Whether you are a new or seasoned private lender, compliance is central to your company’s long-term success. While it is true that private lenders who make business purpose loans are free from many of the complex and bewildering array of consumer laws and requirements, there are a host of compliance issues of which each private lender must be aware.
Here is a checklist you should consider assessing your company’s compliance health:
Before entering a new market, you should understand the state’s licensing requirements for your company’s activities. Each state is different and may require a license for one or more of the following activities:
- Mortgage Loan Originator services
- Buying loans
- Selling loans
- Owning mortgage servicing rights
- Referring loans to others
The rules can be complicated. For example, a few states require a real estate broker license to act as a mortgage broker, even though lenders can originate loans in those states without a lender license. In certain states such as California, you have a choice of licenses that present lenders with different lending authorities and restrictions. Finally, each state presents an array of licensing exemptions which may possibly apply to your activities. For example, certain states allow an unlicensed lender to fund a loan arranged through a licensed mortgage broker.
Another prerequisite to entering a new state is determining whether that state requires your company to register with the Secretary of State before making a loan to a borrower in that state. This step is overlooked but is essential to ensuring your ability to operate in a new state.
Does your business use a fictitious name or DBA? Most states require fictitious name filings, some on a statewide basis and others on a county-by-county basis.
Fees And Charges
Each state regulates the amount and frequency of fees, such as prepayment penalties and late fees. Some states regulate these fees differently for different loan products or borrowers.
Interest rates are regulated on a state-by-state basis. Maximum allowable rates within a state may differ by loan product, borrower, and/or property securing the loan. You also need to know which fees and charges are included in the computation of the rate, and whether a state restricts compound or default interest.
Many mortgage brokers prefer to present themselves to their borrowers as having the ability to fund loans. This can be accomplished by closing mortgage loans in a mortgage broker’s name using funds from a lender that acquires the loan from the mortgage broker. The broker assigns the mortgage to the lender at the closing. Certain states, such as California, may prohibit or otherwise restrict this practice.
Before making your first loan in a new state, you may wish to consider the difficulties associated with foreclosing on a mortgage loan. Does the state allow non-judicial foreclosure? What are the foreclosure timelines? Can a lender claim a deficiency? Does a borrower have a right of redemption?
Many Private Lenders are unaware that there are a host of federal and state disclosures that must be provided to Borrowers at application, closing, and in between.
Has your company originated 100 or more loans during both 2020 and 2021? If so, you probably are required to collect and report a host of data fields to the Consumer Financial Protection Bureau. If this is the case, you will need to invest in HMDA reporting software and integrate the software into your loan origination system.
Equal Credit Opportunity Act
Often considered a “consumer-only” law, the Equal Credit Opportunity Act (“ECOA”) and Regulation B apply in whole to Private Lenders and business purpose loans.
What does this mean? You need to respond to loan applications within specified time periods, and they must contain prescribed language. The applications must provide required information when you deny a loan or grant credit on terms other than what applied for, give each loan applicant a written notice of that applicant’s right to a copy of an appraisal, and provide a copy of that appraisal within specific time periods. We have a seasoned lawyer with decades of experience to help you navigate this law.
Fair Housing Act
The anti-discrimination provisions of the Fair Housing Act also apply to Private Lenders. This Act often works in Concert with ECOA.
Servicemembers Civil Relief Act
The Servicemembers Civil Relief Act (SCRA) is a federal law that provides a range of civil and financial protections for active-duty military members. SCRA safeguards cover everything from mortgage interest, rates, and foreclosures. Generally, SCRA protections cover both regular active-duty military members and Guard and Reserve members activated under federal orders and their spouses.
Loans for commercial purposes are not excluded from SCRA protections. For eligible borrowers, the SCRA caps interest rates for mortgages at 6 percent for service members and their spouses during the term of service and for one year after. The SCRA requires a court order or waiver before a service member’s home can be sold at a foreclosure sale. If the lender forecloses without a court order or a waiver, the sale is invalid if done during the period of military service or one year thereafter.
Telephone Consumer Protection Act And Telemarketing Sales Rule
The Telemarketing Sales Rule does not apply to business-to-business calls but may apply to calls to an individual to solicit business-purpose loans. The TCPA’s rule against calling cell phone numbers with automatic telephone dialing systems without consent applies to most calls, including to business-to-business calls.
A Private Lender cannot call someone if they have indicated that they do not wish to receive further solicitations from the lender. If a Private Lender engages in telemarketing activities, the lender must maintain a “do-not-call” list of persons who have previously indicated that they do not wish to receive further solicitations, and access and implement the national “do-not-call” list. Further, a Private Lender may not call cell phone numbers with a prerecorded voice or using automatic telephone dialing systems (ATDS) without the express written consent of the recipient. It does not matter if a cell is registered to a consumer or a business – they get equal protection from auto-dialers.
The requirements of the Bank Secrecy Act (BSA) and anti-money-laundering laws (AML) are pervasive and longstanding, yet they continue to vex companies trying to comply with them. Regulators have hit many non-banks, with BSA/AML-related enforcement actions, resulting in expensive fines, deferred prosecution agreements, criminal consequences, and reputational damage.
Many factors make the real estate industry an attractive option for criminals as a means of laundering illegal funds. Through real estate, organized criminals try to create the illusion of legitimacy and disguise the origin of their money.
Every Private Lender should have a written AML Policy to prohibit and actively prevent money laundering and any activity that facilitates money laundering or the funding of terrorist or criminal activities by complying with all applicable requirements under the Bank Secrecy Act (BSA) and its implementing regulations.
As you can see, a Private Lender’s compliance obligations are much more than meets the eye.
Ask us how we can help because we are here for you. Geraci has the expertise to walk you through these checklist items from start to finish. We have 50-state surveys to answer all your questions before you get started. If you need assistance applying for a state license, finalizing a foreign registration, completing HMDA reporting, or anything in between, we have a seasoned team to assist you.