When the intended security property for a mortgage is a one to-four residential unit, the facts will determine whether the loan is a “consumer loan” or a “business purpose loan.” This distinction is critical in hard money lending.
The Secured and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) is applicable requiring registration under the NMLS, as defined: “Mortgage loan originator”. An (MLO) means an individual who takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan for compensation or gain.
Depending on whether the security property is owner-occupied, the Truth and Lending Act (TIL) will be applicable and the Real Estate Settlement Procedures Act (RESPA) will apply whether the security property is owner or non-owner occupied. Consumer loans by definition are “federally related residential mortgage loans in which the primary use of the loan proceeds is for personal, family, or household purposes regardless of whether the security property is owner or non-owner occupied.” A consumer loan is also commonly referred to as a “residential mortgage loan.”
The burden of proof is on the lender and broker to establish a commercial-business purpose loan and, thus avoid the extensive body of Federal and State regulations which are intended to protect borrowers in consumer loan transactions and to limit the loan terms available to the lender. Additionally, the purpose of the loan will control how the lender processes, documents, and underwrites the loan.
As a mortgage broker, it is critical to have documented proof if the loan is for business purposes.
A common misconception when considering a loan request is, “this is not the borrower’s primary residence, therefore it is not a consumer loan.” This limited evidence will not result in either the broker or lender having carried the burden of proof that the use of the loan proceeds is for commercial-business purposes.
It is the purpose and use of the loan proceeds and neither the collateral nor the occupancy as a primary residence which establishes whether the transaction falls under extensive and controlling Federal and State consumer laws.
Consumer lending laws will apply if the purpose and use of the loan is primarily for personal, family, or household purposes (even when the intended security property is other than a one-to four residential unit). For example, a gas station owner/operator who wants to re-finance his commercial property to consolidate personal debt such as credit cards, pay for his children’s college, purchase a car or pay for vacation, each fall under “consumer purpose”.
If the loan is to truly be for commercial-business purposes then the loan documents should contain evidence supporting this conclusion, including a hand-written Purpose and Use of Loan Proceeds declaration from the borrower. Other evidence may include:
- Evidence that the borrower is actively participating in the business for which the loan proceeds are intended;
- Confirmation letter from borrower’s attorney;
- Business financials and tax returns;
- Evidence that a substantial majority of the loan funds are being used for business purposes;
- Demands for payment of debts to be discharged from the loan proceeds addressed to borrower’s business;
- Business purpose projections resulting from the new loan proceeds;
- Borrower’s evidence of other loans and/or credit card debt to be paid off as part of a business purpose loan;
- Internet based research to verify the existence of the business entity.
It is vitally important to understand the difference between business and consumer purpose. When considering borrowing, investing or brokering, working with an experienced, knowledgeable broker can make all the difference. Please call us for advice (760) 845-9035. DRE# 00865708/NMLS# 305266