Business Purpose Loans to Individual Borrowers: What Lenders Need to Know

Melissa C. Martorella:

Welcome everyone. We will get started here in just a moment, but we're going to let people join the webinar first. We'll give it another minute or so. Welcome everyone. If you're just joining, we're letting people log in, so we'll be starting in just a few moments. Welcome. We're going to get started here in maybe 20, 30 seconds. I can still see some participants joining, so we want to make sure we start with everybody ready to go.

Awesome. Well, we have a hundred participants, so 102, so I think it's been about a minute and we will get started here. Welcome everybody to today's webinar. I'm looking forward to chatting with you all a little bit. A few housekeeping items before we get started. We get these questions every single time. First, yes, this is being recorded and you should have heard that when you joined the Zoom, but it is being recorded. It will be available on our website either later today or tomorrow. It will also be circulated the link so you can review that and share it with your team members if you'd like. And the second question we always get, yes, you can have the slides. The slides will be available for your review to circulate internally, ask questions, so they will be made available for you after this webinar. A couple other housekeeping items.

There is a chat box in here if you have questions. Do not put them in the chat box, we won't look at it. Instead, there's a q and a box. I know for me I have to click more and then I can see a button for q and a. That's where you'll put your questions. So if you have any questions throughout the webinar, put those in that q and a and Anthony and I will go through those at the very end with you all and try to answer all of those questions as best as we can. And with that, we will get started. Today we are talking about business purpose loans made to individual borrowers, what lenders need to know. This is a topic that's come up kind of frequently lately. It's been interesting, so wanted to shed some light on this area and Anthony has been kind enough to join me. So to introduce ourselves very quickly, I think many of you might know me, I'm a partner here at Geraci and I'm also the department head for our banking and finance team. Our team specializes in preparing loan documents for business purpose loans secured by real estate all across the country. And with that comes a lot of expertise and knowledge, especially related to the different kinds of loans you can make and in particular loans to individuals when you're doing this. So I'm happy to chat with you and today I have the legend with me, Anthony.

Anthony F. Geraci:

Yeah, hey everybody, good to see you or at least hear you hopefully soon. Anthony Geraci, I'm partner and CEO and it's been fun. I've cut my teeth on Truth in Lending Act, so we've got a lot to share with you on business purpose loans to individual borrowers, and just excited about this webinar overall. So ready to get started. Thanks, Melissa.

Melissa C. Martorella:

Awesome, thanks AG Looking forward to this one today. So to get started, here's an agenda overview of what we'll be talking about today. So you guys aren't left in the dark. First, we will go through and talk about how to identify a business purpose loan. It's a little bit heavy with some regulations, but it's exciting and it lets us do everything that we can do. So it's important stuff to know. We'll also dispel some myths about business purpose loans made to individuals. We oftentimes have the big picture, oh, you can't do that, but you can. So that'll be exciting. We'll also talk about some different federal and state specific issues in particular related to licensing and maybe some other concerns that might pop up with these loans. And then we'll also talk about why this might be an attractive investment opportunity for many of you to start making.

And then finally, to wrap up, we will do a q and a. So to get started here, big picture, you want to make a loan secured by real estate somewhere in the United States. First big picture question is does the federal government care about this activity? We have to make sure that there's nothing here that would apply. There are two big statutes, there are many other ones that might apply in different ways, but two big ones for this business purpose analysis, and that's the Truth in Lending Act and the Real Estate Settlement Procedures Act. And we'll go a little bit into depth in these and we'll talk about why these are important to you and how you need to think about them to deal with exemptions from both of these.

The first one, the Truth in Lending Act or TILA, I put where it is codified there for you in case you are really interested and want to dig in to the legislation, that's where you can find this. But big, big picture, TILA applies to any credit offered or extended to a consumer primarily for personal family or household purposes. And these are really important terms that we'll dive into in a second here. They don't put these phrases in the statute for no reason. They're really important. And this is really where we're going to dig into the meat of how we are exempt from this.

