New CFPB Rules and the Impact on Hard Money Lending

Hard-money lending is becoming more popular in the mortgage industry as real estate investors try to find new ways to take advantage of opportunities quickly by accessing this source of liquid capital. In addition, as interest rates rise, hard money lending becomes a way for investors to close deals faster.

There are certain statutory rules that govern high-cost lending, including the provisions of Section 32 of Regulation Z of the Truth in Lending Act (“TILA”). Changes to Regulation Z by the Consumer Financial Protection Bureau (“CFPB”) in January 2014 further defined what types of mortgage loans could be considered high-cost loans — also known as Section 32 loans.

The CFPB has set the following thresholds for high-cost mortgage loans as follows:
• If the APR is more than 6.5% higher than the average prime offer rate for a first mortgage on a borrower’s principal residence.
• If the APR is more than 8.5% higher than the average prime offer rate for a first mortgage of $50,000 or less for a personal property dwelling (manufactured home, etc.).
• If the APR is more than 8.5% higher than the average prime rate offer for a second or junior mortgage.

Fees associated with a loan can also impact its status as a Section 32 loan. A loan is considered high cost if the points and fees:
• Exceed 5% of a loan that is $20,000 or more; or
• Exceed the lesser of 8% of the loan or $1,000 for a loan less than $20,000.

When a loan is classified as a Section 32 loan, the lender must make certain disclosures to borrowers, including explaining loan terms, costs and fees. The lender must also certify that the borrower has received counseling on home ownership and high cost loans.

In addition, hard money lenders may be subject to the TILA and Real Estate Settlement Procedures Act (“RESPA”) Integrated Disclosure rule, also known as TRID. TRID — also known as the “Know Before You Owe” rule — requires mortgage lenders to provide two new documents to consumers applying for a mortgage loan: a Loan Estimate form and a Closing Disclosure form.

The Loan Estimate provides the borrower with detailed information on the key terms of the loan, projected payments over the life of the loan and a breakdown of the closing costs. It also provides information on the borrower’s total payments over a five-year period as well as the APR and total interest percentage over the life of the loan. It replaces the Good Faith Estimate (RESPA) and the early Truth-in-Lending disclosure (TILA), and includes new disclosures required under Dodd-Frank. It must be provided to mortgage loan applicants within three days following the submission of an application.

The Closing Disclosure includes information on the loan terms, projected payments, closing costs, loan costs, a calculation of cash to close, a detailed line-item summary of the loan transaction and other information. It replaces the HUD-1 (RESPA) and revised Truth-in-Lending disclosure and includes new disclosures required under Dodd-Frank. It is a detailed account of the settlement transaction and must be provided within at least three business days before closing.

Romy Jurado is one of the founders of Jurado & Farshchian, P.L. a business, real estate and immigration law firm. She focuses her practice on business law, including corporate and transactional matters with an emphasis on corporate formation, stock and asset sales, contract drafting, and business immigration. Romy is originally from Peru and moved to the USA with the dream of becoming an attorney and entrepreneur. Romy is actively involved in the community through her work as a Score certified mentor, and speaking at conferences to entrepreneurs and small business owners.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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