Predatory construction lender?

14 Replies

I ran across a company and business model that seems suspicious to me, and I'd like some feedback from the BP community.  I'll not mention the company name yet.  It's less than one year old, and I found only one mention in BP on it.

Here are the particulars:

  • Company extends consumer credit for a construction loan, secured by a Deed of Trust on the subject property, in order to repair/upgrade a primary residence prior to sale.  No payments are due until the home sells.
  • After the company completes renovations, the property must be listed for sale within 5 days (hmm...that's odd)
  • Every 30-days where the house doesn't sell, the sales price must be reduced by 2%.  (umm....what??!)
  • Company doesn't appear to carry a valid NMLS license.  Nowhere in their entire website domain is the term 'NMLS' found.  NMLS has no record of this company's name.  I verified that a recent Deed of Trust filed in Dallas county lists the company's name as the lender, not a different 3rd party lender/partner or variation on their name which might show up in NMLS.
  • One individual I found in their employee database (their Finance Controller) carries an inactive NMLS license.
  • Company representatives stated that their loan cannot be paid back with cash or a refi; only selling the home will clear the debt.
  • I've not been able to view their promissory note template yet, but I'm working on getting a copy.

My conclusions:

  • This company appears to be in the business of regularly extending consumer mortgages, and thus is subject to the SAFE Act.  Plus, having at least one employee with an NMLS [inactive] license suggests they are knowingly violating the SAFE Act; I can't fathom how they could claim ignorance on this.
  • Two elements of their business model seem highly predatory:
    • Forcing a consumer to sell their primary residence to clear the debt
    • Forcing a 2% reduction in equity every 30 days

I'm waiting on the Company to tell me what exempts them from either the SAFE Act or Dodd-Frank.  I'll be a shocked if there is a loophole that makes them compliant with state & federal law.

Thoughts?

Keep in mind for commercial purpose NON owner OCC loans only 12 states require RMLS and state RMLO license. 

terms are strange for sure.. but thy with the gold makes the rules.

just make sure its not an advanced scheme lending situation.  some lenders will allow accrual I  know I do .. 

But only to existing very well vetted and experienced operators I would never advertise that to the public and no beginners at all.

Originally posted by @Brit F. :

@Jay Hinrichs

Thank you, Jay. They are absolutely targeting owner-occupied properties.

OK then..  license is required in all states that I know of.. a simple call to the state department that handles mortgage loans will answer your question..  there could be a loop hole or work around that I am not aware of.

but in every state I have worked in and I am NMLS registered you can look me up..  I am inactive as I don't use it right now.

but when taking the state and federal tests these are questions.. so I would be shocked if its not required..

plus these are of course portfolio loans so maybe that makes a difference..  ??  state is who I would talk to . 

I’m guessing it’s Not a straight loan, but rather some sort of equity/profit % sharing arrangement.....thus the reason requiring an actual sale and the monthly price reduction (an owner could list the house at twice market value and never sell it).

I don’t know if that would avoid the lender licensing laws.  But yes, it would certainly lend itself to being perhaps predatory.

Originally posted by @Wayne Brooks :

I’m guessing it’s Not a straight loan, but rather some sort of equity/profit % sharing arrangement.....thus the reason requiring an actual sale and the monthly price reduction (an owner could list the house at twice market value and never sell it).

I don’t know if that would avoid the lender licensing laws.  But yes, it would certainly lend itself to being perhaps predatory.

it could be like Do hard money were they don't actually loan they form a LLC together with the borrower and if the borrower does not follow the rules of the operating agreement they just eject them from the operating agreement and take over.

also in our state ground up construction loans are exempt from licensing  rehabs are not.. not sure about ground up for those that are owner builder and going to occupy though will have to look into that. 

@Wayne Brooks & @Jay Hinrichs ,

I just checked one of the few properties they're doing in Dallas County.  Still 100% owned by occupant - no shared equity and no changes in ownership to a new entity.

The amounts are relatively small, ~$50k or less, and the purpose is strictly to update existing homes.  No new construction.

Originally posted by @Brit F. :

@Wayne Brooks & @Jay Hinrichs,

I just checked one of the few properties they're doing in Dallas County.  Still 100% owned by occupant - no shared equity and no changes in ownership to a new entity.

The amounts are relatively small, ~$50k or less, and the purpose is strictly to update existing homes.  No new construction.

they could be running under a consumer finance license .. for instance in CA you can do these with a real estate broker license , nmls rmlo  or Consumer finance license.. again if it was me and it appears your pretty determined to figure it out.

the place to do that is the state .  