Some definitions here. The first one is consumer. This means a natural person to whom consumer credit is offered or extended. And so who is a consumer that is an individual or a trust? And so right now you might be thinking, well, aren't you saying we can make business purpose loans to individuals and individuals are consumers? So how can we do this? And that's why there's a great part to this definition or how and when TILA applies. But yeah, so big picture consumers are individuals and trusts, meaning who's not a consumer is probably a lot of the borrowers you're used to working with LLCs, corporations, partnerships and other organizations like that. So if you're making a loan to an entity of some kind, it's automatically exempt from TILA. That said, I wouldn't rely on just that fact that there's an entity borrower to say you're exempt. You should also do the part two, which is the big part of the exemption. Oh, go ahead.

Anthony F. Geraci:

Sorry about the one thing I would add to that is we have a lot of creative clients and I love all of you. The next thing you're going to tell me is, oh, we'll just get the borrow to create an LLC and we're just set. That's fine. Just have an entity. And keep in mind, form over substance is not necessarily the best part here. If you create an LLC just for this, you're going to be that borderline and still Truth in Lending Act looks into it. You're creating a company just for this to drive you around the Truth in Lending Act. The CFPB is not going to look too kindly on that. So you do want an existing business, don't just create one just for this. I've always used best practices six months of existence, buying the property into an LLC or entity would be the best practice for this.

Melissa C. Martorella:

A hundred percent agreed with that. And I think probably my only caveat to that would be if it's the borrower's kind of business model to create a new entity every single time. So it might be a fresh entity, but they have a past of doing this for each property that they're going to purchase in development that makes more sense. But if it's a house that the borrower has been living in and you're like, yeah, just put it in an entity that's not going to fly that, yes, it would technically be exempt, but you'll see some litigation if that loan goes bad, is all I can say.

Anthony F. Geraci:

Absolutely.

Melissa C. Martorella:

So moving on. So big picture exemption though from TILA, and this is where we want to play, is an extension of credit primarily for a business, commercial or agricultural purpose. So remember that definition or at least how TILA applies, it's to a consumer, but for personal family or household purposes. So if we can prove that the point of the loan is for a business, commercial or agricultural purpose, we will be exempt from TILA. And this is really where we want to deal with everything. So that's why even if the loan is to a consumer, an individual borrower, it's okay if we can prove this. So this is really where we want to focus.

Anthony F. Geraci:

We'll dig into a little bit of examples later on.

Melissa C. Martorella:

Then remember, there's a second federal regulation that comes into play with these loans. So RESPA or the Real Estate Settlement Procedures Act. I also put where you can find this act in case you're curious about what it looks like big picture, it governs disclosures and loan transactions and the servicing of consumer loans. But helpfully, they also carve an exemption in here that says an extension of credit primarily for a business, commercial, or agricultural purpose as defined by TILA. So what we know is if you are exempt from TILA because it's a business purpose loan, you are also exempt from RESPA. So that's really why we want to focus on making sure that these loans are for a business purpose.

And so to get into that, this is the exciting slide. What is a business purpose loan? And the first question you have to ask is what is the purpose of the loan funds? The question you are not asking is the proper owner occupied property owner occupied? I get that all the time. Like, oh, I don't do owner occupied loans. Well, you could absolutely make a loan to an individual on their primary residence so long as the borrower is using those loan proceeds for a business investment agricultural purpose. If that's true, it is exempt from TILA and RESPA. So that's why the question that we care about is what is the borrower using the money for? Because again, as Anthony mentioned too, you could even have an entity borrower, you could have it on an investment property, but what if the borrower is actually using those loan proceeds to pay medical bills or a child's tuition, something like that.

That's a consumer purpose. And so even though technically we have the form here, we have the investment property and the LLC, if they fought you on it, it's clearly a consumer loan and the CFPP is going to be very kind to consumers. So we want to be careful there. So again, big picture, what is the question we care about? What is the purpose of the loan funds? And a little practice tip that I like to tell people is when you're accepting that loan application request, a handwritten statement from the borrower where they write out what they are going to use the loan funds for and if it's different things, allocating amounts. So if it's purchasing an investment property, doing rehab, whatever it is, have them write that out and break it down. So it's very, very, very clear that it's a business purpose loan.

Anthony F. Geraci:

Yeah, and I can tell you guys just add color to that. There's Regulation Z, the Truth Lending Act just with official staff commentary by the CFPB, used to be of course the FDIC back in the day, and this is carried over from probably 20 years ago, which is they have a seven factor test within that on what is determining the purpose of the loan such that is a business purpose or not. And they look at what is the primary purpose, what we're talking about here, what's the primary occupation or business? What Melissa was saying before, if their business is creating new LLC for investment purposes and they do this all the time, you can show that pattern that would make a lot of sense and go long ways towards saying this is exempt for business purposes. What do they do for bit work? If you're an IT person by day and this is your first fix and flip that grey investment area, you may or may not be that business purpose.

