Experiences investing in trust deeds
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CA · Member since 2011 · 762 posts · 182 votes
12yI originate my own trust deeds here in SoCal. Had to start foreclosure a few times but never went all the way, borrower always came through. Foreclosure fees are limited by statute to about 1% of loan amount plus publishing/posting/tsg etc costs, comes out to about $3k, more if it's a really big loan amount, borrower pays upon reinstatement/payoff/trustee sale. There are a bunch of foreclosure trustee's around, any one can give you a quote. Recouped principal and interest every time, except once when I only got principal back.
The key is to find a really good borrower (flipper), treat them right and they will treat you right, it can be a great relationship if done right. This, to me, is the absolute most important part of this business...interest, fees, terms are secondary.
No really bad experiences ... yet. Mostly the problems come when borrower stops communicating. Irony is most problems can be worked out if we put our heads together, but when they stop communicating everything turns to do-do and not much can be done.
I've only done flipper loans, no keeper loans, and no ground-up loans.
Keep ltv low and 1st position only. Lot's of folks do 2nds ( gap funding or whatever you want to call it), they are going to really get whacked one of these days, if not already, these are generally the ones that raise their hands at the REIA's when asked who are the private lenders, usually about a third of the crowd.
Risky business if you don't know what you are doing, safe if you do. I'm fairly new at this compared to some, but getting better every day (isn't that a beatles song).
Good luck.
63 Replies
- 12yRob CeeLebanon, NH · Member since 2012 · 258 posts · 87 votesOP
Originally posted by @Jeff S.:
Wow!! I think you're playing with dynamite, Rob. You don't meet the borrower and you can't look at the property because you're out of town. Because a broker is licensed doesn't mean his paperwork protects you or that he knows what he's doing. Don't ask me how I learned this.
Title companies are insurance companies. They don't review loan docs on your behalf or ensure that your documents protect you. Frankly, they don't care about you at all. Ditto your escrow company, who must follow your broker's lender instructions, the escrow instructions, and of course, the law. To state the obvious, the only time you'll know if you're protected is when you have to take action against someone, or if they take action against you, and by then it's too late.
You really ought to speak with a good lending attorney, who can review the loan process with you in detail. Even with a checklist, how will you know if the note and DOT protect your interests? How do you know if the assignments to you are enforceable? Did your broker obtain his loan documents from a lending attorney?
I'm not trying to scare you (in fact, really I am), but my suggestion is to either get a set of loan documents from a lending attorney for your broker to use, or have a lending attorney review those from your broker. Or, speak to the attorney who provided the docs to your broker but make sure he specializes in lending and is used by other HML's. Don't ask me how I learned this either.
Jeff
Jeff, when you say, "don't ask me how I learned this", what bad experiences do you have with the documentation not being correct? What ending up happening as a result?
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
nice thread,,,
there is some pretty good advice so far from different points of view.. Reality is anyone who had money out in 07 and 08 got whacked.. Unless you were doing first well under 50% LTV which of course those are far and few between.. I just look back on some loans I made in Atlanta. Nice properties. 140k appraisals on 2000 sq ft 10 year old homes. At the end of the day I sold a few of those ( after I foreclosed) for 35k in 09 and 2010 and took a beating.. nothing any lender could have done to save that.. Same with a lot of central CA I think the inland empire got hammered etc etc. Many many long time West coast HML's went down in the GFC...
- Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes12y
Ok, Rob. On one hand, you're using a hard money broker to market for borrowers and underwrite loans that you fund, presumably as sole bene (100% beneficial interest).
On the other hand, you are questioning the work the broker has done. So, absent getting your brokers license, I suggest you train to be a note buyer like you were going to resell these notes.
For starters, notes aren't recorded (bet you knew that) however the security instrument is (trust deed or mortgage).
Here are some pre-funding things to review:
Appraisal
Borrower application
Borrower disclosures provided
Credit report
Income documentation
Underlying (senior) mortgages (if you will be junior)
Prelim
Legal documents concerning title or clearances
Here are some post-closing items to get:
Hazard Insurance naming your vesting as loss payable
Title policy with correct bene vesting and lien position
Any inspection reports due concerning repairs or construction projects
Servicer info, including hello letter to borrower
Original note and recorded TD, if that is your arrangement with broker
Bill Gulley might chime in here and could have a list as long as my arm. Personally, if you came to me and started bugging me as a lender and tried to micro-manage, you'd be a historical footnote like my early investors.
