This Article is for educational purposes and is not legal advice.  Consult qualified counsel for specific guidance.

Private Lending Is Highly Regulated

Private investors/lenders face real estate and securities compliance.

Capital placed into California real-property–secured loans—whether funding new loans or purchasing existing notes and deeds of trust—triggers Real Estate Law requirements and may also involve Securities Law obligations.  For example, failing to record endorsements or misidentifying investors properly can result in legal penalties, highlighting the need for diligent documentation.

Quote:

“Private lending in California is governed by both Real Estate and Securities Laws—ignore them at your peril.”

Direct vs. Indirect Participation Securities

Your structure determines your compliance pathway.

Private investors/lenders can invest in:

• Direct participation securities: direct ownership of promissory notes (the debt obligation) and deeds of trust/mortgages (the security instrument).
• Indirect or quasi-direct participation securities: equity interests in limited partnerships, LLCs, or LLPs that fund loans or acquire notes and trust deeds.

In indirect structures, the entity itself (LP/LLC/LLP) is named as payee/lender on the promissory note and as beneficiary under the deed of trust.  Returns are then distributed to investors through their ownership interests, unless the offering documents lawfully provide otherwise under an applicable exemption, permit, or registration.

Quote:

“If the investment vehicle is an LP, LLC, or LLP, the entity—not the individual investor—must be the named lender and beneficiary.”

Why Entity Structure and Custody Matter

Protect investor capital with proper control and custody.

Offerings qualified by exemption or pursuant to a permit/registration must align the investment structure with the stated securities framework.  Avoid arrangements where investor returns rely solely on assets under a broker’s exclusive control.  Proper governance often includes placing assets with qualified, independent custodians or trustees and implementing controls that reasonably protect investor funds.

Offerings, Exemptions, and Who May Sell Offerings may proceed through exemptions or registrations, and only by authorized sellers.  Verify that your offering qualifies under the appropriate exemption or registration and that your seller is authorized to ensure compliance and avoid penalties.

Offerings may proceed through exemptions or registrations, and only by authorized sellers.

Qualified offerings (exempt or registered) may be issued and/or sold:

• By real estate/mortgage brokers acting within their authority, and/or
• By registered broker-dealers under the applicable Securities Laws.

These investments are made with the expectation of gain or profit in real property interests—whether equitable or fee title interests, leaseholds, mortgages, or options.

The Broker’s Role and Fiduciary Duty

Real estate/mortgage brokers owe fiduciary duties to private investors/lenders.

Brokers raising capital and arranging loans act as agents and fiduciaries.  The transaction is continuous—from capital formation to loan funding—whether investors take whole interests or lawfully fractionalized interests in notes and security instruments, or ownership interests in entities (indirect/quasi-direct securities).

Quote:

“In private lending, the broker’s fiduciary duty begins with capital formation and continues through funding, servicing, and payoff.”

Fractionalized Interests Explained

California allows fractional funding—with limits.

California Real Estate and Securities Laws authorize up to ten private investors/lenders to fund a loan or purchase a note and deed of trust on a fractional basis.  Each investor holds a recorded fractional interest in the note and security instrument.

Naming, Endorsements, and Assignments

Name the actual funding investors and record assignments promptly to ensure clarity and confidence in legal compliance.

When loans are funded with private equity capital:

• Investors must be named as payees/lenders on the promissory notes and as beneficiaries under deeds of trust/mortgages (for whole or fractional interests).
• If loans were previously funded and held by interim payees/beneficiaries (assets in being), then the notes must be endorsed (with or without recourse, as applicable) and the deeds of trust/mortgages must be assigned to the investing private lenders for the term of the loans.

Failing to reflect the true investors as payees/beneficiaries promptly, or to record endorsements/assignments, can lead to serious legal issues, underscoring the importance of diligent record-keeping for your protection.

Quote:

“If you fund the loan, your name should be on the note and trust deed—record it, or risk regulatory and civil exposure.”

Industry Context: From “Hard Money” to “Private Lending”

Private lending is a major contributor to California’s economy.

Historically known as “Hard Money, the sector is now widely called “Private Lending.” The industry’s scale—annual transaction volume and aggregate loan dollars—makes regulatory compliance and investor protection mission-critical.

Escrow and Title Insurance Essentials

Close correctly and ensure the security position is set.

Loan closings (or acquisitions of notes/trust deeds) occur when:

• Encumbrances and assignments are recorded naming the proper payees/lenders/beneficiaries; and
• Title insurance is issued to ensure priority and to address liens or claims that must be removed or remain.

Obtain the proper title policy form plus necessary endorsements through the escrow holder, consistent with written escrow instructions from borrowers and private investors/lenders (or their authorized agents/fiduciaries).  This confirms the intended security interest and priority.

Compliance Risks and Consequences

Noncompliance carries real penalties.

Deviations from Real Estate or Securities Law—including misidentifying investors, failing to record endorsements/assignments, or selling interests outside permitted offerings—can lead to:

• Regulatory discipline of licensees,
• Civil liability, and
• Criminal prosecution in egregious cases.

At‑a‑Glance Checklist

• Structure: Decide direct (note + trust deed) vs. indirect (LP/LLC/LLP equity).
• Authority: Confirm who can issue/sell—broker vs. broker-dealer; ensure exemption/permit/registration is proper.
• Investors of Record: Name actual investors as payees/beneficiaries; record endorsements/assignments promptly.
• Fractionalization: Keep to ≤10 investors per fractionalized note/trust deed.
• Custody & Controls: Use qualified custodians/trustees and documented controls.
• Escrow & Title: Align escrow instructions; secure title insurance + endorsements to confirm priority.
• Fiduciary Duty: Brokers act as agents/fiduciaries throughout the transaction.
• Documentation: Ensure offering documents (e.g., PPMs) match the actual investment structure.
• Compliance: Monitor for Real Estate and Securities requirements at each step.

📘 Glossary of Key Terms (with Examples & Legal References)

Bottom Line

Private lending demands disciplined compliance.

Align your investment structure, documents, and closing practices with California Real Estate and Securities Laws to protect investors and uphold fiduciary standards.