Amused by post #1 and others! :))
Definitions do exist in the regulatory world of finance, a private lender is based on the exemptions in the Securities Act and banking regulations as to the type of lending that may be accomplished without regulatory oversight or compliance with institutional requirements.
A private lender must conduct their lending activities within the scope of the exemptions, if they do not then they default to another lending status, usually to a broker or a lender lending to the public.
All of the exemptions must be met to identify a private lending status or activity;
Personally Known:
This includes family members, persons known by the lender through past social or business dealings and the past interaction of the parties must be significant, not just someone you met last week at an investor club meeting. Business partners are exempt lender/borrowers or where you have a small enterprise (usually 3 or fewer parties) with a common business goal.
This can be tricky for a lender when they create an obligation to a business entity or Trust, as all natural persons involved should be known, however a private lender may lend to one other party who is unknown to them when the know party introduces that unknown party and those parties have a relationship.
Example: John is a long time friend and he has done work for me. He asks me to lend him $100,000 to he and his wife who I never met. This is fine to do. Or, if John had a deal with Bob who I never met, so long as John and Bob are using my money for a common cause between them, I can lend as a private lender.
Now, if John wanted me to loan the money to his hunting club with 30 member, this is not a private lending arrangement.
Your Own Money:
Funds to be loaned must be from the lender's own personal funds. Funds may not be borrowed from any source to fund the loan! A slight cloud to this is if I refinanced my home, got cash out, then later used my money to lend I could do so. Note that the money was created from my personal assets, it went to me , was deposited, then I funded a loan. Loan funds were not leveraged by debt created to fund my new loan! (This is a brokerage activity.)
Example: I have a securities portfolio, a little over $2.5 M, I want to fund a few loans to people I have done business with in the past. I can sell some stock and obtain cash to loan out. I can not borrow "against the box" or my account to fund my loans as that would be borrowed funds leveraged for lending activities.
Another source which is not allowed as a private lender is "hypothecation" using one note that was funded as collateral for a new loan to fund another loan, again this is a banking and brokerage activity.
Source of funds is an important aspect in meeting exemptions from financial compliance! Borrowing money to fund lending operations becomes a regulated lending activity regardless of how much is borrowed or how big or small a loan might be.
Your own money pretty much means your cash sitting in your personal account. Yes, you could take capital, owner's equity from a business account but I'd suggest you wash it through your personal account because of the next requirement.
A Natural Person:
The lender must be a natural person or their Trust. Any business entity that creates loans is not a private lender, not saying a business can't make a loan but it's not a private lending activity exempt from regulations which may apply.
Income & Activity:
The income created from lending activities cannot be a significant part of total income, going over 50% will place you in the business of an activity, this is viewed in light of IRS business income just as any small operation or hobby type activity. The key word however is "significant" I'd say stay under 25% of other income, you don't want to be identified as an unregulated lender out of compliance and in the business of lending.
Advertising:
Lastly, a private exempt lender may not advertise, they may not offer loans publicly, which includes speaking to some group of real estate investors. A private lender has no business having a business card that suggests they make loans! You're getting into the business of lending by advertising.
An HML is anyone who does not meet the exemptions and generally are asset based lenders, not so much credit lenders.
Understand that a promissory note is a security subject to securities laws with exceptions that are overlaid by banking and finance law or regulation.
These basic exceptions also apply to note sellers and buyers, note investors, you can act personally with your money for your personal portfolio but if you are "in the business of" then you are getting into a brokerage activity.
I won't say that the lender's matrix above is pure hog wash, but it is not close to accurate.
The main difference between an HML and a private lender is that one is exempt and the other isn't, one is in the business, the other is not.
Loan amounts and interest rates are irrelevant nor is the collateral taken under a loan. Collateral becomes most relevant under Dodd-Frank and defining types of lenders.
Points are pre-paid interest! Paying points up front or pre-paid is a brokerage activity, not a private lending activity. Only regulated or registered lenders in the business of lending may legally charge points, Grandma does not.
Thanks to the OP for the great title making this thread searchable for others.
Now, you can heed my advice or dismiss it, I suggest you heed the warning. Stepping out of place as a lender can send you to prison in extreme operations but at the least you can lose your note, collateral and money (usually you'll have a fine as well).
This information comes through the SEC and finance regulations, various parts, various Acts, it's not in one paragraph so don't even ask. You will find most of this in the SEC Regs as mentioned and you'll need to pay attention to the applicability of law and regulation to arrive at the differences between lenders and thos who may be exempt from certain activities. Good luck! :)