Private Money Lending--Requests Made by my Bank

Indianapolis, Indiana
Private Lending & Conventional Mortgage Advice
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Private Money Lending--Requests Made by my Bank

John Jacobs
Indianapolis, IN · Member since 2012 · 74 posts · 22 votes

Hello BP,

I have been a very active private money lender since 2014. I have a single member LLC (me as the sole member) that lends only to real estate investors. That is I do not lend to owner occupants. I only lend to businesses (i.e. LLCs and Incs.) who are renovating the property for sale or to keep as a buy and hold rental. I only lend in states in which I do not have to have a license in order to lend. My lending entity (i.e. my LLC) has a bank account at a national bank. I have been making loans out of this bank account since 2014. For all loans, amongst other things, I have a recorded Mortgage/Deed of Trust, Promissory Note, and Personal Guarantee in place.

Yesterday, out of nowhere, my bank reached out to me and asked me if my business was regulated. I said no. I explained to them the nature of my business. The bank is now requiring the following two things from me: (1) That there be an Anti-Money Laundering (AML) Program in place. (2) That I have a Third Party Audit conducted of my "company" which as stated is a single member LLC.

Does anyone have any experience with the above requests?  I am considering moving my money to another bank.  On the other hand I might consider complying but frankly I don't know how to get the two aforementioned requests accomplished.

Thoughts?

JJ

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
2y

banks have to do patriot act.  I have never heard of this. 

I would simply get away from any large bank and go to a small local community bank that will cherish your deposit relationship..

I mean I have also had up to 30 million in Lines of credit for HML ing and they never once asked for any of this. Although of course to get the LOC's its full doc financials etc.

But for you lending your own dough this is not something I would even remotely consider personally. 

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  • Shafi Noss
    Lender · Nationwide · Member since 2018 · 571 posts · 310 votes
    2y
    I have not run into this but I know some banks dislike having accounts that are for lending and your bank may be developing that distaste. It sounds like they are primarily concerned about AML though. Maybe you could ask them for clarification on how to comply and evaluate how effortful it would be vs. switching banks?
    0Reply
  • Doug SmithPro Member
    Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
    2y

    I've always found it ironic that banks think that businesses that lend money are risky. I thought it was incredibly hypocritical when I worked for a bank and got those requests from "risk management". The bank does have programs known as CIP, or "Know Your Customer" rules and they are heavily regulated to stop money laundering. The AML request is pretty legit. The requirement that you're audited is somewhat suspect. I would start the process of moving. If they have asked you for the above...trust me...they're at some point going to shut you down. I was a banker for many years and had to cope with this from that side many times myself. 

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    2y

    banks have to do patriot act.  I have never heard of this. 

    I would simply get away from any large bank and go to a small local community bank that will cherish your deposit relationship..

    I mean I have also had up to 30 million in Lines of credit for HML ing and they never once asked for any of this. Although of course to get the LOC's its full doc financials etc.

    But for you lending your own dough this is not something I would even remotely consider personally. 

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  • John Jacobs
    OP
    Indianapolis, IN · Member since 2012 · 74 posts · 22 votes
    2y

    @Shafi Noss

    0Reply
  • John Jacobs
    OP
    Indianapolis, IN · Member since 2012 · 74 posts · 22 votes
    2y

    @Shafi Noss   Thank You!

    0Reply
  • John Jacobs
    OP
    Indianapolis, IN · Member since 2012 · 74 posts · 22 votes
    2y

    @Doug Smith   Thank You!

    0Reply
  • John Jacobs
    OP
    Indianapolis, IN · Member since 2012 · 74 posts · 22 votes
    2y

    @Jay Hinrichs   Thank You!

    0Reply
  • Rob K.
    Encinitas, CA · Member since 2011 · 192 posts · 252 votes
    2y

    You might consider opening up an organizational brokerage account with wiring capabilities. I have one I use for funding hard money at Schwab. Another advantage is you can keep cash in higher yield money markets or t-bills while you are in idle cash.

    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    2y
    Quote from @Rob K.:

    You might consider opening up an organizational brokerage account with wiring capabilities. I have one I use for funding hard money at Schwab. Another advantage is you can keep cash in higher yield money markets or t-bills while you are in idle cash.


    a lot of my clients do the exact same thing.. when i have a deal for them to fund they wire right out of their Fidelity account etc.
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  • Jacob Sherman
    12 Penns Trail Suite 138 Newtown, PA 18940 · Member since 2023 · 1k+ posts · 319 votes
    2y

    Yes definitely . That would be the proper way of doing it 

    0Reply
  • John Jacobs
    OP
    Indianapolis, IN · Member since 2012 · 74 posts · 22 votes
    2y

    @Rob K.   Thank You!

