To start a private lending business, you form a legal entity, register it with your state, obtain the licenses that match the type of loans you plan to make, and put loan documents and tax reporting in place before funding a single deal. The specific licenses and federal rules that apply depend on one question above all others: are you lending to consumers on their homes, or to investors on business-purpose real estate? That split drives most of the regulatory work below.
Form a Business Entity First
Before you make a loan, you need a formal business structure that separates your personal finances from business risk. Operating without one puts your home, savings, and other personal property on the line if a borrower sues or the business takes on debt it cannot pay.
An LLC is the most common choice for private lenders. It creates a legal wall between you and the business: if a borrower or creditor wins a judgment against the company, they generally cannot reach your personal accounts or real estate. An operating agreement sets out who manages the company, how profits are split, and what happens if a member leaves. Most states let a single person form one.
A C-Corporation or S-Corporation also works. Both follow more formal governance rules than an LLC, including bylaws and stock certificates, and the S-Corp carries ownership restrictions that limit who can be a shareholder.1Cornell Law Institute. S Corporation The added formalities make corporations less common among smaller lending operations.
Register With the State and Get an EIN
Once you pick an entity type, file formation documents with the Secretary of State in the state where you plan to operate. For an LLC, this is typically called Articles of Organization. Most states offer an online portal where you enter the company name, business address, and the name and address of a registered agent, meaning the person or company authorized to accept legal notices and lawsuits for the business.2Cornell Law School / Legal Information Institute. Agent for Service of Process
Check the state’s business name database first to confirm your chosen name is available. Filing fees generally run $35 to $500, and processing takes anywhere from one business day to several weeks depending on the state and whether you pay for expedited handling. Once approved, the state issues a certificate. Save certified copies; you will need them to open a business bank account.
You also need an Employer Identification Number from the IRS. This nine-digit number functions like a Social Security number for the business and is required for tax filings, hiring, and bank accounts. Apply online at irs.gov for an immediate number, or submit Form SS-4 by fax or mail.3IRS. Employer Identification Number The application asks for the name and Social Security number or ITIN of the “responsible party,” the individual who ultimately owns or controls the entity.4Internal Revenue Service. Instructions for Form SS-4 (Rev. December 2025)
Identify the Licenses You Need
Licensing turns on the type of loans you plan to make. Consumer-facing residential loans, meaning loans on homes borrowers will live in, carry significantly more regulatory burden than business-purpose loans made to investors.
Residential Consumer Loans
If you plan to fund loans on owner-occupied homes, the federal Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) sets the baseline. It requires mortgage loan originators, the individuals who take applications and negotiate loan terms, to be licensed or registered through the Nationwide Multistate Licensing System (NMLS).5Conference of State Bank Supervisors. NMLS At-a-Glance To qualify, an individual must complete at least 20 hours of approved pre-licensing education, pass a background check with FBI fingerprinting, and submit personal history through NMLS.6Consumer Financial Protection Bureau. 12 CFR Part 1008 (Regulation H) – 1008.105 Minimum Loan Originator License Requirements
States layer their own requirements on top. Many differentiate between lenders using their own capital and brokers arranging loans funded by someone else, with separate license categories for each. Check your state’s financial regulatory agency for specifics before originating any loans.
Business-Purpose Loans
Loans made to investors for rental properties, fix-and-flip projects, or commercial real estate face fewer federal disclosure rules because the borrower is not a consumer buying a home to live in. Some states still require a finance lender license or similar credential even for business-purpose lending, so confirm your state’s requirements before assuming commercial loans are license-free.
Know Which Federal Rules Apply to Your Loans
Beyond licensing, three federal frameworks decide how you underwrite, price, and disclose loans.
Truth in Lending Disclosures
The Truth in Lending Act and its implementing rule, Regulation Z, require lenders to give borrowers clear disclosures about interest rates, fees, and repayment terms.7eCFR. 12 CFR Part 1026 — Truth in Lending (Regulation Z) These rules do not apply to every private lender. Under Regulation Z, you are a “creditor” only if you originate more than five mortgage loans secured by a dwelling, or more than 25 other consumer credit transactions, in the preceding calendar year.8eCFR. 12 CFR 1026.2 — Definitions and Rules of Construction Cross those thresholds and you must provide standardized loan disclosures to every consumer borrower. Even below the threshold, clear written disclosures protect you in any later dispute.
Ability-to-Repay for Residential Loans
If you make consumer loans secured by a home, the Dodd-Frank Act’s ability-to-repay rule adds another layer. Before closing a residential mortgage, you must make a good-faith determination that the borrower can afford the payments. At a minimum you consider the borrower’s income or assets, monthly payment obligations, existing debts, employment status, credit history, and any simultaneous loans you know about.9eCFR. 12 CFR 1026.43 — Minimum Standards for Transactions Secured by a Dwelling
The rule covers nearly all closed-end consumer loans secured by any dwelling, including second liens and vacation homes, not just primary residences. Violations expose you to borrower lawsuits and potential loan rescission, making this one of the most consequential compliance obligations for private lenders in the residential space.
