Is Private Lending Legal?

While private money lending is legal, there are essential things to remember. First, you should know what private lending entails to determine whether it covers your transaction. Second, transactions covered by private lending laws must comply strictly to avoid legal consequences. Finally, legal support is optional but extremely beneficial when engaging in private lending.

We address all these areas to help you make informed decisions. The investment attorneys at Calabrese Law Associates can review your matter and provide tailored assistance. Learn more in this guide, or reach out today to speak to our trained professionals.

What Is Private Lending?

Private lending is where individuals or private entities provide loans to other individuals or businesses outside public lending institutions like banks. This arrangement is typical in many industries as it is a flexible and quick way to raise capital. The parties negotiate the terms directly, including the interest rate and repayment schedule.

However, those terms must align with the applicable regulations and generally accepted principles of law. Failing to comply may lead to adverse legal consequences, such as regulatory sanctions or civil or criminal penalties. Depending on the case, the transaction could also be rendered void, making it difficult for parties to sue on the contract.

From an investment perspective, lenders leverage private lending to diversify their portfolios. Instead of limiting their investments to traditional avenues like equity and buyouts, investors can loan money to individuals and businesses in exchange for a higher sum. If the borrower breaches the contract terms, the lender may take legal action to recover the loan amount.

Private lending laws are complex and numerous, and how they apply may vary from case to case. Obtaining legal assistance can help you navigate the regulatory landscape. Private investment attorneys can examine the laws to determine which applies to your situation and help protect your interests.

What Is the Difference Between Secured and Unsecured Loans?

Secured loans are backed by collateral, such as real estate, inventory, and vehicles. The collateral serves as security for the loan, meaning the lender may seize the asset to recoup losses if the borrower defaults. Unsecured loans have no collateral. Secured and unsecured loans have various benefits and drawbacks depending on your status as a lender or borrower.

For example, secured loans provide a safety net for lenders, as they can use the asset to defray the debt. However, borrowers can lose their valuable property if they default. Unsecured loans usually attract higher interest rates since the lender faces higher risks. Lenders are generally reluctant to provide substantial amounts unless the borrower can provide collateral. Finally, considering the high risks associated with unsecured loans, lenders may subject borrowers to strict scrutiny.

To avert these challenges, parties should hire experienced attorneys for professional support. Lawyers can provide tailored advice, prepare contracts, and conduct legal due diligence to mitigate risks.

What Are the Private Lending Laws?

Private lending in Massachusetts is governed by many regulations, which can be categorized into the following:

1. Consumer Protection Statutes

Consumer lending and protection laws prevent unfair and abusive debt practices, such as misrepresentation and deception. Examples include the following:

• Material disclosure requirements: Legislation like the federal Truth in Lending Act and Massachusetts’ consumer credit cost disclosure law are instrumental in the real estate and mortgage credit industry. They require lenders to make written disclosures in lending agreements covered by the statutes. The caveat is that these laws do not apply to commercial or business transactions.
• Predatory home loan practices: The law prevents predatory practices regarding loans secured by the borrower’s home. An example of such an act includes increasing the interest rates for high-cost home mortgage loans after default, subject to exceptions. Aggrieved borrowers with valid claims may initiate civil lawsuits to seek remedies.
• Business practices for consumer protection: This law is general, as it applies to business practices broadly. It also prohibits deceptive practices and unfair competition in commercial settings. Thus, lenders who deceive borrowers or misrepresent information may be liable under the law.

2. Licensing Requirements

Massachusetts law requires lenders to obtain licenses before extending loans to borrowers in certain instances. For example, mortgage lenders or brokers who provide loans secured by residential properties must generally meet this requirement. Additionally, lenders who provide small loans of $6,000 or less may not charge interest and expenses exceeding 12% of the loan’s value per year without licenses.

These laws operate with several exceptions, making them complex. For example, the lender must provide five or more mortgages within 12 consecutive months. Learning the scope of these laws to determine their applicability is crucial as failing to comply may result in sanctions or lawsuits.

 3. Securities and Exchange Commission (SEC) Regulations

Businesses can raise capital in many ways, such as selling investment instruments called securities. The SEC regulates these transactions, including securities offered and sold by private companies. Generally, securities must be registered with the SEC or exempted from registration under the law. This applies to private companies regardless of size, including sales made to family and friends.

Securities could take many forms, including private debts. However, determining which lending transactions fall into the category can be challenging, as many variables exist. For example, what is the type of debt? Is it repaid in cash or converted into equity? A good starting point might be to ascertain whether the end investor intends the investment to be passive and relies on the private lender’s contribution to earn returns. Moreover, when private lenders offer investments to non-accredited investors, that can trigger federal anti-fraud regulations.

4. Interest Rate or Usury Laws

Usury laws protect consumers by limiting the interest charged on loans. Under Massachusetts law, the prescribed legal interest rate is 6% per annum unless parties agree on a higher amount in writing. If the lending agreement or any related document does not expressly indicate the agreed interest rate, the lender may not recover the excess amount in a lawsuit.

Private lenders who charge or receive interests above 20% per annum may be liable for criminal usury. They face a punishment of imprisonment not more than 10 years or a fine not exceeding $10,000. Depending on the situation, the court may impose both sentences — a term in prison and a fine. The borrower may also petition the court to declare the loan void.

5. Private Lending Tax Laws

Both lenders and borrowers have some tax responsibilities when it comes to private lending. For example, state and federal tax laws require lenders to report interest income and deductible expenses when filing their tax returns. Borrowers must also provide details of interest payment deductibility to reduce their tax liabilities. Complying with the tax rules helps you avoid penalties, fines, and other sanctions.

Why Trust Us?

Calabrese Law Associates provides world-class legal services to individuals and businesses in the Greater Boston Area and throughout Massachusetts. Our team of experienced private investment attorneys understands the various regulations and industry standards. We provide practical legal solutions by assessing the merits of each case and paying close attention to the little details.

We have won multiple awards and recognitions through our supportive and efficient services. These achievements motivate us to continue delivering results, regardless of case complexity. We aim to help clients obtain the best possible outcome by leveraging our technical skills and resources.

At Calabrese Law Associates, we prioritize honesty, transparency, and commitment to ethical rules. We are direct in all our dealings and work with clients to achieve their goals. These attributes have enabled us to build a solid reputation and longstanding relationships with our clients. Read our reviews and testimonials to learn more!

Contact a Private Lending Attorney for Professional Assistance

Calabrese Law Associates has handled complex private lending matters for lenders and borrowers. Our services include legal advisory, legal due diligence, contract drafting and review, and dispute resolution. We can provide the necessary representation, taking the load off your shoulders. Our team will listen, examine your situation, and develop tailored strategies. Want to learn more about our services? Contact us now!

This publication and its contents are not to be construed as legal advice nor a recommendation to you as to how to proceed. Please consult with a local licensed attorney directly before taking any action that could have legal consequences. This publication and its content do not create an attorney-client relationship and are being provided for general informational purposes only.

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