You may be aware the legal & regulatory landscape has been dramatically altered with the fallout of the “Mortgage Crisis”.
I just had a conversation with a client that wanted my help in drawing up a loan on his friend’s mother’s owner occupied residence. By the end of our conversation he changed his mind.
The property being occupied by the owner brings a bunchof new demons to the party. Mandatory disclosures within 3 days of “application”, 10 business day “cooling off periods”, rate & term ceilings tied to annual percentage rates, no default interest, limit on prepaid payments & no balloon payments sooner than 7 years. Throw in mandatory impound accounts & independent verification of income along with prepayment limitations & you’ll get an idea what you’re up against.
Some of these issues are still in effect if the property is a vacation home & even go so far as to include rental properties if the owner is not “in the business”. What this means is a borrower with 5 rental houses who is actively engaged in a profession not related to real estate has some of these protections afforded to them.
Using my clients scenario as an example, grandma owns her principal residence, she is desirous of a loan to secure $$ for her grandson to open a business. No problem, right? No It’s not grandma’s business, meaning her support of grandson’s grand plan does not change the face of the loan from a consumer loan, all this hoopla applies.
The penalties for violating these laws are aggregious. In a best case, your looking at recission (read interest free loan) up to the 1st 3 years, with a worse case scenario of you writing a check for $500,000 for damages.
So okay, the borrower is a friend & you are comfortable bending the rules a little, what’s the big deal? As a matter of practice, the borrower owns you. If you need to foreclose, or even badger them for late payments there’sa whole lot of people running around offering to modify borrower’s loans (for a price) . How much are you gonna bet they don’t know about these restrictions when they start to dissect your loandocs?
The bottom line is be very careful if you decide to do a loan without professional guidance.