Hard Money and Dodd Frank

[Jason W.]

Hi All –

I know another DF question. I looked and cannot find a thread with this questions. So please have some patience and provide what you know about the following strategy.

I'm considering the hard money lending business for single family residential homes. 1) I will not own the "dwelling" or residence 2) The buyer/borrower will not be residing in the residence supported by an occupancy affidavit in the loan package stating the home will not be non-owner occupied, notarized 3) The money I lend will be secured by the dwelling/property and I will be in 1st position on the lien. Basically the folks I'm lending my money to have enough of a down payment plus my loan to purchase the home outright. I will collect interest only payments for 3 to 5 years maximum (the loan can be paid in full at anytime without penalty) but at the end of the terms it must be paid be in full - balloon.

Will these loans need to comply with Dodd Frank?

Thank you,

Jason

[Jeff S.]

I know few here want to believe it @Jason W. , but with very little exception, owner occupancy is irrelevant. In this context, Dodd-Frank is mostly concerned with business purpose and consumer purpose loans.

To determine this, your borrower should prepare a Statement of Purpose for the Loan at the time of application. This document is specifically referred to in the regulation and is nothing more than a handwritten signed statement explaining what he or she will be using the loan proceeds for. Assuming good faith (another topic), you could rely on this information to determine if it is a consumer purpose loan, and therefore involve all the requirements of Dodd-Frank, or if it's a business purpose loan allowing an exemption.

A consumer purpose loan is one in which the money is used for "personal, family, or household purposes." There is no specific definition of a business purpose loan so it is considered to be a loan in which the use of the money is not for any of these three purposes. You did not indicate the use of the money, Jason, so it's impossible to know from your question whether Dodd-Frank applies to your loan or not.

Here are a few examples of loans secured by owner-occupied properties that would be for a business purpose and therefore considered an "Exempt Transaction." Quotes are cited directly from the regulation:

1. "A loan to improve a principal residence by putting in a business office." That is, a loan secured by a borrower's personal residence, i.e. where he and his family sleep every night, for the use of adding a business office to their home. This might be an addition or a remodel. Exempt.
2. "A loan to expand a business, even if it is secured by the borrower's residence or personal property." We were once asked for a loan to be secured by someone's condo. He lived upstairs from his stereo store and wanted to use the money to buy business inventory. This would be an exempt transaction even though it would be secured by owner-occupied property.

Here are some examples of loans secured by non-owner occupied real estate that would require compliance with Dodd-Frank:

1. A loan secured by an office building where the primary use of the money would be to take the family on vacation.
2. A loan secured by a shopping center where the primary use of the money would be to buy a family car or to remodel their personal residence or send a child to college.

In general, if the money is used for a business purpose then the loan would be exempt from Dodd-Frank whether or not it was secured by an owner-occupied property. There are a few exceptions and obviously, your state regulations apply as well. Also, if you're going to become a lender, I strongly suggest you spend some time with a lending attorney. This is not the same as a real estate attorney. Ask some local HML's for a reference and don't take lending advice from the internet, including from me. Good luck.