and bridge space deliberately lend only for business purposes. Whichever side you pick, you have to determine the primary purpose of each loan at origination and document that determination in the file.
Get the Right Licenses Before You Originate
Federal Registration Under the SAFE Act
The Secure and Fair Enforcement for Mortgage Licensing Act requires anyone who originates residential mortgage loans to either register or obtain a state license through the Nationwide Multistate Licensing System.2Office of the Law Revision Counsel. 12 USC Ch. 51 – Secure and Fair Enforcement for Mortgage Licensing Employees of federally regulated banks and credit unions register through their institutions. Private individuals and non-bank lending companies must get a state-issued mortgage loan originator license.
Expect to submit fingerprints for an FBI background check, authorize a credit report, and disclose your personal and financial history. A felony conviction within the past seven years is disqualifying, and any conviction involving fraud or dishonesty disqualifies you with no time limit — a money-laundering conviction from 20 years ago still bars you.3Consumer Financial Protection Bureau. 12 CFR 1008.105 – Minimum Loan Originator License Requirements You also have to pass a written test and complete annual continuing education.
Originating residential mortgage loans without proper registration or licensing can bring penalties of up to $25,000 per violation.4Office of the Law Revision Counsel. 12 USC 5113 – Enforcement by the Bureau Unlicensed loan contracts are often unenforceable in court, so if a borrower defaults you may have no legal path to recover your money.
State Licensing
Federal law is the floor. Most states layer on their own licensing for consumer and commercial lending, typically requiring you to maintain a minimum net worth, post a surety bond, and file detailed financial statements with a state banking or financial services department. Bond amounts and net worth thresholds vary widely by state and license type, and the bond itself functions as a financial guarantee that can be drawn upon to compensate harmed borrowers.
Many states require a license for commercial lending too once activity passes a volume threshold. The application process looks much like the federal one: fingerprints, background checks, personal financial disclosures, and sometimes additional pre-licensing education hours. Because operating across state lines means complying with each state’s rules separately, lenders typically work with a licensing attorney to map out which licenses the business model actually triggers.
Set Your Interest Rate Inside Legal Limits
Every state caps interest rates on at least some categories of loans, and charging above the limit makes a loan usurious. Penalties vary. Some states void the entire contract, some strip the lender of all interest earned, and a few let the borrower recover double the interest paid. Statutory caps across the country run roughly from 5% to 45% depending on the state and the loan type, and many states tie the cap to a floating index or allow any rate agreed to in writing, so the effective ceiling depends on your structure and jurisdiction.
One federal cap applies everywhere. The Military Lending Act prohibits any creditor from charging an active-duty servicemember or their dependents an annual percentage rate above 36%, inclusive of fees and other charges.5Office of the Law Revision Counsel. 10 USC 987 – Terms of Consumer Credit Extended to Members and Dependents: Limitations If any of your borrowers could be covered, you need a reliable way to verify military status before closing.
You cannot simply pick a rate that looks profitable. Research the usury ceiling in every state you lend in and confirm your rate, combined with fees, stays under it.
Draft the Loan Documents
Every loan starts with a promissory note — the borrower’s written promise to repay a specific amount under defined terms. The note states the principal, the interest rate, the repayment schedule, and the default consequences. Late fees should be stated plainly; most states cap them, often between 4% and 6% of the overdue payment, with enough variation that you should check your state before setting a number.
If the loan is secured by real estate, you also need a security instrument. States use either a mortgage or a deed of trust, and the difference shows up at foreclosure: mortgages generally require a judicial foreclosure, while deeds of trust allow a faster nonjudicial foreclosure through a trustee. State law and local practice dictate which instrument you use.
For consumer-purpose loans, the Truth in Lending Act requires written disclosures before consummation, covering the annual percentage rate, the total finance charge, the total of payments, and the number and timing of each scheduled payment.6Office of the Law Revision Counsel. 15 USC 1638 – Transactions Other Than Under an Open End Credit Plan The point is to let the borrower compare your loan to other offers on a standardized basis.7Office of the Law Revision Counsel. 15 USC 1601 – Congressional Findings and Declaration of Purpose Incomplete or inaccurate disclosures can expose you to statutory damages and give the borrower grounds to rescind. Business-purpose loans are exempt from TILA disclosures, but a well-drafted note that spells out every material term still protects both sides.
Underwrite the Borrower Lawfully
Ability to Repay on Consumer Mortgages
If you make consumer mortgage loans secured by a dwelling, federal law prohibits closing unless you have made a reasonable, good-faith determination that the borrower can actually repay. The rule requires you to consider at least eight factors — current or expected income or assets other than the collateral, employment status if you rely on employment income, the monthly payment on this loan, the payment on any simultaneous loan you know about, mortgage-related obligations like taxes and insurance, current debts and alimony and child support, debt-to-income ratio or residual income, and credit history — and you must verify each with reasonably reliable third-party records such as tax returns, pay stubs, or credit reports.8eCFR. 12 CFR 1026.43 – Minimum Standards for Transactions Secured by a Dwelling
The CFPB replaced the former 43% hard debt-to-income ceiling for qualified mortgage status with a price-based approach, so DTI is now a judgment call rather than a bright line, though many private lenders still treat 43% to 50% as a practical benchmark. Business-purpose loans are exempt from the ability-to-repay rule entirely.
