The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama in 2010 as a response to the financial crisis and recession. The act was intended to provide consumers with financial protections and other safeguards against predatory mortgage lenders, pay day lenders, banks, and credit card companies.
However, the primary reason Congress passed the law was to monitor and regulate the financial markets more closely. The Consumer Financial Protection Bureau (CFPB), a financial oversight, and investigative body that monitors mortgage lenders, was born out of Dodd-Frank.
Dodd-Frank has made many changes to past rules that regulate traditional mortgage lending. Although not specifically targeted by Dodd-Frank, the private lending industry, more commonly known as “hard-money loans,” is obligated under some of the act’s statutes. Dodd-Frank regulations will more tightly regulate hard-money transactions in a way that may affect how California real estate investors operate.
Hard Money Lending
Private money loans are designed to provide capital, primarily for real estate purchases or bridge financing, with fewer restrictions and faster turnaround times than that of traditional bank loans. Hard money lenders typically offer “asset-backed” loans that come with a higher interest rate, possible prepayment penalty, and shorter terms. However, rather than base the mortgage on a borrower’s credit history and income, they are generally structured around the value of the asset (usually real property) and the borrower’s ability to pay back the loan within a shorter loan term.
Dodd-Frank has put in place some strict disclosure requirements for mortgage lenders who lend to consumers on residential properties. These restrictions, some of which also apply to private lenders, have steered more lenders away from residential properties and into the commercial loan space. Title XIV of Dodd-Frank, known as the Mortgage Reform and Anti-Predatory Lending Act (MRAPLA), amends existing statutes, including The Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), and the Home Ownership Equity Protection Act (HOEPA), placing additional requirements on lenders.
Subtitle A of the MRAPLA lays out standards for the origination and funding of residential mortgages. The law defines a “mortgage originator” as anyone who assists consumers with obtaining a residential mortgage loan. Subtitle A also dictates the amount of compensation a loan officer can receive on a residential mortgage and requires that loan originators verify the ability of a borrower to repay the debt before closing the transaction.
Dodd-Frank places most of its focus on protecting consumers, and therefore only covers residential mortgage lending. Business and commercial property transactions typically do not fall under the purview of Dodd-Frank, such as the purchase of residential property for a business purpose, such as house flipping. There is also an exemption for buyers who are purchasing a home with the intention of leasing the property. Most of these real estate investment transactions would not be considered “consumer” transactions under Dodd-Frank.
Although Dodd-Frank regulations do not encompass all hard money transactions, there are some residential hard-money mortgages, such as purchase bridge money or residential construction loans, which could expose originators to certain obligations under Dodd-Frank. Those obligations primarily fall under TILA, where specific loan disclosures are required to be provided to the borrower at origination and closing.
Although the Consumer Financial Protection Bureau has not updated TILA requirements since May 2018, private lenders should familiarize themselves with current regulations to ensure they are abiding by all the provisions of Dodd-Frank when lending to consumers on residential property.
The Trump administration is actively working to alter some of the more restrictive lending regulations under the CFPB, so rules for mortgage lenders may be changing once again. You should check periodically with the CFPB’s website to keep abreast of any new changes in federal mortgage regulations.