What Might A Typical Pre-payment Penalty Be In SW Florida

Question

Greetings fellow BP'ers...I have been doing some private lending (for some BP users as well as others) for some time now. My general parameters are 12%, 4 points origination fee (rolled into the note), for one year with no pre-payment penalty. Some of these loans are small (50K, 60K, etc). If they pay off in 2-3 months, the annual return is high but the actual cash is minimal. I know a few private lenders have a pre-payment penalty to guarantee a minimum return. I am curious as to what others typically ask for in a pre-payment fee if the loan is paid off in less than one year. Ideas?

@Jay Hinrichs

@Bill Gulley

p.s....i DEFINITELY want to be compliant with DF as well as state regs which have a maximum rate of 18% APR. Anything over that is usurious. These loans are strictly investor loans to entities, etc so I am never in harms way with CFPB, etc.

John Thedford · Answer

@Jay Hinrichs I don't know for sure but believe loans on any RE in Florida cannot exceed 18%. I do know I had a problem with a borrower a few years back, he hired a lawyer, and they raised the usury issue. Rather than fight it out in court, I accepted less interest, he sold the house, we parted ways. Now, if you wanna make some real change, open a pawn shop in Florida. 304% interest:) and at that rate, it compounds very well:)

Jay Hinrichs · Answer

I see these set up with 3 months minimum payments... but in my lending practice I am always happy to get paid off.. but then again I have deal flow.. so it depends on the lender.

John Thedford · Answer

@Wayne Brooks if the loan is written for 12 months at 12% plus 4 points, an early payoff does not trigger usury because the loan was written for 12 months. Write that same loan for 6 months, you basically have 12% per anum plus 4 points (for six months) which  equals 8 points for 12 months...so 12%+8 points = 20==usury! Early payment is an option of the borrower but not required per the note. @Jay Hinrichs so I can write any loan and require 3 months interest minimum without triggering usury? 12% plus 4 points origination fee and require 3 months interest no matter if they pay it off in 1 month or 3?

Account Closed you don't have any points? Strictly 13%?

Account Closed · Answer

@John Thedford No points.

Dustin Lauer · Answer

@John Thedford I don't know if pre-payment penalties count!  Just like you said it is not required of the borrower to payoff, so I'm not sure.... All I know is I don't like being in any "interpretable area of a law"  I personally don't ever use pre-pay penalties.  I do this more so to incentive payoff, valuing the velocity, security and liquidity over the overall yield earned.  Some rental lenders have crazy high pre-payment penalties akin to skyscraper financing.  Many rental lenders have either 10 year, 5 year, or 3 year step down pre-payment penalties lowering by 1% per year.  To my knowledge some lenders require loans or blankets of loans to be over $500K+ in Florida to avoid usurious rates charged.  Statue source (disclosure I'm not an attorney or accountant)  http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0600-0699/0687/Sections/0687.02.html

Bill Gulley · Answer

Now, prepayment penalties can be charged, but they can also be pretty tricky, not just as to the math or usury but also hamstringing a borrower taking on predatory practices. Don't go there at all with residential contracts. There is an exception in seller financed sales where an early payoff creates a tax liability for the seller, however the value may be the difference in the tax liabilities being paid over time vs. a single payment. Before attempting to employ such a penalty see your local attorney.

Commercial loans as I've mentioned before, depend on the loan classification, your "commercial" lending can become a different type of loan when dealing with single family residential properties. The lion's share of the determination is the use of funds being for a commercial purpose, but there are other tests as well and this can vary by state.

Prepayment penalties are common with business loans or commercial, generally the penalty is retired in the first 3 years on a graduated basis. For example, 3% the first 12 months, 2% the second year, 1% the 3rd year and none thereafter.

Prepayments cannot be seen as a profit motive, that becomes predatory, the penalty is to reflect the costs associated with making the loan, setting up servicing and be indemnified under any servicing contract, it's not a profit center nor should the be used to tie the hands of a business borrower. This is called handcuffing a borrower. If a business fails, says it was the note that was the issue, they didn't have equity to refinance and pay the penalties or seek other relief, they can come back to you, part of lender's liability. So can bankruptcy courts.

Just a note, lender's liability also comes into play if an applicant asks for X dollars and the lender offers less in Y dollars. Best just to turn down that request. Reason is, you bait the borrower as they need money, you don't give them enough money and they fail. Again, predatory dealing.

Another issue comes into play when you advance more than was originally requested, it's better to say no and leave the failure on the borrower. The saying is you can't make a bad loan go good. Advancing more simply puts the borrower in deeper on the deal and increases the likelihood of failure. Trying to help can backfire on you.

Making money as a lender needs to be by the rate and terms originally agreed to, that's where the profit center needs to be. Lenders have junk fees, that's up front money and computed in the APR as the cost of the money. Attempting to profit on the back end is a much different matter. Covering your costs and even for your additional admin services required in your portfolio is acceptable with commercial loans.

A commercial loan from a hard money lender should not have a problem with a point within a year, most don't go a year, and a point can be justified easily. We're talking HMLs with a license.

Private money is generally barred from making cash advanced loans with penalties as such are pretty well reserved for institutional lenders or those legally in the business, such offset business expenses. There are also often different usury limits for personal transactions or private lenders not in the business of lending. You may well bump into brokerage requirements or need to be a registered lender.

Before you venture off in lending and creating loan terms you really need to speak to a local finance attorney type, ask your bank who they have used. If you have money to lend then seeing a good attorney shouldn't be making you eat beans for a week. If you expect to advertise, then you better check on licensing as that is not a private lending transaction. Good luck :)

John Thedford · Answer

Exactly @Bill Gulley and that is why I am VERY careful. 12% +4 points rolled into the note is over 16% APR...but under 18%. I get approached by people offering stupid high returns asking for money. Regardless of the soundness of the deal, they are offering way over usury. They may not have a clue...or maybe they DO have a clue and are looking to snare someone that doesn't know better!  Now, if I have a pre-payment penalty in the note I don't know if this puts the loan over usury rates. Thoughts?

Bill Gulley · Answer

Sounds good, just remember, APR is an annualized rate, charging points for 3 months is effectively times 4. Points are prepaid interest. :)

John Thedford · Answer

@Bill Gulley yes my concern is usury. My loans are not consumer loans under CFPB. They are strictly to entities. I have not researched the usury statutes in Florida but have made sure that all the loans are under 18%. About 3 years ago I had trouble with a borrower and his attorney threatened legal action. That loan was written by a RE attorney whose only real competence was billing his customers:) Anyways, it was easier to reach an agreement than litigate...and heck of a lot cheaper as well. If I recall, that loan was written at 15% plus 3 points for six months. I am more careful today, and definitely changed attorneys.

What Might A Typical Pre-payment Penalty Be In SW Florida

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