Private Lenders

TRSD , I hope you can get this answered , be interested myself . Read it as it was posted in another forum here at DG . Many things were unclear other than it was going to , in my words plug many holes in dike , maybe . Footnote from the publication said the government saw the pit falls and was working on a new version and wording . So be looking for a redo . Not much help .

Yes you can private lend, but there are some rules to the game and each state has their own set of rules. The SAFE ACT does not affect private lending if it meets certain criteria. I live in CA, so I will use CA as the example.

1. You cannot pool investor money together unless you go through your state's Securities & Exchange Commission and get approval.

2. You can avoid the SEC by keeping one lender per mortgage not more than 2 lenders per mortgage (3 is pushing it).

3. The lender who puts up the most cash is the lender who gets first position.

4. Know your usury laws. In CA, the usury law is 10% maximum. That means that I cannot pay a private lender more than 10% interest. If I was a licensed broker, I could pay above the 10% usury law. That is why hard money lenders can charge 12, 15, 18% above. They are licensed.

5. If a private lender tells you that they will lend, but they want half of the profits then you need to go to the SEC and get approved. They consider this going beyond a private loan.

6. If you market to private money lenders then you need to get approved by the SEC. You cannot market on CL, newspapers, etc. unless your marketing material is approved by the SEC. You can't even get a list and send a letter to a potential private money lender unless you are approved. All those new private money guru course are not telling you the whole story. If you want an accurate and up to date guru, PM me.

7. If you market to friends and family then you are okay and do not need to go to the SEC.

If in doubt go to your local SEC and find out what they want. They are hard core and you don't want to do jail time and/or pay a hefty fine. Many investors don't even know that there are usury laws. Every state has them.

Hope this helps!

If you market material that teaches what PML is, instead of your company offering to pay X%-XX%; or 'looking for PML'; you teach them how to earn X%-XX% becoming a private money lender, not specifically for your company, but in general, I believe you do not have to goto the SEC. UNLESS this was changed by the SAFE Act.

Was my understanding of this incorrect?

that is done in CA for investment purposes must be approved by the SEC. It is not a big deal to get approval from the SEC. It will cost you a filing fee, but it is so worth it because you are legal!

I don't think you are answering the OP's question. The SEC has nothing to do with the SAFE ACT. The SEC has to do with pooling money and creating investment securities, which some lenders do, but it has nothing to do with SAFE Act.

The main way for private lenders to avoid SAFE Act requirements is to make "commercial" loans and not "residential" loans. People mistakenly think this means only on commercial property. But it means any loans for "Business purposes" as opposed to "consumer purposes". This means you only loan to investors and not owner occupiers.
Texas is the exception there. Cali is also a gray area.

"We do clarify, however, that
this definition does not include loans
for business, commercial, or agricultural
purposes that use as collateral property
that meets the definition of a ‘‘dwelling.’’
http://www.occ.gov/news-issuances/news-releases/2010/nr-ia-2010-86a.pdf
....so do I take this to mean that if you are "in the business" of flipping or rehabbing properties and they are not your residence, the SAFE act does not apply?

The SAFE act is an act that curtails the powers of the Patriot Act. Its purpose is to taper and stop terrorism. A small part of this deals with the movement of money such as in financing.

The safe act is designed around the idea that those doing seller financing need a license. This law or suggestion has been given nationally but only a very small handful of states have adopted it and not in it entirety.

You can check with a good, knowledgeable real estate lawyer familiar with this and they can let you know how it applies to you.

Another note:
SEC is designed around following securities and other such investments.
Seller financing becomes a security or will bring in the SEC when:
1) Funds are pooled.
2) promises are made and not kept concerning private financing.
3) Investments are not secure. (such as purchasing a home above its value)
4) You market on a public platform.

Others had some ideas how this may work. You can also find my information by searching in the forums as well.

