Private Money Loan Transactions: Hard Money Lenders California
*The following information is provided by the California Bureau of Real Estate
Loans funded by private investors/lenders and arranged by MLBs that are secured directly or collaterally by liens on real property (deeds of trust or mortgages) have been historically referred to as “hard money” loans. Whether the proceeds of the loan funded by private investors/lenders are for the purchase of the intended security property or used to further encumber or refinance existing encumbrances (including the payment of additional net proceeds to the borrower known as an “equity loan”), the term “hard money” has been historically applied to such transactions.
The term “hard money” has also been applied to loan transactions funded by depository institutions and licensed lenders when the loan proceeds are used to refinance existing encumbrances or to further encumber the security property (including loan transactions where additional net proceeds are paid to the borrower known in this setting as a “cash-out refinance”). The discussion in this Section is intended to apply to loan transactions made or arranged by MLBs with the capital/funds of private investors/lenders. MLBs also make and arrange loans relying on capital/funds from private investors/lenders where the loan proceeds are used to purchase, develop, or improve the intended security property (land acquisition and development or vertical construction loans). In addition, loans made or arranged by MLBs may be secured by either senior or junior deeds of trust or mortgages.
Many practitioners have redefined making and arranging loans with the capital/funds of private investors/lenders as “private money” transactions. Investment bankers and broker-dealers refer to the use of funds from private investors/lenders as “private equity capital”. The traditional term “hard money” has given way to industry use of the terms “private money” or “private equity capital”. As a cautionary note, the use of “private money” in a loan transaction does not excuse MLBs from following applicable federal and state law, including (among others) standards imposed regarding the appraisal of the intended security property and the underwriting of the borrower’s credit worthiness and financial standing.
As agents and fiduciaries, MLBs remain subject to the responsibility of ensuring that a reasonable method of repayment of the debt/loan has been established and that the borrower is capable of paying the required mortgage debt service throughout the term of the loan, i.e., the proposed loan transaction is suitable for the borrower. Equally, MLBs must assess whether the intended loan transaction is suitable for the private investors/lenders whose capital/funds are being relied upon to make or arrange the loan. (Business and Professions Code Sections 10131(d) and (e), 10131.1, 10131.3, 10176, 10177, 10232.4, .5 and .6, 10238(h)(3) and (4), 10240 et seq., including 10241.3 and 11302(b), among others).