Occasionally we are asked to prepare private loan documents for a real estate settlement. The seller might be holding a “seller take-back” loan, where the seller agrees to forego receipt of some or all of the purchase price at settlement in exchange for regular monthly payments with interest (or some other agreed-upon loan terms). Or the buyer might be obtaining a private loan from a family member, friend, business partner, etc.
What many (most) do not know, however, is that pursuant to the Maryland Mortgage Lender Law (MD Code, Financial Institutions Article, Section 11-501 et seq.), the state of Maryland requires licensing for people or entities making private secured loans, unless they are exempt.
In years past, there was an exemption to the law for lenders who made three or fewer loans in a year, but that exemption was removed by a 2013 amendment. Today, subject to a few exemptions listed below, the law applies to anyone making any number of loans secured by residential real estate in Maryland, if the loan is, “…primarily for personal, family, or household use.”
Exemptions include seller financing, and loans made by a spouse, parent, child, sibling, grandparent, grandchild, or employer. Interestingly, there is also a narrow exemption for a licensed real estate broker loaning money to a buyer to assist with the purchase of a property when using the broker’s services, but note that the repayment scheduled on the loan must be two years or less.
Under the language of the Code, this law does NOT apply to loans made for commercial purposes. Therefore, private loans on investment properties should be exempt as the loan is for a commercial purpose and not for “personal, family, or household use.” But in a case like that, it is important to keep proper records substantiating the fact that the loan is a business or commercial loan, and to clearly state that in the loan documents.
If you or your clients are contemplating a transaction with a private mortgage, always be sure to discuss the matter with a knowledgeable Maryland attorney before finalizing any agreement. You don’t want to take a chance of violating this law. If you do, you are not allowed to collect any interest or other fees on the loan, and penalties could include up to a $50,000 fine and 10 years in prison!
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