One last note:
Usury. Most states have had usury. Most no longer adhere to this any more. Licensing has nothing at all do to with the usury law. Usury is a blanket law that says you cannot charge above a certain interest rate or you will be considered loan sharking - which leads to trouble.
How do you know if your state no longer has usury? Do you have check cashing services or pay day advances? Yes - then you have NO USURY. Because these companies charge such huge interest they would break usury every day. There may be states that keep these companies under wraps but that would be a needle in the haystack (few and hard to find).

CA has a Usury Law.

The Basic Law:

In California, usury is the charging of interest in excess of that allowed by law. As stated above, due to the machinations of various entities seeking to protect their interests, the usury laws are complicated and there are many exceptions to the general rules. Listed below are some of those general rules. Since there are exceptions, and the penalties for violating usury laws are severe, individuals making loans for which there are interest charges should contact an attorney for further guidance.

a. The Basic Rate: The California Constitution allows parties to contract for interest on a loan primarily for personal, family or household purposes at a rate not exceeding 10% per year. Note that as with all other percentages we are listing, this percentage is based on the unpaid balance. For example, if a loan of $1,000 is to be paid at the end of one year and there are no payments during the year, the lender could charge $100 (10%) as interest. However, if payments are to be made during the year, the maximum charge allowed could be much less since the outstanding balance would have been reduced. For example, if half was paid, then the ten percent due on the remaining half would have to be reduced to ten percent of five hundred dollars or fifty dollars on that amount.

b. The Exceptions: In regard to usury, a loan to be used primarily for home improvement or home purchase is not regarded as a loan for personal, family or household purposes. With these loans and for any other loans which are not for personal, family or household purposes, the allowable rate is the higher of 10% or 5% over the amount charged by the Federal Reserve Bank of San Francisco on advances to member banks on the 25th day of the month before the loan (if the agreement to loan and the actual lending of the money are in different months, the 25th day of the month before the earlier event is used).

The usury laws do not apply to any real estate broker if the loan is secured by real estate. This applies whether or not he or she is acting as a real estate broker.

The limitations also do not apply to most lending institutions such as banks, credit unions, finance companies, pawn brokers, etc. State laws place limitations on some of these loans, but at a higher percentage rate than the usury laws listed above.

Time payment contracts (for example: retail installment contracts and revolving accounts) are not generally regarded as loans. The usury laws normally do not apply to them. There are no limits on finance charges for the purchase of personal, family and household goods or services at this time.

Banks take the position that the charges for third party credit cards (Visa, MasterCard, American Express, etc.) are not subject to these limitations and charge interest far, far in excess of the usury limits, compounded daily. (Many credit cards offer low introductory rates but if you miss even a single payment by a single day, impose their “usual” rates which can be above eighteen percent compounded daily thus in excess of 22% annually…all perfectly legal.)

In transactions for the purchase of goods or services which are not for personal, family or household purposes, there are normally no limits to finance charges except those set by the parties.

In the absence of an agreement between the parties as to what is the rate of interest, the law imposes a rate of seven percent.

_______________________________________________________________________________
In considering personal, consumer loans in the State of California, the general legal, usury interest rate attached to these loans is 10%. The usury limitation that has been established for non-consumer loans in California is 5% greater that the interest rate duly established by the Federal Reserve Bank of San Francisco. California is the only state in the nation that currently connects its usury loan limitation for non-consumer loans to a specific Federal Reserve Bank. Normally, if it is to be tied to a Federal interest rate, it is the more generalized Federal Prime Rate.