Fair Lending Applies to Every Loan
Whatever you lend for, credit decisions must rest on objective financial data. The Equal Credit Opportunity Act makes it illegal to discriminate against any applicant based on race, color, religion, national origin, sex, marital status, or age.9Office of the Law Revision Counsel. 15 USC 1691 – Scope of Prohibition Violations expose you to actual damages, punitive damages, and attorney’s fees. Age may factor into a credit-scoring model only if the model is statistically sound and does not penalize elderly applicants.
A standard underwriting file pulls a credit report, a professional appraisal if real estate secures the loan, and a title search to confirm the property is free of undisclosed liens. Income verification through W-2s or tax returns is routine for consumer loans and common on business loans too. Document every decision; those records defend you in regulatory audits and in any discrimination claim brought by a denied applicant.
Build the Compliance Infrastructure
Anti-Money Laundering Program
FinCEN classifies non-bank residential mortgage lenders and originators as “loan or finance companies” and requires each one to maintain a written anti-money laundering program with risk-based policies for identifying customers, monitoring for suspicious activity, and filing suspicious activity reports when warranted.10FinCEN. Final Rule – Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Residential Mortgage Lenders and Originators At a minimum you need identity verification procedures, staff training, a designated compliance officer, and independent testing of the program.
Borrower Data Protection
Collecting Social Security numbers, credit reports, bank statements, or tax returns makes you a handler of nonpublic personal information. The Gramm-Leach-Bliley Act requires every financial institution to protect the security and confidentiality of customer records, guard against anticipated threats, and prevent unauthorized access.11Office of the Law Revision Counsel. 15 USC 6801 – Protection of Nonpublic Personal Information The FTC’s Safeguards Rule puts specifics behind that: designate a qualified person to oversee information security, run risk assessments, encrypt sensitive data, implement multi-factor authentication, train personnel, and keep an incident response plan.12eCFR. 16 CFR Part 314 – Standards for Safeguarding Customer Information Any entity significantly engaged in extending credit is a financial institution under these rules.
Fund, Close, and Record the Loan
For consumer credit transactions secured by the borrower’s principal home, TILA gives the borrower three business days after closing to cancel. During that cooling-off period you cannot disburse loan proceeds other than into escrow.13Office of the Law Revision Counsel. 15 USC 1635 – Right of Rescission as to Certain Transactions Rescission does not apply to purchase-money mortgages used to buy or build the home, refinances with no new money advanced by the same creditor, or transactions where a state agency is the lender.14Consumer Financial Protection Bureau. 12 CFR 1026.23 – Right of Rescission In practical terms, home equity loans and cash-out refinances trigger the wait; a first mortgage to purchase the home does not. Failing to provide proper rescission disclosures extends the borrower’s right to cancel to three years, which can be ruinous once you have already funded.
Once rescission expires or does not apply, you disburse by wire or cashier’s check to the borrower or an escrow agent, with escrow instructions ensuring closing costs and existing liens are paid before the borrower receives any balance. Business-purpose loans without a rescission period often fund the same day the documents are signed.
Record your mortgage or deed of trust with the county recorder’s office. That public filing establishes your priority over later creditors and puts the world on notice of your lien. Recording fees vary by jurisdiction, and timing matters: a delay can let another creditor record first and jump ahead of you in priority, which in a foreclosure is the difference between recovering your principal and losing it. If your consumer mortgage loans fall within RESPA’s scope, you also have to follow its servicing rules for the life of the loan, including prompt crediting of payments and timely responses to borrower inquiries.15Consumer Financial Protection Bureau. 12 CFR 1024.5 – Coverage of RESPA
Handle Tax Reporting
Receiving $10 or more in interest from a borrower during the calendar year triggers a Form 1099-INT filing with the IRS and a copy to the borrower.16Internal Revenue Service. About Form 1099-INT, Interest Income The threshold is low enough that essentially any active loan hits it.
Receiving $600 or more in mortgage interest on a single loan in the course of your trade or business adds a Form 1098 filing and a copy to the borrower so they can claim their mortgage interest deduction. The $600 threshold applies loan by loan, not across your portfolio.17Internal Revenue Service. Instructions for Form 1098 If lending is not part of your trade or business — for example, you are carrying a note on a former personal residence you sold — the 1098 requirement does not apply. All interest income is still taxable to you regardless of whether a reporting threshold is met, and you report it on your own return.