Reducing Claims on Business Purpose Owner-Occupied Loans
December 5, 2023
The number one source of claims we are seeing in the private money world are coming from owner-occupied business purpose loans. This is a loan secured by a primary dwelling to finance a business or to purchase investment property. When the borrowers on these loans default, some will go to their lawyers and seek help staving off a foreclosure. If the claim is not settled immediately, the cost of the resulting lawsuit will be excessive. If a borrower wins in proving the loan was a consumer loan, not only will the court give the borrower a free loan (reversal of all interest and fees) and more time to pay but will also make you pay for all of the legal fees (your law firm’s fees and the borrower’s attorney’s fees). You could easily be out hundreds of thousands of dollars.
A carefully documented business-purpose owner-occupied loan file will contain:
- Borrower’s handwritten detailed statement of loan purpose
- Corroborating evidence of the business or business related expense
- Formal Certificate of Business Purpose under penalty of perjury
- Net proceeds paid to a business bank account
- Make it clear on your Letter of Interest (or Term Sheet) that is a business purpose loan (and that you do not make consumer loans – if you don’t)
- Satisfy the numerosity test (i.e., more than 51% of net loan proceeds go to the business – we recommend at least 65% going to the business purpose)
If these six items are done carefully and thoroughly that might be enough to make a borrower’s lawyer think twice about challenging your loan. If you want to vastly improve your odds of deflecting a claim at its inception, think about leveraging inexpensive technology such as Zoom, Microsoft Teams or other video conference software that allows you to record and save a video meeting to the borrower’s loan file. After all, we now live in a world where human interaction is often via video rather than in person or a phone call. A video of the borrower or borrowers explaining the business purpose live on camera is going to be a powerful deterrent to a claim based upon the alternate reality that might otherwise develop if the borrower defaults.
If you are convinced the little bit of effort to record a video is worth the time, consider a video call with the borrower after loan documents are issued but before they are signed. Of course, if during the video you get information that the purpose of the loan is consumer, stop and turn the loan down. It’s not worth the risk. Here is a sample script:
Video Conference Script—BP O/O Loans
Hello, my name is Billy Kidd with Kidd Mortgage. Do I have your [both of your] permission to record this video call?
How are you doing today?
What is/are your name(s)?
Are [either of] you taking any medications that affect your thinking? [blunt the “I was on drugs” defense]
Do you have your driver’s license(s) handy? Great, can you move it/them close to your camera? Thanks [visually verify identity]
Okay, the purpose of our call today is two-fold. I promise the call will be short. First, I want to confirm certain details about the purpose of the loan, and second to go over the material features of the loan. So let’s get started.
[share screen and display borrower purpose letter or other borrower statement of purpose]
Let me share my screen and show you a handwritten letter. Do you recall that you were asked to provide a statement, in our own words, about the purpose of the loan?
Is this your handwriting?
Did anyone tell you what to say, influence you in any way, or put words in your mouth for this letter? [anticipating the claim they were told what to say by a third party]
Is anyone doing that here today, that is, telling you what to say?
Is what you said in the letter still true today?
[stop screen share now so borrower’s face is visible—this is the most important moment in the video so take your time]
[with borrower’s face visible] Putting aside the letter for a moment, can you provide a little more detail about the purpose of the loan in your own words?
Next… draw them out
[if to finance a business: tell me a little bit about your business]
[if to finance rental property: this property you are buying with the money from the loan, will that property be a rental property?]
[if paying off business debt: will some of the money from this loan be used to pay off business debts? What can you tell me about that business? Is the business still ongoing today?]
Is any of the money [besides …. if some money will pay consumer debts] going to be used for personal debts, home improvement, personal purchases, other personal expenses, family expenses or consumer purposes?
Did you get the opportunity to review the loan documents for the loan?
Are you ready to go over them or do you need more time? [anticipating the claim that the closing was rushed and/or the borrower never got the chance to review the docs before signing]
I’m not going to cover every detail but let’s go over a summary of some of the more important features of the loan [screen share the MLDS or other summary].
- Loan Term
- Interest Rate
- Monthly Payment
- Place to send monthly payments, mail, ACH option, bank auto pay option
- Late charge grace period and how that is computed
- Late charge % or $
- Maturity Date
- Extension Options, if any, and conditions
- What is your exit plan for this loan? In other words, how do you intend to repay it?
- Collateral is a deed of trust on your property, commonly called a mortgage—do you understand what that the deed of trust means or do you want me to explain more about it?
- Prepayment penalty/guaranteed interest
- Origination fees
Now is there anything I just went over different than what you were expecting?
Has anybody promised you something about the loan that is different from what we went over today, or anything else we have not talked about?
Do you have any questions about the loan?
Do you need more time to review the loan documents or are you ready to close the loan?
Okay, that’s all I have. Unless you have any other questions, I will stop this recording. I want to thank you for taking the time to talk to me.
Prudent legal advice comes from experience. We have over 50 years of it.
© 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.