Law governing usury in California are governed by statutory provisions that are found generally in ten different sections of the California Code:

1. CALIFORNIA CIVIL CODE SECTION 1917.610-1917.619
2. CALIFORNIA CORPORATIONS CODE SECTION 25110-25118
3. CALIFORNIA CIVIL CODE SECTION 1917.060-1917.069
4. CALIFORNIA CIVIL CODE SECTION 1917.160-1917.168
5. CALIFORNIA CORPORATIONS CODE SECTION 25110-25117
6. CALIFORNIA CIVIL CODE SECTION 1917-1917.006
7. CALIFORNIA FINANCIAL CODE SECTION 22050-22064
8. CALIFORNIA GOVERNMENT CODE SECTION 5900-5909
9. CALIFORNIA COMMERCIAL CODE SECTION 9201-9208
10.CALIFORNIA FINANCIAL CODE SECTION 22050-22062

You can read the above information at these sites. These are just a few of the sites I found information from.

http://www.usurylaw.com/state/california.php

http://www.stimmel-law.com/articles/Usury_Law_in_California.html

I love this. Thanks for the information. Wow! you have done your homework. When was the usury adopted?

A question for you as well: How do pay day advance services survive in your market? The risk they take is not worth a 15% return. This is why they charge 200%+. There has to be some exception here. This same exception could then be applied to private lending above and beyond the 15%...hmmm...

Maybe it has to do with the time payment contracts you mention in your synopsis. I have lenders from California that charge higher than the 15%. Could it be applied in as a form of points to the loan instead of direct interest? ...hmmm... love the thoughts this takes me.

is that CA investors who are paying more than 10% have no clue that they're breaking the usury law. I only stumbled across the usury law because of a private lender. I told him I could give him 12% and he asked about the usury law. So I investigated it and he was right; 10% max. for private lenders. Many investors do a 50/50 split at the back end trying to entice private lenders, and again, this is against the law unless you get approval from the SEC.

As far as check cashing places, there are exemptions to the law based on business classifications.

But, notice what you said: "As far as check cashing places, there are exemptions to the law based on classifications."

If this is truly the case there is a way that investors have found to be classified under the same as the check cashing place.

Check cashing services by nature are hard money lenders. They lend similarly to a real estate hard money lender but on a much smaller term. Some of my hard money lenders have actually come as owners of these services.

The question I am looking into, and anyone is welcome to answer this, is how do you do just this - become classified under the same as a check cashing service so that you or hard money can charge higher interest rates?

Okay, I researche NStreet's question about payday loans. First of all, many states have laws, but payday places are claiming they are only "leasing" their funds. There are many outstanding law suits on the legality of this loophole "leasing."

Leave it to CA to find a way to regulate and make money, even though they do a bad job. They are required to hold a payday license through the department of corporations. So this is not a loophole for investors. I am copying and pasting some key information from an article. If you want to read the whole thing then you can go here

http://www.corp.ca.gov/pub/pdf/EO/PaydayLoan_TextOnly.pdf

California Payday Lending Laws Protect You:

• In California, all payday lenders must be licensed by the Department of Corporations. Use the Department’s website or call Toll-Free to verify a lender’s license or to file a complaint.
• A payday lender may only make you one loan (which cannot exceed $300), and may only charge a maximum fee of 15% of the total amount of the check (up to $45). Additional fee restrictions apply for military servicemembers.
• Payday lenders are required to visibly post their CA license and a fee schedule at every location.
• A payday lender cannot make you a new loan to pay off an existing loan.
• A payday lender cannot make you a new loan while an existing loan with the same lender is outstanding, even if the combined balance of the existing loan and the new loan does not
exceed $300.
• If your check bounces, the payday lender may charge only one bounced check fee (up to $15).
(Be careful — your bank may charge you additional fees for insufficient funds.)
• Additional fees cannot be charged if you request an extension of time or payment plan. However, the payday lender is not legally required to grant your request.
• By law, the contract for a payday loan must be provided to you in the language you primarily used to negotiate with the lender.
• A payday lender cannot threaten to prosecute you in criminal court for insufficient funds.
• You may also have other legal protection under California law. If you need help or suspect violations of the law, please contact the Department of Corporations.

Hi George, what states are you funding in and what kind of properties are you funing? What's your parameters? Thanks.