Jay Hinrichs - I read about that 07-08 thing. I even think I was there. It never helps when people tell you that what doesn't kill you, makes you stronger, though. All said, bet you still never missed a meal, right?
Hope this is all stuff on your current checklist. Improve yours as you improve. Btw, Bill Tan from SDCIA just called. Telepathy, I guess.
- Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes12y
Originally posted by @Rob Cee:
Originally posted by @Ellis San Jose:
Here's a simplified version of how I look at a loan:
The Collateral: If everything went wrong, would I be ok taking the property back minus all expenses. ?
The Borrower: Do I have an ethical person willing & capable of paying on time?
Will they communicate with me BEFORE there is a problem & work to responsibly solve it?
The Documentation: Did I read & understand the agreement?
Did all the right parties sign the agreement properly?
Is the agreement legal & recorded properly?
When in doubt, pay an attorney to review it with you.
The better the collateral & documentation, the less important the borrower is in the formula.
Thanks Ellis, when you say "agreement" are you referring to the note? How do I know the note is legal and has been recorded properly? I'm relying on the HML (who is licensed with the NMLS & CA BRE) & escrow/title for this expertise. Do you have a checklist to make sure the HML and escrow/title are doing all the paperwork correctly when funding a new trust deed in CA?
- Los Angeles, CA · Member since 2014 · 15 posts · 1 vote12yOriginally posted by @Rick H.:
Ok, Rob. On one hand, you're using a hard money broker to market for borrowers and underwrite loans that you fund, presumably as sole bene (100% beneficial interest).
On the other hand, you are questioning the work the broker has done. So, absent getting your brokers license, I suggest you train to be a note buyer like you were going to resell these notes.
Hi, Rick
How do you train to become note buyer and where do you buy note?
Assuming all paperwork is not correctly, the other way to look is whether you are willing to buy the property at the price you lend. In general, there are two outcomes. Either the loan is paid or you take the ownership of the property. If a property is appraised at $300k and you lend $200k and are willing to pay $200k for it. I think it does not matter whether the borrower pays the loan or not. Sometime I would prefer the borrowers don't pay back. Does it make sense?
- Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes12y
The note typically contains the terms of the loan, so yes that is "agreement". There may be other disclosures and documentation involved depending on the type of loan. Have your attorney review all your documentation and use the same forms for every deal. It will be money well spent.
The more you "outsource" your financial life to someone else, the greater the chance you have for the "dynamite" to explode in your face " well put Jeff S. ". I'm not implying that your broker would purposely do anything to harm you, however, human nature is something you should not ignore. When there is money to be made greed makes people blind, and sloppy.
I wouldn't feel comfortable unless I ...
Verified borrower info, Verified title, verified condition of the collateral.
I spoke to a newbie "investor" a few months ago. He asked me to review his note and TD, AFTER he already funded the "6 figure" loan.
Here is what I found.
1)The trust deed was never recorded.
2) The person that signed for the loan didn't own the property and had no authority to encumber the property used for collateral.
3) There were multiple liens and mortgages and liens on the property so there was no equity anyway.
Apparently this was a big scam perpetrated on many naive private lenders in my area.
The money is basically gone and the note is worthless.
- 12yRob CeeLebanon, NH · Member since 2012 · 258 posts · 87 votesOP
Originally posted by @Ellis San Jose:
The note typically contains the terms of the loan, so yes that is "agreement". There may be other disclosures and documentation involved depending on the type of loan. Have your attorney review all your documentation and use the same forms for every deal. It will be money well spent.
The more you "outsource" your financial life to someone else, the greater the chance you have for the "dynamite" to explode in your face " well put Jeff S. ". I'm not implying that your broker would purposely do anything to harm you, however, human nature is something you should not ignore. When there is money to be made greed makes people blind, and sloppy.
I wouldn't feel comfortable unless I ...
Verified borrower info, Verified title, verified condition of the collateral.
I spoke to a newbie "investor" a few months ago. He asked me to review his note and TD, AFTER he already funded the "6 figure" loan.
Here is what I found.
1)The trust deed was never recorded.
2) The person that signed for the loan didn't own the property and had no authority to encumber the property used for collateral.
3) There were multiple liens and mortgages and liens on the property so there was no equity anyway.
Apparently this was a big scam perpetrated on many naive private lenders in my area.
The money is basically gone and the note is worthless.