And then do they have personal liability on the debt? What's their financial statements and what's their tax returns? Those are the seven factor tests. They'll take a look at things. One of the things that I think is going to come up soon of course is maybe we go through a recession is you're going to see a lot more foreclosures. And this is to me, the danger zone is, well, they're opening a medical practice, but also they're going to take care of the foreclosure bill. What's the primary purpose of the funds, right? The primary purpose, while I don't care if the majority of the money is going to bill open the medical practice, even if a little bit is going to the foreclosure, you're going to have a hard time convincing the CF PB that the primary purpose wasn't to bail out the foreclosure of the loan. So there'll be some things to watch out for as we get more or deeper in a recession.

Melissa C. Martorella:

Absolutely, yeah. We get these mixed use questions all the time as well. And as Anthony is alluding to here, we really want to be looking at what is the reason behind asking for the loan. Even if as he was saying, even if you can prove that the majority, vast majority of proceeds are for a business purpose, if the impetus for them reaching out and being like, Hey, I need some cash, is clearly consumer purpose. That's also going to drive this here. So really looking into the purpose of the loan funds. But it's exciting because if we can prove this, if you can show that it's a business purpose loan, you have all sorts of opportunities. You are not subject to regulation under TILA and RESPA. There are a few other federal regulations that may apply. I've done other webinars on that, so we could definitely share those with you, but otherwise you're just looking at a state level. So that's really exciting. But before we get into that, Anthony was going to go over some opportunities for loans.

Anthony F. Geraci:

We just covered a few of those for sure. But if you're exempt from truth ofac, you're exempt from reco, you're exempt of course, from the disclosures that truth OFAC require. Some of the fun ones, for instance, and high cost loans actually got to go get hug counseling in order to do these. Those are not needed here. There's no debt to income ratio, there's no debt to income verification with at least the federal side where there may be state requirements depending on what's going on in the state that you're lending in. There's no point limitations and there's also no balloon limitations. Some of these we've try to work in different exemptions. There's a one year balloon. You could have a bridge loan between primary residences. You don't have to do that analysis with business purpose loans, which is really, really nice. And then others would be fearful to end.

And this is a great opportunity for you. Remember Melissa started this webinar, the first thing that most people focus on, oh, it's owner occupied. I don't want to touch it. I'm not getting involved at all. That's really not the analysis here. The analysis is what are you doing with these funds? If their business purpose, I don't care if they live there, business purpose, great, now you've got business purpose. I can foreclose as if this was a business loan on the property. And again, people are going to be very fearful. They think Truth Lending Act is like, oh no, I can't do anything like that. I'm not going to touch it. This is an opportunity for you to go where people are fearful to tread.

Melissa C. Martorella:

Awesome. Yeah, there's definitely a lot of opportunity here, a lot of ways to be creative, which is very exciting. So yeah, hopefully you'll dive into some business purpose loans. But as we were talking about for our webinar, big picture is we are really looking at these business purpose loans to individuals. So we know we're making business purpose loans, but maybe it's a little tricky with individuals. We'll kind of go through these next few slides and talk about licensing on a statewide level. So big picture, we know federally we are okay, but on a state level you might be subject to additional licensing. So that's something to look at. So I have two maps for us today. Here's our first one. This is a big picture on lender licensing state by state. So if the states set are here in black, these ones are all okay to London.

So there are no licensing restrictions. You can make a loan there tomorrow if you wanted to for a business purpose. It's good to go from a licensing standpoint, but then kind of going through the other states, the states in red, these ones are going to require you to have a license regardless of the collateral type. It doesn't matter if it's a one to four family, commercial, multifamily, vacant land, these states require a license no matter what. So it's good to keep that in mind. The states that are in green, you need a license. If the property securing the loan is a one to four family property, so that means commercial and multifamily might be okay there. But if you have a residential property, know that there are some restrictions. Three states in purple where if it's an owner occupied one to four family, you would need a license.

