Doss Guides

As the economies of other countries stagnate, foreign investors are increasingly buying United States real estate. Some banks will lend to foreign investors but not at the speed and ease that foreign investors find acceptable. Sometimes the foreign investor needs to close an acquisition quickly, with the plan to obtain a conventional loan later. A private money loan is the only solution.

There are no laws prohibiting you from making a mortgage loan to a foreign national who is neither a terrorist, money launderer or on the sanctions list published by the United States Government. This article will give you some practical ways of avoiding stepping on Uncle Sam’s toes when making a mortgage loan to a foreigner.

Internal Revenue Service. You should ask the foreign national for their Individual Taxpayer Identification Number (ITIN). An ITIN is a special tax identification number for non-US citizens. If the borrower doesn’t have one, they can apply for one by mail by filing a W-7. The ITIN is one form of acceptable identification under the U.S. Patriot Act. You may be able to use it to obtain a U.S. credit report on the foreigner.

Office of Foreign Assets Control (OFAC). The Office of Foreign Assets Control has multiple lists of persons you are not allowed to do business with. Make a loan to someone on that list and you will incur not only heavy fines but publicity you don’t want. OFAC collected $600 Million in fines in 2015, down from $1.2 Billion in 2014 from companies not smart enough to check the OFAC lists. You can screen your borrowers and the principals of any entity borrower at:

https://sanctionssearch.ofac.treas.gov

Financial Crimes Enforcement Network (FinCen). The U.S. Treasury’s Financial Crimes Enforcement Network (FinCen) takes the position that all mortgage companies are subject to the Bank Secrecy Act (BSA) and Anti-Money Laundering Law (AML):

“The BSA defines the term “financial institution” to include, in part, a loan or finance company. The term, however, can reasonably be construed to extend to any business entity that makes loans to or finances purchases on behalf of consumers and businesses. Non-bank residential mortgage lenders and originators, generally known as “mortgage companies” and “mortgage brokers” in the residential mortgage business sector, are a significant subset of the “loan or finance company” category.

FinCEN is issuing AML program and SAR filing regulations for residential mortgage lenders and originators as the first step in an incremental approach to implementation of regulations for the broad loan or finance company category of financial institutions. Thus, the definition of “loan or finance company” initially includes only these businesses, but is structured to permit the addition of other types of loan and finance related businesses and professions in future amendments.”

These laws also apply to United States citizen borrowers. You are first required to “know your borrower,” or have a Customer Identification Program (CIP). The CIP is intended to enable a mortgage company to form a reasonable belief that it knows the true identity of each borrower and of the persons controlling any entity borrower. In the case of an individual, that would include traditional means of identification such as a passport, banking information and employment information. In the case of an entity, you are required to determine who are the actual beneficial owners and control persons. Of course you should run their names though OFAC. That requires you to examine the entity documents including such things as articles of incorporation, operating agreement, partnership agreement, and bank signature cards.

If you are aware of or suspect your borrower or its principals have or are attempting illegal activity, such as money laundering, fraud or other bad conduct you are required to efile a Suspicious Activity Report (SAR) with FinCen. Here is the link for SARs reporting:

http://bsaefiling.fincen.treas.gov/main.html

What is suspicious activity? Here is how the government defines it:

“Suspicious activity is any conducted or attempted transaction or pattern of transactions that you know, suspect or have reason to suspect meets any of the following conditions:

Involves money from criminal activity.

Is designed to evade Bank Secrecy Act requirements, whether through structuring or other means.

Appears to serve no business or other legal purpose and for which available facts provide no reasonable explanation.

Involves use of the money services business to facilitate criminal activity.”

Other Tips:

Here are some other practical tips when making loans to foreign nationals:

1. Have the borrower sign the loan documents in the United States, preferably in the state where you are located and even more preferably at the title company that will insure your loan. Avoid foreign powers of attorney.

2. If you are funding the loan with private investor money, do an addendum to your Lender/Purchaser Disclosure Statement disclosing that your borrower is a foreign national or your entity borrower is owned by a foreign national. Note that you could not verify the borrower’s income or other assets located out of the US. If the foreign national is signing a guaranty, disclose that enforcement of the guaranty may be problematic.

3. State and federal consumer protection laws apply to loans to foreigners so don’t lower your guard.

4. Don’t handle the escrow; let a licensed escrow or title company handle that. Don’t accept fees or money in cash to make the loan.

5. Determine upfront how your borrower is going to make loan payments. You want to avoid foreign wire transfers to your account if possible. If you are going to accept foreign wires, place the loan with a professional loan servicer set up to accept and report foreign wire transfers.

© Doss Law, LLP. Attorney advertising materials. These materials have been prepared for educational purposes only and are not legal advice.  This information is not intended to create an attorney-client relationship.  Consult a knowledgeable lawyer before implementing any of the ideas in this publication.