Wow that is crazy. So this was a refi? I have only lent hard money on new purchase loans not refi's. Were they using a well known escrow title company for this deal? Were they going though a HML that has been in business say at least 10 years with references? I can't imagine a well know escrow/title company not recording a trust deed or allowing a loan to fund if the escrow instructions say that the lien is to be in 1st position and there are other liens ahead of it. I do look at the borrowers application & credit closely. If they own other properties on the loan app I check that they are on title for those...I do not ask for tax returns, bank statements or paystubs though (doing more asset based lending). I do check the title report....but escrow/title companies (Chicago, First American, Old Republic, etc...) fund tons of mortgage loans everyday and if the escrow instructions say for my lien to be in 1st position or it doesn't fund, I would think this would happen. I do check the appraisal (I could spend $150 on an independent licensed appraisal review for a 2nd opinion if I am uneasy about the collateral or a drive by appraisal by a 2nd appraiser). I do talk to Realtors about the neighborhood if I'm not sure of it. One thing I have not done though is have the HML's I use loan docs run though a good local mortgage attorney. Maybe I should be doing this ($1,500 was a quote I got for this). I only lend on stuff I would be comfortable owning as a rental if it came down to that. I'm only lending in CA & WA right now in urban areas with jobs. I have not been lending on new construction spec homes or high dollar fix/flips.
I may be being a little sloppy making sure all documentation is being done properly and relying too much on the HML and escrow and not checking their work thoroughly. Trying to figure out how I can do this better.
- CA · Member since 2011 · 762 posts · 182 votes12y
We'll see what Ellis says, but it's doubtful this went through a title/escrow closing ... if it did lender would have a claim against both title and escrow. I get lender instructions signed by both escrow officer and title officer that all these things are in order.
Anybody the funds 6 figures without going through a formal closing is, well ... I don't know what to say!
- 12yRob CeeLebanon, NH · Member since 2012 · 258 posts · 87 votesOP
So I want to make a list of everything that could go wrong funding a CA trust deed. So far Eliis mentioned on his example:
-trust deed not being recorded
-borrower getting the loan in a refi is not on title to the property
-lending on a 2nd mortgage with multiple sr. liens unbeknownst to you
What are some other real world examples that trust deed investors have seen gone wrong with others or things that have gone wrong for them causing them to lose money? What are some real life examples of investors losing money because something was wrong with the loans docs?
- Encinitas, CA · Member since 2011 · 191 posts · 252 votes12y
Here are a few for the list that come to mind:
-Failure to check that Broker’s representation of nature and condition of collateral is correct;
-Failure to catch that Borrower is substantially overpaying for property;
-Failure to verify that Borrower statement of business purpose of loan is inaccurate (loan in reality is for personal, household or family purposes) making loan subject to consumer protection laws and disclosure;
-Failure to verify that insurance is sufficient and the type of policy that covers lender as insured for loss; or policy lapses after funding and servicer does not catch it;
-Failure to verify that broker or arranger is properly licensed such that lender exemption from usury is invalidated;
-Failure to monitor and require borrower to keep property taxes current;
-Title company e-mail gets “hacked” and you wire funds based on fraudulent e-mail
-Not understanding the limitations on your options and problems that come up with "fractional" (multi-lender) loans when they go into default
-And here is one for the books that actually happened:: arranger comes into possession of notary stamp and commits identity theft by convincing lender, brokers, escrow and title that she is the person who’s identity has been stolen.
- CA · Member since 2011 · 762 posts · 182 votes12y
Or, how about, originating broker confirms good insurance at origination, borrower transfers title without informing lender or originating broker, and without naming new owner as primary insured on hazard insurance policy, property burns to the ground, insurance carrier denies claim because named insured no longer owns the property.
- 12yRob CeeLebanon, NH · Member since 2012 · 258 posts · 87 votesOP
OK so the list is below with my thoughts in parenthesis on what due diligence a trust deed investor can do to mitigate these issues...please add your thoughts on due diligence. Also please keep posting everything that you have seen go wrong so we can add to the trust deed "gottcha" list.
-trust deed not recorded (call title/escrow and make sure it gets recorded and get proof)
-borrower getting a cash out refinance is not on title (check prelim make sure borrower is on title)
-lending on a 2nd mortgage with multiple sr. liens unbeknownst to you (title check for liens or only lend on 1st trust deeds)
-Failure to check that Broker’s representation of nature and condition of collateral is correct (review appraisal closely, if in doubt hire a property inspector to check it out. Could also get an appraisal review)
-Failure to catch that Borrower is substantially overpaying for property (2nd appraisal review, BPO in addition to brokers appraisal)
-Failure to verify that Borrower statement of business purpose of loan is inaccurate (loan in reality is for personal, household or family purposes) making loan subject to consumer protection laws and disclosure (make sure you have a borrowers statement of business purchase in file ...... by the way, if a borrower checks the box on page 4 of the 1003 loan app that they will NOT occupy does this trump getting a statement of business purpose of loan?)
