(The discussion below is intended as education material, not legal advice. For legal advice consult legal counsel with expertise in this area–good luck because there aren’t many of us!)
Quiz Question One:
Q: Alex Smith owns a small strip center in Los Angeles. He comes to you for a small second to pay his income taxes. Nice property, low loan-to-value, strong cash flow. Your hand is on the trigger, itching to pull it. But wait! Is this a consumer loan and if so what laws do you have to comply with?
A: Yes. Remember one thing if nothing else: “Purpose is King.” Paying personal income taxes is a consumer purpose. Dodd-Frank amendments to TILA mandated the use of TRID disclosure forms (Loan Estimate and Closing Disclosure) and new disclosure timing to ALL consumer loans secured by any kind of real estate. Here is the text of the Regulation 1026.19(e):
(e) Mortgage loans secured by real property—early disclosures.
(1) Provision of disclosures.
(i) Creditor. In a closed-end consumer credit transaction
secured by real property, other than a reverse mortgage
subject to § 1026.33, the creditor shall provide the consumer
with good faith estimates of the disclosures in § 1026.37.
However, an NMLS endorsement, the ability to repay rules and the higher-cost rules only apply to loans secured by dwellings so you don’t have to worry about the scarier stuff on this deal.
Quiz Question Two:
Q: Cynthia Jones owns a modeling agency that does business as a corporation. It owns a cherry building in San Diego–free and clear. She tells you her company owes her back salary so it wants to mortgage the headquarters so it can pay her. She will use the money to vacation in Europe for a month. You want this deal BAD. The money is going to end up in her pocket, so is it a consumer loan?
A: Loans to bona fide business entities are not subject to the consumer credit laws, even here where the ultimate recipient of the money will be using it for a consumer purpose. As to the borrower, the salary is a business debt.
“Like” my Facebook page to get automatic updates.