For private lenders or hard money lenders exclusively originating investment mortgages, the regulatory requirements under the Dodd-Frank Act changes somewhat. Investment mortgages are generally considered commercial transactions rather than consumer transactions, which can affect the applicability of certain provisions. Here are the key points for hard money or private lenders originating investment mortgages only.
In This Article
Exemption from Consumer-Focused Provisions
Investment mortgages, being commercial loans, are typically exempt from many consumer protection provisions of the Dodd-Frank Act, such as the Ability-to-Repay (ATR) and Qualified Mortgage (QM) rules. These rules are designed to protect consumers in residential mortgage transactions.
Ability-to-Repay (ATR) Rule
The ATR rule mandates that lenders must verify a borrower’s ability to repay a mortgage by assessing their income, assets, employment, and debt obligations. This ensures loans are given to borrowers who can realistically meet their mortgage payments.
Qualified Mortgage (QM) Rule
The QM rule offers lenders legal protection if they issue loans meeting specific criteria, such as no risky features (e.g., negative amortization), points and fees capped at 3% of the loan amount, and a debt-to-income ratio not exceeding 43%. This encourages safer lending practices.
CFPB Oversight
The Consumer Financial Protection Bureau (CFPB) primarily focuses on consumer financial products and services. Since investment mortgages are commercial in nature, they may not fall under the direct purview of the CFPB. However, lenders should still adhere to fair lending practices to avoid any potential scrutiny.
Disclosure Requirements
While the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) integrated disclosure (TRID) rules may not apply to investment mortgages, lenders should still provide clear and accurate information about loan terms, costs, and risks to maintain transparency and build trust with borrowers.
Anti-Steering and Fair Lending Practices
Although the Dodd-Frank Act’s anti-steering provisions are aimed at consumer loans, hard money and private lenders should still avoid practices that could be construed as unfair or discriminatory. Adhering to fair lending principles helps mitigate legal risks and promotes ethical lending practices.
Mortgage Servicing Rules
The comprehensive mortgage servicing rules introduced by the Dodd-Frank Act are primarily focused on consumer mortgages. However, lenders servicing investment mortgages should still implement robust servicing practices to ensure timely payment processing and effective communication with borrowers.
Risk Retention Requirements
The risk retention requirements in the Dodd-Frank Act are generally aimed at securitized loans. Private and hard money lenders involved in securitizing investment mortgages should be aware of these requirements, although they may not apply as directly as they do to consumer mortgages.
State-Specific Regulations
Even though federal consumer protection laws may not apply, lenders must still comply with state-specific regulations governing commercial lending. Some states have specific rules for investment properties, and non-compliance can result in legal consequences.
Best Practices
Adopting best practices in underwriting, documentation, and borrower communication can help hard money and private lenders mitigate risks and maintain a good reputation in the market. This includes conducting thorough due diligence and ensuring transparency in all transactions.
Conclusion
Hard money and private lenders originating only investment mortgages are generally exempt from many consumer protection provisions of the Dodd-Frank Act, such as ATR and QM rules. However, interpretations vary by state and it is essential to seek the guidance of legal, financial, and tax professionals when considering compliance for your business.
To be an investment mortgage, the loan must not be to a residential loan to a homeowner who will reside in the property as their primary residence. It is also advisable to not lend on a borrower’s second home that they could still reside in or, could suddenly become their primary residence.
Further Reading on the Dodd-Frank Act:
- Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act)
- Visit the Consumer Financial Protection Bureau (CFPB) website section on mortgages.
- Truth in Lending Act (TILA)
- The Real Estate Settlement and Procedures Act (RESPA)
- Guide to Seller Financing Under SAFE and Dodd-Frank Acts
DISCLAIMER: We are not attorneys and we cannot advise you regarding your particular circumstances. You must always obtain competent legal counsel and financial advice. We believe this information to be accurate, but please check with a qualified real estate attorney in your state before making any decision based on this information.