-Failure to verify that insurance is sufficient and the type of policy that covers lender as insured for loss (check insurance policy) or policy lapses after funding and servicer does not catch it; (make sure servicer is checking policy doesn't lapse - do servicers carry E&O insurance for this?)
-Failure to verify that broker or arranger is properly licensed such that lender exemption from usury is invalidated (in CA check BRE lookup page and check their NMLS license number at www.nmls.com)
-Failure to monitor and require borrower to keep property taxes current (a good servicer should do this - do they have E&O insurance for negligence?)
-Title company e-mail gets “hacked” and you wire funds based on fraudulent e-mail (call title person in person to get wire info over the phone)
-Not understanding the limitations on your options and problems that come up with "fractional" (multi-lender) loans when they go into default (don't lend fractionally, only buy whole trust deeds)
- Encinitas, CA · Member since 2011 · 191 posts · 252 votes12y
Rob Cee, a few thoughts I would like to put down based on some of the due diligence points you have raised.
1) All the appraisals, bpos, etc. in the world will not IMHO ever be a sufficient substitute for either you or someone you inherently trust putting your feet on the ground and actually looking at the property and understanding up close exactly what you are funding. To a certain extent, this is a similar debate to the one on the boards where risk is talked about in local v. out of state investing.
2) “Owner occupied” is not the same as the consumer definition of “personal, family, or household” purposes. Case in point: I just passed on a loan in which the borrower was buying out siblings on an inheritance so her daughter could live there. Not owner occupied, but clearly a consumer loan. Some less than scrupulous brokers would create a “rental agreement” between borrower and daughter so that they could justify calling it a “business loan”. Don’t ever go there and always look beyond the paperwork to get a sense of what is really going on. Borrower will blame the broker for the false paperwork for doing this whether the complaint is justified or not, and that obviously impacts the lender.
3) If it is a true business loan, broker probably does not really need a NMLS endorsement.
- 12yRob CeeLebanon, NH · Member since 2012 · 258 posts · 87 votesOP
Originally posted by @Rob K.:
Rob Cee, a few thoughts I would like to put down based on some of the due diligence points you have raised.
1) All the appraisals, bpos, etc. in the world will not IMHO ever be a sufficient substitute for either you or someone you inherently trust putting your feet on the ground and actually looking at the property and understanding up close exactly what you are funding. To a certain extent, this is a similar debate to the one on the boards where risk is talked about in local v. out of state investing.
2) “Owner occupied” is not the same as the consumer definition of “personal, family, or household” purposes. Case in point: I just passed on a loan in which the borrower was buying out siblings on an inheritance so her daughter could live there. Not owner occupied, but clearly a consumer loan. Some less than scrupulous brokers would create a “rental agreement” between borrower and daughter so that they could justify calling it a “business loan”. Don’t ever go there and always look beyond the paperwork to get a sense of what is really going on. Borrower will blame the broker for the false paperwork for doing this whether the complaint is justified or not, and that obviously impacts the lender.
3) If it is a true business loan, broker probably does not really need a NMLS endorsement.
Thanks Rob I appreciate your points. If your local I agree going by the property yourself is good. By 99.9% of all mortgage loans done in America are done with the funding lender and the end investor relying on an appraisal to fund a loan and never seeing the property. With point #2, if a borrower checks the box on page 4 of the declarations section of the 1003 loan application that they are not going to occupy the property and signs the loan application, that is loan fraud if they personally live in the property in any way. So with that I do not see how it could be argued that it is a consumer loan when they checked that box and signed the app AND got a investment insurance policy (you are going to know if it's a owner occ or investment insurance policy). But yes I agree it is must to get them to sign a document saying it is an investment.
- CA · Member since 2011 · 762 posts · 182 votes12y
You can have a business purpose loan that is secured by a OO property, conversely, you can have a consumer purpose loan that is secured by a NOO property. Occupancy has very little to do with consumer vs business purpose loans.
- 12yRob CeeLebanon, NH · Member since 2012 · 258 posts · 87 votesOP
Originally posted by @Account Closed:
You can have a business purpose loan that is secured by a OO property, conversely, you can have a consumer purpose loan that is secured by a NOO property. Occupancy has very little to do with consumer vs business purpose loans.