And then other, I put other here because it's a little bit weird. For example, Texas, there's really no licensing requirement. However, on owner occupied one to fours, they have homestead requirements. And because of that, there's almost a quasi licensing scheme in place there. So I recommend not making owner occupied loans in Texas. And then North Carolina has a bond requirement and Florida has a very weird rule where you cannot make a loan to an individual if the property is commercial or multifamily. When you read the statute surrounding this, it makes it appear as if they just forgot to cover that, but just know if it's commercial or multifamily. The borrower cannot be an individual in that state. So that's a little restriction that you have there. But otherwise, this is the lay of the land from a licensing perspective. So it's really exciting. You can see there's a lot of opportunity here.

But what we're going to go into next is this is just licensing. There are other things that states care about. They care about prepayment penalties, they care about usury, they care about balloon payments. Sometimes there are other things that might matter, and that's where we'll dig into next. So in this slide, aside from licensing, so you'll need to look at those two slides together. Aside from licensing, these are the states in purple that don't care if there is an individual borrower on that transaction as well. So if we kind of toggle back and forth here, for example, we'll look at Oklahoma for funds. So Oklahoma doesn't care about licensing. They say all good to go. We don't need a license to make a business purpose loan. They also don't have other restrictions for prepayment penalties, usury, all those other things, late charges. They don't care if the borrower's an individual. So that's really exciting.

A different example we will go to, let me just try to mess around here and see Massachusetts. Massachusetts doesn't require a license to make a business purpose loan, but if you go over here, we have that in red. In red, that means there's something else that matters here. They don't care about licensing, but there's something else in this state. If the borrower is an individual that we care about, it might be pre-payment penalties or usury. Those kinds of things reach out to us and we can let you know, but at least from a licensing perspective. So if you look at these together, you can kind of figure out these states that are in purple, aside from licensing, no different, you don't have to treat them any different. The loans if the borrower is an individual versus an LLC or corporation. So that's really helpful to you to know.

Some of them do require a license to make a loan to begin with, but assuming you've got that hurdle out of the way, now you can underwrite your loans all the same in those states. And again, the state's in red, if there are some other issues, if the borrower is an individual, so let us know, we're happy to help there and walk you through that. And then in block, there are other issues. Oh, I'm sorry, red is, it's only if it's an individual borrower and it's owner occupied, I apologize. So in Massachusetts, just if it's an owner occupied loan, otherwise good to go. And then in black, if the borrow is an individual, there are other things that come into play. So just keep this in mind and use these two slides together. Like we said, we'll have these slides available to you to review to kind of help you maybe make some decisions about where you'd like to lend. And if you need additional information about any restrictions that might exist in those states, especially those states in black here, we can go through those with you. And then some loan structuring considerations once you are making these. Anthony, if you'd like to jump in on any of that.

Anthony F. Geraci:

Oh, I've got a lot to say about this entire slide. So the first point, it sounds logical, but I can't say this enough. The borrower is an individual, right? That's who's going to make the obligated on the loan and they can't therefore guarantee the loan as well, right? You have a borrower. The borrower is the person obligated to signing on the loan. And then what I've seen quite a few times is well, we'll have 'em sign as guarantee as a guarantor as well. That does not get around the fact that they're also obligated on the loan. And in most states it's called a sham guarantee. I would say all states, I just don't have, of course all states off the top of my head. And so either way it's going to merge into the borrower. You don't really have a guarantor. They're already obligated loans.

So the guarantor function just fizzles and goes away. You could have a third party now if there's a third party, even an entity they own and control, that would be a guarantor if that's something you want to do. But for our purposes of this, you really don't have a guarantor unless you have that third party. So the whole point is underwrite the borrower well, right? Property value is going to be very important here, and you're going to just want to make sure, does the property value support what you want it to do? And as well as the borrower, maybe they have other assets, there could be other reasons you may want to foreclose, maybe not traditionally, but maybe non judicially and go after their other assets. That's a case by case basis. You as the lender have to make. And then documentation is golden key to a business purpose loan.

And I can't underscore this enough, and I could tell you horror stories of quite a few things. So we're dig into that a second. So I've seen a lot of documentation and of course I know you guys have your own document sets. The absolute thing that must happen is you must make sure that all your documents say this is a business purpose loan. And I'm going to give you some point in fact of a couple of things that happened seven years ago where there was a borrower, that business purpose loan, it was owner occupied, but it was business purpose except one thing. There was a document that was used that, well, tell me what the purpose of this is. Oh, it's good. Super purpose loan. Just a checkbox. Just a checkbox. And they had the borrower checked consumer, no one did a quality control on that loan.

