What are consumer owner occupied loans? These loans are loans where the borrower intends to live in the property as a residence or for a consumer purpose. Consumer purpose includes paying a tax lien, helping a family member or bill consolidation. There are tight lending regulations when it comes to consumer owner occupied loans in addition to borrower protections and time frames. It can be too cumbersome for many private lenders to want to pursue. However, private consumer loans can be a good Plan B for borrowers who cannot qualify for Plan A. It’s an option for those who cannot get a conventional loan.
The Types of Private Consumer Loans
There are two types of private consumer loans: consumer bridge loans and and long term private consumer loans. There may be a number of reasons why someone would need a consumer bridge loan. They may not be able to obtain conventional financing due to foreclose, probate situations, down payment challenges, 1031 exchanges, downsizing or reverse mortgage fallout. Here’s the terms of bridge loans.
- No prepayment penalty
- Close in 5 to 7 days
- 11 month maximum term
- Purchase component
- 2.0 to 3.0 points
- 9.9 percent interest rate
Long term private consumer loans are less common. They are usually due to borrower credit issues or short term employment when applying for a conventional loan. In these circumstances, a borrower may be able to qualify for a long term private consumer loan. This loan is only available as a 30/30 loan. It’s a 30 year loan with payments based on 30 year amortization. Recent regulatory changes have eliminated the 30/5 loan. Some of the reasons for a 30/30 private consumer loan include inconsistent income history, bankruptcy, credit issues, self-employment, need to finance and difficulty documenting income. The terms of long term private consumer loans are:
- No prepayment penalty
- 30 year fixed
- Close in 5 to 7 days
- Up to 9.9 percent interest rate
- Debt ratio can be above FNMA
- 2.0 – 3.0 points
Keep in mind that California hard money lenders can also offer 15/15 and 20/20 loans. However, these are uncommon because borrowers typically struggle with debt ratios.
Navigating the Regulatory Compliance Landscape
While the regulatory compliance landscape is clear for mortgage lenders making loans to consumers, it’s a lot more complex when it comes to business purpose loans. This includes fix and flip loans. Many people are under the myth that these types of loans are exempt from state and federal laws that govern consumer lending. Business purpose does not equate with compliance exempt.
The Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) come into play. Lenders can face stiff penalties by categorizing a loan as exempt and investors can face exposure for violations. Both lenders and investors need to pay attention when TILA and RESPA apply.
“There are two key TILA exemptions potentially applicable. First, loans to non-natural persons are exempt. In other words, if the loan is extended to an entity as opposed to an individual, then TILA will not apply. Second, loans primarily for a business or commercial purpose are exempt. However, this exemption is more nuanced than the exemption for loans to non-natural persons.
The Official Commentary to Regulation Z, the implementing regulation of TILA, sets forth guidance for determining whether a loan can be considered to be primarily for a business purpose. A creditor must evaluate five factors in making a “business purpose” determination:
- the relationship of the borrower’s primary occupation to the acquisition;
- the degree to which the borrower will personally manage the acquisition;
- the ratio of total income from the acquisition to the total income of the borrower;
- the size of the transaction; and
- the borrower’s statement of purpose for the loan.”
It’s important to note that there is a special rule for non-owner-occupied rental property. A property attained to improve will always be deemed as a business purpose. Owner occupancy is determined when the owner occupies the property for more than 14 days. Regulation X does not have a specific exemption for non-natural persons either.
Other Considerations With Federal Law
In addition to TILA and RESPA, there are other regulations under the Fair Credit Reporting Act, Home Mortgage Disclosure Act, Equal Credit Opportunity Act and the Servicemembers Civil Relief Act. And FHA applies whether or not the loan is for an individual or corporate entity. Furthermore, additional signatories required for business purpose loans can trigger considerations under Regulation B, SCRA and Regulation E. Plus, the 2015 amendment to Regulation C may not be excluded.
State Law Considerations
The consumer business loans are broad, and business-purpose lenders may be subject to state laws. In addition, state laws vary with mortgage lending. But, most of the state laws are in place to protect against high-cost loans, unfair practices and predatory lending. This includes doing due diligence of the assets and knowing the originators of the loans. Non-compliance penalties can be severe for both the lender and the investor.
The Wild West of Private Money Lending
To ensure compliance with all of the regulations of private money lending, money lenders in California and lenders face many rules. It’s like living in the Wild West. Violations can come with hefty fines and sometimes and even criminal penalties. That’s why it’s wise to have a real estate attorney look over the contract for proper navigation. Everyone involved in the deal must be aware of the extensive rules that apply. “In California, one such law passed in 2012 regarding investor suitability requirements and took effect January 1, 2013. Cal. Bus. & Prof. Code §10232.45 (setting further requirements to determine investor suitability following the crash of the real estate market). This law added a whole new level of requirements to the already heavily regulated profession, requiring, among other things, a broker to determine whether an investor can invest in a certain loan or indeed in any loans at all. A professional unaware of all of the new and constantly changing requirements will set him or herself up for a professional liability claim down the line.”
