Congress enacted the Dodd–Frank Wall Street Reform and Consumer Protection Act, commonly known as “Dodd-Frank,” in 2010 in response to the financial crisis of 2007 and 2008. Among the purposes described in the bill’s full title, Congress intended the law “to protect consumers from abusive financial services practices.” This includes provisions affecting the residential mortgage business. Dodd-Frank has led to numerous changes in how banks handle mortgage loans. It has also affected the hard-money lending market in ways that are likely to affect California real estate investments.
“Hard-money loans” are a means of financing a real estate purchase or development without many of the procedural hurdles associated with bank loans. Private businesses and investors offer hard-money loans on a shorter time frame, but with higher interest rates and other expenses. Unlike banks, which focus on a borrower’s ability to repay a loan, hard-money lenders usually look at the value of the collateral when deciding to make a loan. Dodd-Frank has created new obligations for hard-money lenders who loan money for residential properties in some circumstances. It has also potentially made this type of loan more appealing for commercial real estate.
Title XIV of Dodd-Frank is entitled the Mortgage Reform and Anti-Predatory Lending Act (MRAPLA). It amends multiple existing statutes that regulate residential mortgage lenders, including the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), and the Home Ownership and Equity Protection Act (HOEPA).
Subtitle A of the MRAPLA sets standards for the origination of residential mortgage loans, including regulating the amount of compensation mortgage loan originators can receive and requiring originators to verify that a prospective borrower has the ability to repay the loan. It defines a “mortgage originator” as anyone who assists consumers with obtaining residential mortgage loans, with some exceptions. Subtitle B places additional obligations on originators, including an additional verification of the borrower’s ability to repay the loan at the time of closing.
Restrictions on Mortgage Lending
The provisions of Dodd-Frank that affect real estate lending focus on consumer protection and therefore only cover residential property. Commercial real estate loans generally do not fall under Dodd-Frank’s authority. Dodd-Frank also might not apply to loans for residential property purchased for purely commercial reasons. For example, a real estate investor who intends to renovate and resell residential property—i.e., “flipping”—without ever living there is engaging in a commercial transaction. An investor who purchases residential real estate for the purpose of leasing the dwelling to tenants would also not be considered a “consumer” under Dodd-Frank. Investors seeking hard-money loans for these types of transactions should still exercise caution to be sure that the transaction could not be mistaken for a residential deal.
Residential Mortgage Lending Restrictions
Even if hard-money loans for investments in residential real estate are not subject to Dodd-Frank’s rules, California real estate investors should be aware of some of the basic elements of the law’s requirements. Federal regulators, including the Consumer Financial Protection Bureau (CFPB), routinely update the rules in ways that could affect hard-money lending. Dodd-Frank places a significant disclosure obligation on residential mortgage lenders, contained in multiple federal statutes. The CFPB has summarized these obligations in the TILA-RESPA Integrated Disclosure (TRID) rule, as well as rules for refinance loans based on HOEPA.
More Blog Posts:
Hard Money Lending for California Real Estate Investments, Titles and Deeds, October 5, 2017
Real Estate Financing for California Real Estate Investors, Titles and Deeds, August 17, 2017
Securities Laws and Regulations Affecting California Real Estate Syndicates, Titles and Deeds, June 19, 2017