They documented away, put it away, and didn't think about it until three years later, borrower sues. Well, no, it's consumer purpose loan. Now remember, you're now putting yourself in the judge's shoes. You've got someone who says, Hey, business purpose, I handwrote that. But now you've got a conflicting document says, well, no, I made it a consumer purpose loan. So what's really important here is before you fund, you've got to do a quality control on your loan documents. Make sure every single piece of document says business purpose loan. If it doesn't junk it, throw it away, tear it up, whatever you need to do and get it resigned. So that I can't emphasize enough if you don't do that, that's going to cause trouble for you and a headache later on down the pet road.

Melissa C. Martorella:

Absolutely agree with that one. And there's a lot of things that you can do as well for determining business purpose. We talked about that handwritten letter at the front of the loan where borrower breaks down what they're using the loan proceeds for and the amounts at the time of loan closing. You should include another basically business purpose certificate that reaffirms the use of the loan proceeds and again, have it handwritten, broken down, and that'll help you in two different ways. One, it should act as a good double check, Hey, has anything changed from that loan application time? If so, do we know about that? Do we need a letter of explanation? Like what's going on here? And two, it really reaffirms that at the time the loan close, it's a business purpose loan. So then down the line, if there is any litigation, you can pull this out and say, oh, you're claiming that this was always a consumer purpose loan and lenders should have known, but it matters at the time of the loan funds what the proceeds are being used for. So if the borrower later on goes and buys some Mardi Gras beads for their bachelorette party or whatever they end up doing with it, you can contest that and say, well, at the time you said it was to rehab this house and then you went out and did this. So you were either lying then or you are lying now, but when was the lie? So you have to figure that out. But yeah, so that's another great way, Anthony.

Anthony F. Geraci:

Yeah, I was going to say one other thing to think about too is what I call the broker chain. I know you guys get these through one, maybe two brokers. Keep in mind along the path, the borrower has represented something to one of these two brokers and you're going to be held liable for that. And so I highly, highly recommend, by the way, these are well worth doing, right? This is where the risk comes in, but it can be very well mitigated. Get a recording with the borrower and just interview them. There's a business purpose, right? This is not consumer. Make sure that you do everything you can to show up your loan file, if you will, saying, well, I asked all these things and the borrower told me under penalty of surgery that this is what it's going to be. They didn't give me any conflicting information and here's what they signed, and here was the interview I gave the borrower business purpose using it for investment. They're going to fix and flip the house, for instance. They're living it while they're doing this. Whatever that scenario is, that shows up to be business purpose, get as much documentation and recordings, everything you do to shore up the business purpose and you'll be golden when it comes time. Hopefully it never does, but if it comes time for litigation,

Melissa C. Martorella:

Absolutely. And then the last thing that I wanted to also reiterate here, not reiterate, but really go over again is why it's important to have a guarantor. We don't always use them or need them, but without having a guarantor, you really eliminate that breach of guarantee suit that you can go for down the line. So if you end up foreclosing and maybe you're not made whole through the foreclosure, unfortunately, if you just have an individual borrower, that's it. You're done. And so hopefully that foreclosure gets you through if it doesn't in loans where you would have had a guarantee. So think about how you normally structure your loans. You have an LLC borrower for example, and usually the members of that LLC are going to personally guarantee the loan as well. So if something happens and you foreclose on that property and say that foreclosure doesn't recoup the full amount owed to you, the lender, you could then sue those guarantors for breach of guarantee for the deficiency balance. And that's really eliminated here. So just know that going into it that your recourse is a little bit different. So you might underwrite these loans a little bit differently than you would if you had a guarantee, as Anthony was saying, it's really important to look at the property and maybe it's something where you don't quite leverage the property as much as you might have if it were to an LLC or something like that, playing it a little bit safer with those loan terms.

