Money lending business - What do you do?

[Jason Turo]

Have you started a hard money lending business or lent private money?  How did you structure your business to deal with filing with the SEC and complying with Dodd-Frank?  Start up costs and things to consider?

[Jeff S.]

The first thing we did, @Jason Turo , was to find the worst real estate attorney on the face of the earth who assured us the note and deed of trust we obtained from our first borrower was sound. (Note to self: Never take unvetted legal documents from a borrower). It was not until we originated a bunch of loans ourselves that we learned what we did was usurious and illegal.

After rewriting all of our notes by lowering the interest rate and points to bring them into compliance (to the joy of those borrowers), we found a lending and securities attorney who set us straight on our process and our paperwork. (Another note to self: Lending attorneys are not real estate attorneys).

We also found a great broker to do our originations legally and he's been with us ever since. You might or might not need a broker in OK, and I'm sure usury, licensing, and other restrictions are different in CA. Before you do anything, ask a few hard money lenders in your area which lending lawyer they use. I bet you only hear the same few names. Choose one and spend an hour with him or her to understand the basics. Don't loan a dime until you understand the law and loan process in your state.

We only loan our own money and do not take on investors or pool funds from outside sources. Nor do we sell or hypothecate our notes. This avoids compliance with security issues or any interaction with the SEC and keeps startup costs to a minimum. Our initial costs were mostly for legal consultations and documentation. Now, our greatest cost is taking existing and potential borrowers to lunch.  I'm not kidding.

We only make loans that are NOT for "personal, family, or household use." That is, all of our loans are for a business purpose only, not for a consumer purpose, and therefore they avoid TILA, RESPA, TRID, Dodd-Frank, etc., etc., etc. It's important you understand this and also recognize that it has almost nothing to do with owner occupancy -- easily the most misunderstood concept in private lending.

We only loan locally and will never loan on a property we've never seen or to a borrower we haven't previously gotten to know even just a little.

A few of us shared our processes in detail in this thread. It's a bit old, but still 95% current in our case.  Good luck, Jason.

Jeff

Edited to add:  Looks like I just joined the 1000 post club!!