Lender REFUSES mortgage payments from LLC business account

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Lender REFUSES mortgage payments from LLC business account

Matthew McNeil
Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes

My lender is warning its clients that it will no longer accept payments from a business bank account, which is how I’ve been paying the loan since its inception many years ago. They insist I must pay using a personal account starting next month.

If we don't accommodate the demand, they're warning its clients the consequences will be as follows;
1) Reject all payments 2) Add a late fee 3) Report non-payment to the credit reporting agencies

To require this of me would force me to be in violation of the legal requirements regarding LLC’s mixing of funds between personal and the LLC business accounts. Thus, they are exposing me to liability.

I feel the lender may be in violation of the law for the above-mentioned reason. Furthermore, my loan was conventional and sourced from Fannie Mae which recognizes the legitimacy of a Quitclaim between the mortgage holders (me and my wife) and the LLC; so long as the LLC is controlled by me and my wife . In other words, Fannie Mae views the legitimacy of the LLC as a legal entity and I don't feel Fannie Mae would agree with this demand of the lender.

It seems to me that I can challenge the lender advising that I’m not obligated to honor their demand, and to force me to do so would empower me to file a formal complaint with the state Attorney Generals Office.

Any thoughts or advice?

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
5y
OK open and account that is owned by your LLC and just has your name on it for check writing purposes we do this alot.

the LLC owns it we name the account what we want and put the personal name on the checks but its run through the LLC books as hte account is owned by the LLC..  
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  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    5y

    I dont understand why you need an LLC to own rentals. I have owned as many as 12 rentals in my personal name and never felt the need for an LLC. Good insurance including umbrella coverage is a simpler and cheaper solution. The only exception is if there are multiple partners and then of course you need some legal structure.

    1Reply
  • Brady Gallagher
    Financial Advisor · Baltimore, MD · Member since 2020 · 12 posts · 6 votes
    5y

    @Joe Splitrock

    And be sure your accountant is paying attention on how to classify those payments. It won’t matter if you account properly.

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y
    Originally posted by @Jeyo Punnakottil:

    @Joe Splitrock most lenders wont let you close a loan in an LLC @ first so there is no option left but to close the loan in your personal name and then quitclaim the ppty to an llc.I was scrambling a yr before with this issue went to 8 lenders no one will close the loan in an LLC name.How can it be be justified @ this point that corporate veil is piereced.Then that means there is no way asset protection and bankers are purposefully pushing you to do it.I am not a lawyer ,this is not a legall advice but just sharing my thoughts.

    If you want to borrow in an LLC you can do that with commercial loans, but either the LLC needs credit or you will need to personally cosign the loan. The reason you had trouble with standard lenders is most likely because you are seeking conventional financing. Conventional loans are Fannie Mae and Freddie Mac backed loans, which are primarily designed for personal home ownership. This products can be used by investors in a limited manner, but they are designed to lend to individuals, not businesses. The risk with lending to an LLC is that there is no recourse to collect money from the individual. That is why they allow you to transfer to an LLC, but you are required to keep the loan in your personal name.

    Piercing the corporate veil may be easier than most people think. An attorney simply needs to prove that the business was not functioning as a separate entity from its owner. Keeping separate accounts is only one aspect. A corporation needs to have its own operating bylaws which the employees follow to prove the business had its own "operating mind" separate from the owner. This can be difficult if you are sole owner, making all the decisions and self managing your tenants. An LLC is really designed to protect owners from mistakes the business makes, because often you have employees who may not follow the rules. If you are the only employee, it is harder to prove you are separate from the business. If your negligence is proven to be the cause of liability, you can be held personally liable. Even if you separate bank accounts, in the end you are still the business.

    There are things you can do. Make sure you properly fund the business and are careful how money is put into the LLC and taken out. Setup operating rules and policies (like any business would have). Always use your business entity name in all communications and interactions. Not only should you have business checking, but also business credit cards and cell phone in business name. If you are reimbursing persona expenses, have an expense report to accompany every reimbursement. The expense report should list business purpose and have receipts.

    It is not that you can't maintain separation, it is just that most people are really horrible at it. They are sole proprietors who think just signing up for a LLC means they are protected like a magic bubble. The reason I don't use LLC is I don't want to go to all the extra effort and time for marginal gain. I have really good insurance and focus my efforts on avoiding litigation.

    2Reply
  • Nick BelskyBusiness Member
    Lender · Orlando, FL · Member since 2021 · 1k+ posts · 704 votes
    5y

    @Jeyo Punnakottil

    Next time you need to close a loan in an LLC, give me a call. I close residential loans in LLCs all the time.

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  • Patricia Steiner
    Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes
    5y

    This isn't about the lender. It's about the legal structure; from Tom Copeland, Business Author, who recently addressed this very same question in another forum: "When you set up an LLC (or any other corporation) you must follow the formalities of the corporate status. Keeping a separate business account and not paying personal expenses out of that account are necessary. Otherwise, you can lose your liability protection. Sounds like you are a single person LLC - but you should not pay mortgage payments or any other bill that has a personal use. This is one of the complexities of becoming a corporation. Although an LLC is the simplest form of a corporation, and doesn't require filing different tax forms, it's still more cost and work to do this."

    Technically if you write a business check to your personal account and draft from there, you would lose that expense as a business deduction but still be eligible for the personal mortgage deduction. You need to decide which way to go but know that Fannie has changed investor guidelines that now require an LTV of 75% and higher interest rates from those offered to individuals.

    Just is...

    A financial institution cannot auto draft an account of a non-borrower for payment. You may just have to write a check each month.  

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