I got a copy of the contract/agreement and talked to an investigator with TX Dept of Savings & Mortgage Lending.  His ears are perked up, and he's looking into the company.

Crazy thing about the agreement: pages 1 & 2 are the standard Texas Disclosure for construction lenders, clearly stating (formatting is mine):

"Your contractor may not require you to convey your real property to your contractor as a condition to the agreement for the construction of improvements on your property".  

Buuuuut, on page 3, which is where the company-authored portion begins, it states:

"This contract creates a mortgage or lien against your (Owner's) property to secure payment and may cause a loss of your property if you fail to pay the amount agreed upon."

It's kind of ridiculous and laughable, or incredibly bold if intentional, for the company to include such a contradictory statement immediately following the required Texas disclosure.

To recap:

  • Company is currently operating as an unlicensed lender across multiple states
  • They require an owner-occupied home to secure an equity line of credit for a consumer
  • They do not consider the borrower's Ability to Repay, which might violate federal law
  • Their hybrid 'Construction HELOC' (my term) fails to meet several TX requirements:
    • Requiring a Deed of Trust violates terms of TX consumer construction loans
    • Borrower doesn't control money drawn from the LOC, which violates TX requirement: "The owner requests advances, repays money, and reborrows money."
    • Repayment terms do not meet TX requirements of "substantially equal successive periodic installments"
    • HCLTV could exceed 80% max allowed in TX if they use ARV, rather than FMV when credit is extended.

From this point on, the TX SML Investigator will do his thing, and we'll see where he takes it.

On second thought, this really doesn’t look like a loan at all.  The “Company/contractor” are directly paying for/performing the work....not loaning the home owner $30k and then the owner goes and gets some contractor.  It walks and talks more like a joint venture agreement that is specifically geared toward a sale after the rehab is done.

It’s irrelevant for You to call it a “hybrid heloc” and impose “heloc laws” on it when it’s not a heloc.

@Wayne Brooks , I know what you mean. I initially struggled to define this thing until seeing the Agreement: it establishes open-ended credit based solely on home equity and is secured with a Deed of Trust. In Texas, that's a HELOC.

Texas has some of the strictest homestead laws with rigid rules & terms for the two types of allowed home equity lending products.  There's very little wiggle room for creativity.

Hypothetically, if they dropped the Deed of Trust and instead used a Mechanic's Lien for non-payment (like most contractors would do), then many of these issues disappear.

Originally posted by @Brit F. :

I got a copy of the contract/agreement and talked to an investigator with TX Dept of Savings & Mortgage Lending.  His ears are perked up, and he's looking into the company.

Crazy thing about the agreement: pages 1 & 2 are the standard Texas Disclosure for construction lenders, clearly stating (formatting is mine):

"Your contractor may not require you to convey your real property to your contractor as a condition to the agreement for the construction of improvements on your property".  

Buuuuut, on page 3, which is where the company-authored portion begins, it states:

"This contract creates a mortgage or lien against your (Owner's) property to secure payment and may cause a loss of your property if you fail to pay the amount agreed upon."

It's kind of ridiculous and laughable, or incredibly bold if intentional, for the company to include such a contradictory statement immediately following the required Texas disclosure.

To recap:

  • Company is currently operating as an unlicensed lender across multiple states
  • They require an owner-occupied home to secure an equity line of credit for a consumer
  • They do not consider the borrower's Ability to Repay, which might violate federal law
  • Their hybrid 'Construction HELOC' (my term) fails to meet several TX requirements:
    • Requiring a Deed of Trust violates terms of TX consumer construction loans
    • Borrower doesn't control money drawn from the LOC, which violates TX requirement: "The owner requests advances, repays money, and reborrows money."
    • Repayment terms do not meet TX requirements of "substantially equal successive periodic installments"
    • HCLTV could exceed 80% max allowed in TX if they use ARV, rather than FMV when credit is extended.

From this point on, the TX SML Investigator will do his thing, and we'll see where he takes it.

 It's interesting how they are doing this. When I read OP, I was thinking it was a combo deal:

- General Contractor. They can file mechanic's liens if not paid back.

- Unusually aggressive listing agreement. 

And, poof, no NMLS needed necessarily (check with a lawyer bla bla bla). But it would accomplish basically what they have herein attempted to accomplish by  breaking the rules.