Compliance Tips When Making Loans to Foreign Investors

January 24, 2017 by Melissa C. Martorella, Esq.

The decline of overseas economic markets has led to an increasing number of foreign investors seeking to purchase real estate in the United States. While certain banks choose to lend capital to foreign investors, the process in which they do so is often delayed and unpredictable. For foreign investors operating on tight deadlines, obtaining a private money loan is a viable alternative to the conventional mortgage process.

The decline of overseas economic markets has led to an increasing number of foreign investors seeking to purchase real estate in the United States. While certain banks choose to lend capital to foreign investors, the process in which they do so is often delayed and unpredictable. For foreign investors operating on tight deadlines, obtaining a private money loan is a viable alternative to the conventional mortgage process.

There is no statutory bar preventing banks from offering a mortgage to foreign investors as long as the government has not formally sanctioned them for criminally fraudulent or terrorist activity. The following is an overview of the safeguards potential financiers can implement to avoid complications with the various government oversight offices when considering making a loan to foreign investors.

  • Internal Revenue Service (IRS): Obtain the potential investor’s Individual Taxpayer Identification Number (ITIN). If they do not currently have one, instruct them to apply for an ITIN via mail by filing an IRS W-7 form. The ITIN will enable your financial institution to conduct a U.S. credit report on the foreign investor.
  • Office of Foreign Assets Control (OFAC): The OFAC maintains several databases of individuals that U.S. banks are prohibited from engaging with in business transactions. Banks should consult these lists before making a loan to any foreign investor. If found non-compliant, lenders could face substantial financial penalties—between 2014 and 2015 alone, the OFAC handed out over $1.8 billion in fines.
  • Financial Crimes Enforcement Network (FinCEN): FinCEN has stipulated that all financial institutions that make loans or mortgages are under the purview of the Bank Secrecy Act (BSA) and Anti-Money Laundering Law (AML). These regulations are also applicable to all U.S. citizen borrowers. As part of the BSA and AML requirements, lenders are required to implement a Customer Identification Program (CIP). CIPs allow mortgage lenders to establish a reasonable belief they know the true identity of each borrower as well as the individuals having control over any entity borrowers. This evidence could range from obtaining the foreign investor’s passport, financial information, and employment history if it is an individual. If the foreign investor is an entire entity, the lender must verify the actual beneficial owners and control individuals in addition to carefully examining the organization’s articles of incorporation, bylaws, and bank signature identification. If suspicious activity involving potential crime or an attempt to evade BSA or AML regulations is detected, banks are required to submit an electronic Suspicious Activity Report (SAR) with FinCEN.

Additionally, there are several general non-agency specific practices banks should follow when extending mortgages to foreign investors.

  • To avoid any potential foreign power of attorney issues, always require the foreign entity to sign the loan documents on U.S. soil—ideally in the state in which the financial institution is based or at the office of the title company insuring the loan.
  • If financing the mortgage with private investor capital, attach an addendum to the Lender/Purchaser Disclosure Statement stating that the borrower is a foreign entity or individual. If applicable, clarify the lender was unable to verify the borrower’s income and foreign assets. If the foreign national signs a guaranty, note that any subsequent enforcement may involve potential complications.
  • Be aware of any state and federal consumer protection laws, as these are applicable to loans made to foreign entities.
  • The lender should not personally handle the escrow or accept cash to make the loan. A licensed escrow or title company should conduct this procedure.
  • Verify in advance how the borrower is going to submit loan payments. If the lender is willing to accept foreign wires, have a professional loan servicer handle the transactions and report any subsequent transfers.

Performing the right due diligence, ensuring the borrower documentation is in order, and working closely to maintain regulatory guidelines, is the best way to feel confident that a foreign national loan will not become a problem for your organization.

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