I guess I'm confused then. I thought it was clear cut, if they check the box on the loan app that they do not intend to occupy the property, then it is considered a non-owner occupied loan not subject to the consumer laws of primary residence loans. If you go out and get a conventional fannie/freddie investment property loan from Wells Fargo or anyone, the only thing they have in the loan file to document you are not going to live in the property is the box that is checked in the declarations section of the 1003 loan app. They don't even require any statement of business purpose or anything like that.
- CA · Member since 2011 · 762 posts · 182 votes12y
As @Rob K. alluded to, if the loan proceeds are used for personal, family or household use it's a consumer loan, if not, it's a business loan. Nowhere in the immediately preceding sentence did I say anything about occupancy, there is a reason for that, it's because it's irrelevant.
If you lend a flipper money to do work on his rehab, secured by the rehab property, but he uses the money to take his family on vacation to Hawaii instead, you have a consumer loan, even thought he doesn't occupy the rehab.
If you lend a flipper money to do work on his rehab, secured by his personal residence, and the money is used to do work on his rehab, it's a business loan.
Starting to see?
- 12yRob CeeLebanon, NH · Member since 2012 · 258 posts · 87 votesOP
Originally posted by @Account Closed:
As @Rob K. alluded to, if the loan proceeds are used for personal, family or household use it's a consumer loan, if not, it's a business loan. Nowhere in the immediately preceding sentence did I say anything about occupancy, there is a reason for that, it's because it's irrelevant.
If you lend a flipper money to do work on his rehab, secured by the rehab property, but he uses the money to take his family on vacation to Hawaii instead, you have a consumer loan, even thought he doesn't occupy the rehab.
If you lend a flipper money to do work on his rehab, secured by his personal residence, and the money is used to do work on his rehab, it's a business loan.
Starting to see?
Thanks David. No I think I'm fully confused on this one, not sure we are on the same page. I would have to talk to a mortgage attorney to have them explain it to me to get more clear on this one. As far as I knew, they check they box on the loan app that they aren't going to occupy the property, it's an "investment loan" no matter what they do with the loan proceeds, period. And thus is not subject to "primary residence" consumer mortgage finance laws, period (the laws are different for primary residence and investment property mortgages). I am talking about a purchase money trust deed here, how could they use the funds to take their family to Hawaii instead? Even on a cash out refinance on a non owner occupied rental property, if a borrower states that they are not going to occupy the property it is considered a" investment loan" in terms of mortgage consumer laws, no matter what they do with the cash out proceeds.
- CA · Member since 2011 · 762 posts · 182 votes12y
I guess it is a nuanced point. I had to have a discussion with my mortgage attorney before I understood, or at least I believe I now understand. Talking with the right attorney is important in this business not only on this point but many others as well.
They key to understanding is to first clear your mind of any preconceived notions you have on the subject and concentrate on the words 'personal, family or household use'.
What if borrower received more than 100% of purchase price on a purchase money loan ... money for Hawaii. What if it's a gap funding for rehab and money doesn't go through funds control ... money for Hawaii. If it's a purchase money loan for less than purchase price or more than purchase price with funds control, then there is probably no Hawaii money.
What if borrower doesn't move in but a family member does ... family use thus a consumer loan.
Just because the borrower checks a box saying HE doesn't INTEND to move in falls way short of guaranteeing a business loan.
- 12yRob CeeLebanon, NH · Member since 2012 · 258 posts · 87 votesOP
Originally posted by @Account Closed:
I guess it is a nuanced point. I had to have a discussion with my mortgage attorney before I understood, or at least I believe I now understand. Talking with the right attorney is important in this business not only on this point but many others as well.
They key to understanding is to first clear your mind of any preconceived notions you have on the subject and concentrate on the words 'personal, family or household use'.
What if borrower received more than 100% of purchase price on a purchase money loan ... money for Hawaii. What if it's a gap funding for rehab and money doesn't go through funds control ... money for Hawaii. If it's a purchase money loan for less than purchase price or more than purchase price with funds control, then there is probably no Hawaii money.
What if borrower doesn't move in but a family member does ... family use thus a consumer loan.
Just because the borrower checks a box saying HE doesn't INTEND to move in falls way short of guaranteeing a business loan.