    0Reply
  • John Jacobs
    OP
    Indianapolis, IN · Member since 2012 · 74 posts · 22 votes
    2y

    @Jay Hinrichs  Thanks again

    0Reply
  • John Jacobs
    OP
    Indianapolis, IN · Member since 2012 · 74 posts · 22 votes
    2y

    @Jacob Sherman  Thank You!

    0Reply
  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    2y

    Banks will not accept a business they think is operating illegally or fraudulently, @John Jacobs. The problem in your case is that banks understand conventional lending and the associated restrictions but have no idea what a private money loan is and how they differ. Someone at your bank, who likely never loaned a dime in his life, has decided on the restrictions they think you need to meet to comply with regulations important to him or her.

    What might be most convincing is a letter from your lending attorney explaining that he’s been representing you in all lending matters for 14 years (or the last x years) to ensure you comply with all state and federal rules and requirements. This could give the bank what they need to show their regulators if asked. They really don’t care about you.

    Alternatively, if the handwriting is not already on the wall, you can try to placate them piecemeal, but this may never end.

    We have an Anti-Money Laundering Declaration in our loan documents and so should you. Your lending attorney should easily be able to help with this. Send the bank a copy of this document, required of all borrowers, to show them how you comply. Don’t mention any sort of “program,” but if they ask, this document is it.

    I hope you use a CPA to do your taxes. If not, you should. I would tell the bank, “We use a licensed CPA to review our books each year, to remain in compliance, and to generate our taxes. He performs all appropriate financial reviews. We are not subject to a third-party audit.”

    There’s no telling what more the bank will ask for, so I’d be searching for another bank just in case.  Which bank is this?

    0Reply
  • John Jacobs
    OP
    Indianapolis, IN · Member since 2012 · 74 posts · 22 votes
    2y

    @Jeff S.  Thank You!

    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y
    Quote from @John Jacobs:

    Hello BP,

    I have been a very active private money lender since 2014. I have a single member LLC (me as the sole member) that lends only to real estate investors. That is I do not lend to owner occupants. I only lend to businesses (i.e. LLCs and Incs.) who are renovating the property for sale or to keep as a buy and hold rental. I only lend in states in which I do not have to have a license in order to lend. My lending entity (i.e. my LLC) has a bank account at a national bank. I have been making loans out of this bank account since 2014. For all loans, amongst other things, I have a recorded Mortgage/Deed of Trust, Promissory Note, and Personal Guarantee in place.

    Yesterday, out of nowhere, my bank reached out to me and asked me if my business was regulated. I said no. I explained to them the nature of my business. The bank is now requiring the following two things from me: (1) That there be an Anti-Money Laundering (AML) Program in place. (2) That I have a Third Party Audit conducted of my "company" which as stated is a single member LLC.

    Does anyone have any experience with the above requests?  I am considering moving my money to another bank.  On the other hand I might consider complying but frankly I don't know how to get the two aforementioned requests accomplished.

    Thoughts?

    JJ


     I had PNC cancel our accounts one day because they said we were a money transmittor and that was not allowed. I am with Chase and we are regulated as well as have a AML program in place. Banks are doing this for federal compliance so most likely every large bank is going to eventually ask for this if you have large money going in and out the door. Plenty of companies can do a AML check and you can make that cost as part of your origination process.

    As a FYI, we had someone fail a AML / KYC check because they were a former drug runner in a cartel.

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  • John Jacobs
    OP
    Indianapolis, IN · Member since 2012 · 74 posts · 22 votes
    2y

    @Chris Seveney   Thank You!

    0Reply
  • Beth JohnsonPro Member
    Lender · Renton, WA · Member since 2018 · 227 posts · 216 votes
    2y

    I've been turned down by national banks when they confuse our business with title lending or payday loans. As other PML business owners here have commented, this isn't uncommon in our industry but you can certainly find local or regional banks that would be easier to do business with and not require an audit - haven't heard of this before. We use Key Bank for our origination business and US Bank for our debt fund accounts, which allows us to sweep into a HIYMM account to reduce drag, which we weren't able to do with Chase. 

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  • John Jacobs
    OP
    Indianapolis, IN · Member since 2012 · 74 posts · 22 votes
    2y

    @Beth Johnson   Thank You :-)

    0Reply
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