All loans we offer are backed by real estate as collateral. The real estate can be non-owner occupied or owner occupied, also known as “investment properties” or “primary residences”. However, the “purpose” of each loan is solely based on the use of the funds by the borrower. It is this “purpose” that the majority of Lending regulations are based on.
“Consumer Purpose” loans are where a majority of the loan funds are used or earmarked for consumer use, such as:
- Buying a primary residence
- Making property improvements to their primary
- Consolidating high interest consumer debts (24% credit cards)
- Paying personal Fed or State taxes
- Paying for kid’s college
- Etc.
Just as there are regulations for Business Purpose loans, there are precise regulations for Consumer Purpose loans too. Some of those regulations include: no prepayment penalty is allowed, terms are more strict, no default interest rate allowed, 120 days of delinquency prior to filing an NOD, and certain disclosures are required such as a Loan Estimate and Closing Disclosure.
There are many times where a borrower is getting a loan against their primary residence, however the funds are being used for their business. This would not be a consumer loan. We would have to follow the regulations for Business Purpose loans. Conversely, a loan on an investment property that is being used for consumer purposes would have to have the consumer regulations followed.
Documenting the purpose of the loan is therefore key. To help satisfy documenting this, we have the borrower handwrite, date, and sign their purpose for getting a loan. If the purpose is for consumer use, we will then prepare the Trust Deed Offering and the loan using the regulations for Consumer Purpose.
There are some Private Money Brokers that only do Business Purpose loans. Two primary reasons for this are 1) simplicity – this avoids the separate regulations needed on a consumer purpose loan, and 2) licensing – to originate this type of loan an additional Federal license is required in addition to the State required license (of which we do have). Unfortunately, we’ve seen Brokers who cannot write Consumer Loans try to force a scenario into a Business Purpose Loan when it is clearly a Consumer Loan. This is something that you would want to avoid!
This practice is not something we do, as we are licensed for both Business Purpose and Consumer Purpose Loans and have programs for both scenarios. My team and I take pride in sending Offerings that we would invest in ourselves. We have funded many loans personally and co-invested in many loans with our Lenders.
If you have any questions about this newsletter, or as questions arise when we send out our Offerings, feel free to email me so I can address them!
I look forward to many, many years of investments with you.