OK let's take a hypothetical situation here. I have a rental house and I go to Wells Fargo and do a cash out refinance on that rental house on a investment loan program parameters, and I check the box on the app that I do not plan to occupy the house. But I change my mind 2 weeks after closing and move in. You are saying when I default and Wells Fargo goes to foreclose, I can make a claim to Wells Fargo that this loan should be foreclosed upon due to guidelines regarding a primary residence and not and investment home (there are different rules for example in CA how and when you file a NOD on a investment vs. a primary residence)? You are saying I can go back to Wells Fargo and argue that this loan should be non-recourse (not recourse as all investment loans are) because I changed my mind after closing and moved in? I'm not sure I buy that. Then what would be the point for having different laws at all for investment mortgages vs. primary residence mortgages if someone can just "move in" after close even though they stated it was an investment property on the application, got an investment loan, and it becomes a primary residence loan? And I'm not sure I buy that if I go to Wells Fargo and get a cash out refi on my rental 4-plex, check the box that I won't occupy on the app, and use the cash out proceeds to go Hawaii, and all of a sudden this becomes subject to "primary residence" laws in terms of Dodd Frank, Qualified Mortgage (QM), recourse/non-recourse, foreclosure laws, etc.... That is hard to believe.
- CA · Member since 2011 · 762 posts · 182 votes12y
I don't completely follow your example, but if I did the answer would likely be that WF originates only consumer loans ... RESPA, TILA, DF etc compliant and with NMLS licensing.
- 12yRob CeeLebanon, NH · Member since 2012 · 258 posts · 87 votesOP
Originally posted by @Account Closed:
I don't completely follow your example, but if I did the answer would likely be that WF originates only consumer loans ... RESPA, TILA, DF etc compliant and with NMLS licensing.
Yes but the loans funded by Wells (or any lender) that are owner-occupied and non owner occupied are subject to different consumer rules and regulations. For example in the state of CA, technically a primary residence purchase loan is "non-recourse" and a investment purchase loan is "recourse". Investment property loans are also not subject to a lot of the Dodd Frank rules. As far as I know, an investment property mortgage is an investment property mortgage, whether it is originated and funded by Wells Fargo and assigned to Fannie Mae, or originated by John Doe hard money broker and funded by Jane Doe investor. They are subject to the same rules as far as I know.
- 12yRob CeeLebanon, NH · Member since 2012 · 258 posts · 87 votesOP
The point I'm trying to make is, if a mortgage loan is underwritten and funded based on it being a investment property mortgage (whether that is a hard money lender or Wells Fargo, Chase, BofA or whoever making the loan), I do not believe a borrower can just "move in", or use the cash out proceeds to go to Hawaii, or move their grandma in, and all if a sudden make it the loan flip to being under "primary residence" consumer laws.
- CA · Member since 2011 · 762 posts · 182 votes12y
Let me try saying it a different way, Rob Cee.
If the loan origination complies with RESPA, TILA, DF, SAFE, CFPB, et al, the money can be used for personal, family or household purposes, and is called a consumer loan; If the loan origination does not comply with these regulations, the money cannot be used for personal, family or household purposes and is called a business purpose loan.
If a loan originator when originating a loan does not comply with said regulations (a business purpose loan) and the money is used for personal, family or household use, lender and originator potentially have big problems. Thus originator and lender bend over backwards (or should) to ensure proper use of the funds. That's why you see so much talk about only lending to entities, and only lending for flips or rentals ... it's all about keeping the loan purpose in the business domain.
What's sad, imo, is that hml's/pml's and other experts propagate the notion that if the property is NOO, it's a business purpose loan and everything is hunky dory, this is wrong! I think this misconception is at the root of the confusion here. And this is why trust deed investors need to understand and review loan docs and not depend on their hml broker ... brokers often times don't get it themselves.
Anybody that knows different is free to chime in!
I'm not an attorney and this is not legal advice. Seriously, this is not a simple subject and one should consult with a knowledgeable attorney before engaging in loan origination, it is after all real money with real consequences.
- 12yRob CeeLebanon, NH · Member since 2012 · 258 posts · 87 votesOP
Thanks for the explanation Dave, that is good info. So Dave you are saying, if I went to you to get a hard money cash out refinance on my rental 4-plex and I checked the box on the 1003 that I do NOT plan to occupy as my primary residence, but then I went used the cash out proceeds to go to Hawaii or have my grandma move into one of the units, that trust deed your originated is now considered a "consumer loan"? And what are the consequences for the lender for that being a consumer loan? Can you point me to more info on that specific law somewhere?
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