Hard money tends to get a bad rap in the press. Despite providing a very valuable service to borrowers, financial experts of all sorts tend to speak of hard money in not-so-good terms. Sometimes, they go so far as to say things that are not true. For example, it is often stated that hard money lenders aren’t regulated.
Critics can get away with such claims by inserting two words at the end: ‘like banks’. They say that hard money lenders ‘aren’t regulated like banks’, implying that they are not regulated at all. But truth be told, they are regulated. It is just that different regulations apply to them. The government regulates hard money and bank lending in different ways.
States Regulate Financial Institutions
Though the federal government exerts regulatory influence over the commercial and retail banking sectors, most private lending regulation is handled at the state level. States call the shots in hard money lending, and most of them have very specific requirements for lenders looking to be licensed.
For the record, licensing is the line of delineation between private citizens and hard money lenders. As a private citizen, you could loan your money to someone else at will. You do not need a special license. You don’t have to draw up a legal contract. But it is different if you want to establish a private lending enterprise as a legally recognized business.
To do that, most states require obtaining a license. With that license comes the requirement to follow a certain set of rules. States regulate everything from interest rates to collection terms. This dictates that a licensed hard money lender, like Salt Lake City’s Actium Partners, isn’t free to do whatever it wants. It must adhere to state regulations.
How the Regulations Differ
The regulations for both banks and hard money lenders can differ substantially. For example, banks have had to follow much stricter rules related to loan approval since the last housing crash in 2008. Those rules require them to turn over every stone and look around every corner to guarantee that a borrower truly has the financial resources to pay back a loan.
This is why the bank process takes so long. For something as simple as a residential mortgage, banks need to go to great lengths to guarantee borrower creditworthiness. It can take weeks, if not months just to get from approval to underwriting. After that, closing can take another month or more.
Hard money lenders are not required to follow the same rules. After all, the money they lend is their own. They aren’t funding loans with deposits from their customers. They have another advantage as well: hard money lending is asset-based lending. This means lenders can make approval decisions based solely on collateral.
Losing a License
Licensing hard money lenders give states the ability to control them to some degree. And with that control comes the ability to revoke a lender’s license. If a lender doesn’t follow the rules, its license could be pulled by the state regulating authority. Therefore, there is every incentive to play nicely.
The idea that hard money lending is not regulated is simply not true. Hard money lenders aren’t required to follow the same rules that apply to banks and credit unions, but that doesn’t mean they are completely free from rules. It simply means that the rules they must follow are different.
If you plan to utilize hard money at any point in the future, look for a lender with a state license. Doing so guarantees you will be working with a company required by law to play by the rules.