One characteristic of private money loans is high interest rates. But, most states now have usury laws in place to guard against this, including California. Some penalties for violating usury laws include hefty fines, invalidation of borrower’s obligation to pay interest and nullification of the loan contract.” On August 13, 2018, the California Supreme Court (“Supreme Court”), in a unanimous decision authored by Justice Mariano-Florentino Cuellar, said courts “have a responsibility to guard against consumer loan provisions with unduly oppressive terms,” including interest rates, even though California’s Financial Code (“CFC”) allows lenders to charge whatever the market will bear for loans over $2,500.00.”It’s also important for an investor to have their own attorney. There should be no dual representation. There could be a conflict of interest that may wind up in court.
Keep in mind that there may also be servicing issues. While private money lenders have a fiduciary duty to protect a borrower’s collateral, they may want to foreclose. Missing interest payments or failing to pay the principal can trigger a host of problems. An attorney can enlighten an investor as to the provisions of the contract. Private money lenders often include other provisions, such as waste provision. This allows the lender to foreclose if a borrower’s conduct causes the decline of the property’s value. Other provisions to be aware of include provisions to prohibit unapproved junior liens. If the lender retains the right to review the financial status of an investor, they may have the right to call the loan due. It’s advisable for investors to use an attorney to be able to understand the servicing provisions in order to avoid a dispute down the road between the lender and the investor. Plus, an attorney can help the investor structure the deal.
At the same time, due diligence is required of private money lenders. There should be a collateral evaluation, geology inspection, property inspection report and a review of the borrower’s financial records.
The Benefits of Having an Attorney
The idea of becoming an investor is intriguing to many. After all, real estate has always outperformed the stock market. Buy a fixer upper, ramp it up and sell for a sizeable profit. Or, become a passive-income landlord to make money. However, there are multiple moving parts for success. Investors must constantly monitor local laws, accounting, new regulations, taxes and project management. Investing in an experienced attorney offers many benefits from contract creation and creating LLCs to conducting closings and staying in compliance. Having a real estate attorney to draft contracts is well worth the expense. During closing, a real estate attorney will review all the documents and let you know the risks.
A real estate attorney can advise investors on ways to reduce liability and potential risks. There may be more liabilities and risks looming than an investor may be aware of. Both flippers and landlords function with a lot of exposure to legal liability. An attorney can assist in mitigating risk and liability. In addition, an attorney can help an investor decide whether it’s best to form a partnership or LLC. And most of all, an experienced real estate attorney can help keep an investor on the right side of the law. In the Wild West of investing, an experienced and knowledgeable attorney is essential to success.
According to JWB Real Estate Capital, “If you plan to upgrade your investment property, this work will usually need investment property contracts to complete the work professionally. Many contractors should be hired with an agreement to protect the investment that you make to upgrade your property. Attorneys that specialize in real estate understand contracting laws and what is to be expected in each contract. These professionals can also provide legal assistance to you if there is a problem with a contractor or in the finished work. Protecting your rights as an investor is one of the ways that you can retain more of the rental income that you make. States with high foreclosure rates often have a larger than average percentage of unscrupulous contractors that prey on beginning real estate investors.”
No investor can be a legal expert, and state laws are tight with regard to tenant rights. An attorney can assist an investor in reviewing the lease terms to avoid future lawsuits. It’s important for real estate investors to protect their investment by using a real estate attorney.
The Regulatory Landscape
When it comes to compliance with regulations, size doesn’t matter. Both large and small properties face the same intense regulations. Certain standards must be in place. For example, single family home in LA are required to fit properties with water saving devices. Investors planning to do construction need to know what’s required. What if something goes awry? Are there fines or a hearing? Knowing the answers to these questions can save an investor thousands.
From coast to coast, real estate compliance laws are on the uptick. The laws can impact the growth of an investor’s property. Knowing and abiding by the real estate compliance regulations is both necessary and prudent to protecting investment properties. And remember, real estate compliance regulations transcend type of structure, location and building size. Real estate compliance laws are defined by jurisdiction and region. What you have to abide by differs in cities and states.
If an investor has a diverse portfolio with different properties in the country, it’s critical for the investor to understand the complex regulations in each location. It’s critical for preventing violations and fines.
If you’re an investor seeking to invest in property in California, there are many hard money lenders in California to assist you in your purchase of real estate. Do your due diligence and select one that is experienced. You’ll also want to select one that offers fast funding, competitive fees and rate, flexible lending criteria and good service. Choose one that has experience with multi-family residential, single family residential, land and commercial.