And with that, we are fast talkers over here. It might be our Italian heritage or something else, I'm not sure. But some key takeaways. First, purpose of the loan proceeds, not occupancy or who the individual is, what matters. So remember, what are we using the loan proceeds for? We need to know that if we don't know that we are in trouble. So find out what the borrower is using the money for. Second, know that some states may have additional restrictions aside from licensing about lending to an individual. So take those two slides, compare them, figure out if there's a licensing issue, and then figure out if they care if the borrower is an individual. Play those two together, and again, I'm happy to talk to you about in depth about what some of those restrictions might be. And then as we just talked about, your structure of your loan might be a little bit different since you won't be able to have a guarantor. So that in mind, Anthony, any other key takeaways you'd like to add?

Anthony F. Geraci:

No, just again, the structure of the loan documents. If I was going to add a fourth one, just ensure that the documents, all of the documents add up to the same thing, which is this is a business purpose loan owner occupied. You don't want conflicting documents because again, the ccf PV and or the judge is going to be very borrower friendly. So this is definitely the thing where details matter. Make sure everything adds up to business purpose loans and you'll be golden.

Melissa C. Martorella:

Awesome With that, here's our contact information. If you have any follow-up questions, feel free to reach out to either of us. We would be happy to answer them for you. Otherwise look for other webinars. As I mentioned, I believe our corporate and securities team is going to do on talking about if you want to make these sorts of loans, business purpose loans to individuals, making sure your fund documents, for example, allow for those kinds of loans. And Steve, I believe will be on our litigation team will also be going through later on about litigation strategies when you have individual borrowers. So it should be really good. Keep in touch for those webinars. And with that, we will go through to the q and a. Awesome. So to get started here, I will read each one and we will pick and choose who's going to answer them. And a GM might throw you a bunch here.

Anthony F. Geraci:

All good.

Melissa C. Martorella:

So first question. If a borrower goes bankrupt, what are the different implications for a lender, an owner occupied, non-owner occupied and business purpose owner occupied loan? In short, what happens to these categories of loan when a borrower declares chapter 11 protection? I have no idea. I'm not a bankruptcy attorney.

Anthony F. Geraci:

Yeah, I pretend to be one sometimes, but I don't know outside the normal bankruptcy process that the purpose of the loan has any impact. It comes back down to your secured creditor at the end of the day, and so are you first position, second position depends on your position. Do you have security? That kind of stuff. We would probably defer to our bankruptcy counsel here, but I can't think of anything glaring that's going to have a difference between any of these different times.

Melissa C. Martorella:

Awesome. And yeah, if you would like more detail on this kind of thing, if you want to email us, we can introduce you to Steve and Marina on our litigation and bankruptcy team and they would be happy to answer these for you. Next question. If I refinance a fix and flip business purpose loan with my own funds, is it considered a business purpose loan? I don't think I understand the question. Anthony, do you understand the question?

Anthony F. Geraci:

Yeah, I can take one. Yeah, and I'm going to actually rephrase it, Stu, if you finance, if you refinance a business purpose loan, is it still considered a business purpose loan? The answer is yes. Here's the caveat though. Is it a business purpose loan? Are you ready to prove that it was a business purpose loan that you're refinancing? And that's where the trickiness comes in, right? We see some of the gray area we've been talking about here again, like shoring up documents and all that stuff. You're basically proving that you're refinancing the underlying business purpose loan and that it was a business purpose loan to consider you as a business purpose loan. And that's one aspect. The other aspect is, is there any new funds or is it complete refinance? There's no additional funds going out. If there's additional funds going out, then what's the purpose of the new funds going out? Remember that whole foreclosure thing we just talked about? If you're refinancing a business purpose loan, but you're also getting 'em $20,000 to reinstate of foreclosure, you can't rely on that business purpose right now. You've really turned it into a consumer purpose.

Melissa C. Martorella:

Thank you. Next question. Is it legal to add late fees and other loan fees to the principal owed and charge interest on those fees? It depends on the state. Right now in California it's unclear if you can charge interest on advanced fees. The way our documents are written is that you could, but you'll have to go through on a state by state basis to see whether you should actually do that sort of thing. Next question. This is a good one. Do you consider an irrevocable trust a consumer or not? I would say so. The way that TILA defines consumer is most trusts are including family trust. I would probably say that an irrevocable trust would be considered a consumer under TILA. But remember that said, that's okay. The question is what are you using the loan proceeds for? And so if it ends up being a business purpose loan, you're totally fine here. It's okay that it's a trust as your borrower. Next question, have you seen the handwritten business purpose certificates being fought in court? Thankfully, I don't go to court, so I have not. But Anthony, you are nodding. So talk to me.

