Dodd Frank & Private Lending Question

7 Replies

Hey BP Forum Readers,

Who can explain how the Dodd Frank regulations affect the way private money and hard money loans can be written for investment properties and owner-occupied properties? And do you know of a helpful resource for understanding this?

I've had a few  hard/private lenders tell me that they can't lend on owner-occupied properties. Whether they're single family or multi unit, whether it's a short term loan or a 30-year fixed rate loan, owner-occupied is apparently a no-go. Why is that? And does Dodd Frank regulate loans on non-owner occupied properties at all? I have a few specific examples that I'll share in response to your comments.

Thanks y'all!

Dodd Frank requires that loans to owner occupants cannot have a balloon less then 5 years. So that is a problem for a short term lending on owner occupied property. 

If it is non owner occupied and property is owned by a company then there are no issues with Dodd Frank on a short term loan.

I bet banks lobbied this one in. They don't want competition.

@Roman M. thanks for commenting! So why would a private lender, offering a 30 year fixed-rate mortgage on my personal residence (a 3-family), state that Dodd Frank regulations are the reason he can't lend to me?

You have to really ask that lender.  

It could be the rate maybe considered usuary in your state or he could be not licensed to lend. 

@Slocomb Reed , you can search numerous threads or Dodd Frank regulation, but what you will find can be summarized as follows

Dodd Frank Act, and administrative rulings by the Consumer Financial Protection Agency, are unbelievably numerous, hard to interpret, subject to subjective judgements, have harsh and draculon penalties for even small or inadvertent infractions, and cases are being pursued by trail attorneys both as individual cases and as part off class action.

So, a lender set up to do a huge volume of personal mortgage loans may find the risk acceptable, the enormous investment in compliance and personnel  and procedures a cost of doing business.

Private lenders do not have the time, money, staff or risk tolerance to be in this market.  For example, one of the rules is that a lender must verify that a borrower can 'afford' to make the payments on a loan.  But, no direction is given on how this is to be accomplished; i.e. there is no safe harbor that a lender can confidently say he complied with this regulation. It will be up to a judge or jury to decide on an individual basis.  This is only one regulation that puts a lender at risk.  

Since private/hard money lenders can make 12% + on investment property loans, without the compliance risks, what the incentive to try to navigate through the thousands of pages of regulations, rules and procedures involved with a consumer mortgage?  The risks are too great, the return too small. 

@Slocomb Reed
Many already mentioned but private investors want rates that are double digits and many states have usury laws that prohibit rates above a certain limit. Also for Dodd Frank regulations are very strict and a lot of disclosures - if the loan is a non qualifying mortgage which a private investors loan would be since I don’t think a PL will give a rate under 5.5% then most will not touch it in today’s environment.

If you cannot get a loan through a bank then you should not be buying the home. That’s the most obvious reason why they won’t lend.

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