Fair Lending
Two federal laws prohibit discrimination in lending and apply to private lenders just as they do to banks. The Fair Housing Act makes it unlawful to discriminate in any residential real estate loan, including the decision to lend, the interest rate, or other terms, based on race, color, religion, sex, disability, familial status, or national origin.10Office of the Law Revision Counsel. 42 US Code 3605 – Discrimination in Residential Real Estate-Related Transactions
The Equal Credit Opportunity Act covers all types of credit, not just housing. It prohibits discrimination based on race, color, religion, national origin, sex, marital status, age, or because the applicant’s income comes from a public assistance program.11Office of the Law Revision Counsel. 15 USC 1691 – Scope of Prohibition When you deny a loan or offer less favorable terms, you must send the applicant a written adverse action notice within 30 days stating the specific reasons for the denial and identifying the federal agency that oversees your compliance.12Consumer Financial Protection Bureau. Regulation B – 1002.9 Notifications Written underwriting criteria applied consistently to every applicant is the most effective way to show compliance.
Set Rates Within State Usury Limits
Every state sets a ceiling on the interest a private lender can charge, commonly called a usury limit. Caps vary widely. General limits range from roughly 5% to 45% depending on the state, with many states setting their default cap near 10% to 12% for private contracts. Some states tie the limit to a floating index like the Federal Reserve discount rate rather than a fixed number.
Consequences for charging over the cap are real, and some states void the entire loan, not just the interest, if the rate is too high. Research the specific usury statute in every state where you plan to lend before setting your rates.
Decide How You Will Fund the Loans
If you plan to lend only your own money, you can skip this section. If you intend to pool capital from outside investors in exchange for a share of profits or a promised return, you are likely selling a security, and federal securities laws apply. The most common path for private lending funds is an exemption under Regulation D, which lets you raise money without a full SEC registration.
Two versions are available:
- Rule 506(b) lets you raise unlimited capital but bars public advertising of the offering. You may accept up to 35 non-accredited investors as long as each has enough financial sophistication to evaluate the risks; the remaining investors must be accredited.13eCFR. 17 CFR 230.506 — Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering
- Rule 506(c) lets you advertise and broadly solicit, but every purchaser must be accredited and you must take reasonable steps to verify their status.13eCFR. 17 CFR 230.506 — Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering
An accredited investor is an individual with a net worth above $1 million excluding their primary residence, or annual income above $200,000 ($300,000 with a spouse or partner) in each of the two most recent years, with a reasonable expectation of meeting the same threshold in the current year.14U.S. Securities and Exchange Commission. Accredited Investors Work with a securities attorney to prepare a private placement memorandum and subscription documents before accepting any investor funds.
Prepare the Loan Documents
Every loan needs a paper trail that defines the debt, secures your collateral, and protects your right to collect. Three documents form the core of each transaction:
- A promissory note, which is the borrower’s written promise to repay. It spells out the principal, interest rate, payment schedule, late fees, and default consequences.
- A security instrument, either a mortgage or a deed of trust depending on the state, that ties the debt to a specific piece of real estate and gives you the right to foreclose if the borrower stops paying.
- A loan agreement, a broader contract setting out ongoing obligations such as maintaining insurance, paying property taxes, and not taking on additional liens without your consent.
If Regulation Z applies to your loans, you must also provide standardized disclosures detailing the annual percentage rate, total cost of credit, and payment obligations. Even for business-purpose loans where disclosures are not required, a clear written breakdown of all costs and terms reduces disputes.
Title Insurance and Recording
Before funding, require the borrower to purchase a lender’s title insurance policy. It protects you if someone later challenges the property’s title through an undisclosed lien or ownership dispute. Coverage matches the loan amount and stays in effect until the mortgage is paid off.15Consumer Financial Protection Bureau. What Is Lenders Title Insurance? A clean title search before closing is essential; title insurance backs it up if the search misses something.
After closing, record the mortgage or deed of trust with the county recorder’s office where the property sits. Recording puts the public on notice that you hold a lien, which protects your priority if the borrower takes on additional loans or faces a judgment. An unrecorded lien can be wiped out by a later lender who records first, so file promptly.
Handle Tax Reporting From Day One
Interest you earn is ordinary business income. If your lending qualifies as a trade or business, which it generally does when you lend regularly for profit, you report the income on Schedule C of your personal return, or on the appropriate business return if you operate through a corporation. Lending falls under IRS business code 522200 for nondepository credit intermediation.16Internal Revenue Service. Instructions for Schedule C (Form 1040) Schedule C income is also subject to self-employment tax unless you elect corporate taxation.
You have a separate reporting duty for interest your borrowers pay you. If you receive $600 or more in interest from a single borrower during the year in the course of your trade or business, file Form 1099-INT reporting the amount. Below that, a 1099-INT is still required if you receive at least $10 in interest or if you withheld any federal income tax under backup withholding rules.17Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID Furnish a copy to the borrower as well. Track every payment, its split between principal and interest, and the date received. Clean records from the start make year-end reporting straightforward and help you survive an audit.