Business

Not All Lenders Have to Be Licensed But Most Are

Consumers have a reasonable expectation that the banks, credit unions, and private lenders they borrow from are licensed by their respective states. Most are. But did you know that not all lenders have to be licensed? It is possible to legally lend sizable amounts of money without being licensed. It all boils down to who you lend to and your purpose for lending.

The first line of demarcation between licensed and unlicensed lenders is whether a lender is a public entity. For all intents and purposes, banks and credit unions are public lenders. So are most private lenders that operate as corporations or holding companies. The nature of their business operations requires that they be licensed. Most are licensed at the state level.

Some Private Lenders Are Different

While all banks and credit unions need to be licensed, the same is not true for all private lenders. A private lender who offers you a mortgage must be licensed because mortgages are federally regulated financial instruments. But there are other types of private loans that are not regulated. For example, you could offer to lend your brother $10,000 to make capital improvements to his business. You are free to do so without a license.

Where private lenders are concerned, the first line of demarcation for licensing is whether a loan is open or closed-ended. A closed-ended loan is one with structured terms. There is a specific payoff date as well as a regular schedule for paying down the loan. Though there are exceptions to the rule, most close-ended loans are regulated in some way, shape, or form. Some of them require a license to fund.

Open-ended loans are just the opposite. You loan your brother money and expect that he will pay you back gradually over the course of 12-16 months. But you have no formal arrangement, no scheduled payment dates, and no final payoff date.

Loan Position Can Make a Difference

Yet another line of demarcation among private loans is loan position. Strangely enough, many types of second and third position loans are not regulated and do not require a license to offer. The question is this: what is a second or third position loan?

When a bank or credit union loans money to buy something like a house or car, they file a lien against the property being acquired. That lien protects the lender’s interests should the borrower default. It gives the lender the right to collect from the proceeds of the sale of said property.

What if there are multiple liens on the same property? That is where loan position comes in. Let us say you already have a mortgage for your house. Your bank is in the first position. If you obtain a new loan and use the equity in your home as collateral, the bank that offers the loan takes the second position. A third form of credit against your house would be in the third position.

Licensed is the Safe Way to Go

Even though not all lenders have to be licensed, working with a licensed lender is the safe way to go. That is true with standard financing and hard money alike. And yes, as explained by Salt Lake City’s Actium Partners, hard money lenders are licensed by the states in which they do business.

Banks, credit unions, and most private lenders are licensed. But that is not true of all lenders. Some private lenders can lend without a license due to the types of loans they make and to whom they make them.