Question About Lending Laws Regarding Private Loans

[Mindy Jensen]

So let's say I have $X to lend. I've been happily lending it out at 10% with no points. (And no, I'm not looking for new borrowers at this time.)

If a friend has his own lending business, where he is lending at 12% + 4 points, that would obviously be more. Could I lend him my money to lend out at high rates? Does he have to be licensed or since he is also doing private loans, could he just use my cash to fund his business, and I am just lending him money, and no one needs to be licensed?

Thank you. @Jay Hinrichs 

[Jeff S.]

Originally posted by @Mindy Jensen:

Could I lend him my money to lend out at high rates? ... could he just use my cash to fund his business, and I am just lending him money.

I can't tell from your question, Mindy, who's loaning to whom or what you're funding.

If your friend ran an auto repair business, could you loan him money as working capital for him to use as he wishes? Of course. This could be an unsecured personal loan or you could secure it with a lien against his home, car, art collection, purchase orders, etc.

You could also loan money to your friend's lending business for any use and he could sign for it as an officer of his company. Again, this could be an unsecured personal loan or you could lien any business assets, including real estate or his notes.

You would hold a note as the lender and the appropriate lien, which would be a mortgage or deed-of-trust if the loan was secured by real estate. As a secured lender, depending upon the asset under lien, it's you who might have to be licensed and that would be state specific. Unsecured personal loans, probably not.

In both cases, your friend or his business could use the money as he or it wishes. Loans would be in the name of he or his company as the lender and he/it would hold the note. As a lender, he would have to follow all state licensing requirement and these would have nothing to do with you. You could loan to him at 10% and he could loan the money to someone else at 14% and keep the spread plus any points.  Isn't he appropriately licensed already?

On the other hand, if your friend were using your money to loan out and putting your name on the note as the lender, then you are not loaning him money -- he's brokering. I'm not aware of any state where brokering (arranging a loan between two parties) does not require a license. Same if he's loaning money in his company's name, keeping a spread, and assigning the loan to you at a lower rate. In this case, he's selling you a previously originated (hopefully performing) note.

As you can see, there are a lot of ways to do this, Mindy.  I can't tell from what you wrote, which applies to you.