Anthony F. Geraci:

Of course. Yeah, I mean I've absolutely seen these fought in court and if you want to take the entire thing, I don't want to belabor the point, but here's, I am using these funds for investment purposes and then title wires the money to x, y, Z medical for medical bills. Guys, this is what I'm really talking about. All your documents need to add up to the same thing. And that also means sometimes things out of your control by title. If you get a borrow or demand to pay someone for medical bills, it's consumer purpose, right? You're going to have to fight that in court. And here's the argument. Well, yeah, I wrote that, but you forced my hand. You told me I had to write this because you wanted me to get business purpose. It qualified for you, but you knew that I was going to send this to medical bills.

You knew I told you about it, don't you remember? And so this is exactly what I'm talking about, making sure everything up to business purpose, and I know it sounds unfair. Here's the next thing you want to say to me. I have no control over title. I get it. But this comes back down to your lender and escrow instructions. You need to tell them you cannot use these for any other purposes, but A, B, C, D, and E. And if you do, you have to get my permission to do so. Now, if they go against your title instructions, now you can of course cross complaint against the title company or stuff like that. That'd be something you could do. But again, have I seen these fought in court? Absolutely. Because remember that handwritten document is one document of 20. You're going to have it alone,

Melissa C. Martorella:

Thank you ag, and I'm sure Steve will happily include some more stories when he does his webinar on this

Next question. So if part of a new business purpose loan is used to pay off preexisting debt on an owner occupied SFR, that fails business purpose, and I'll say it depends if that preexisting debt is at the consumer loan they used to purchase that owner occupied house, yeah, that's consumer purpose. And if the majority of the proceeds are going to refinance that or the reason for the loan is because that loan is in default or something like that, then it probably fails. But it could have been another business purpose loan that was secured by the owner-occupied property, that would be fine. So again, it's not an exact answer yes or no. These are really fact specific scenarios and you have to go through each one to figure out, okay, what are we doing here? Amounts on digging in and getting clarity from your borrowers.

Anthony F. Geraci:

A lot of you guys are going to require first liens, so you could be, Hey, I'm happy to give you this a hundred thousand dollars towards your new business, but I'm not going to be in second position, so I've got to refinance that debt as well. That could be a business purpose adding it on, but I don't want to discount what Melissa said because of course, if part of it's foreclosure, if the maturity is going to happen two months from now, again guys, what is the story? What are you going to have to prove in court? You mean the a hundred thousand dollars was easy if the loan maturity lines up right when you refinance, that's going to be tougher to say. But let's say there are five years left on the loan or 10 years, yeah, you can now look at, yeah, of course they're going to refinance the previous loan. We only do first position loans and a hundred thousand dollars is to finance medical practice. There's no maturity date, there's no risk of that. That would of correspond itself to the purpose really being business purpose to pull money out of the house.

Melissa C. Martorella:

Next question, a little lengthy here, and there's five questions in it, but we'll try. What if a borrower wants a business purpose second on their owner occupied property and they claim in a letter of explanation that they want to use the funds to purchase an investment property. Do they need to have identified the property already? What if they lied about that just to get the loan and end up not purchasing it or if they got the loan and then changed their mind? Is the lender still in the clear? So we get this scenario a lot and my whole thing is like, well, if that's true, if you are going to buy an investment property, well then get the loan and secure it with the investment property and you could cross collateralize the owner occupied property. But I always find it very suspicious when borrowers do this and they're like, yeah, I need a loan on my current property. I'm going to buy an investment property, but they don't have one identified and all that and they don't want you to put debt on that other one. And I'm just like, no, no, put the debt on that property. It's an investment loan for that investment property. The loan should be on that property or tied to it somehow. And if they refuse to let you do that, to me, red flags just are in the air.

Anthony F. Geraci:

You got it. Remember, you're telling the story to 12 people and a jury and a judge. What would you think? They told you they're doing an investment property, but they don't have property identified. So where's the funds going? Oh, I'm just going to hold on to 'em.

Melissa C. Martorella:

Right?

Anthony F. Geraci:

That's going to be a hard one to convince a jury that that was the story because remember, you're going to have a completely different story when it comes down to the litigation, which is well, he knew I was going to use it to pay my medical bills. He told me to create the story. Of course, I lied to get the money he wanted me to, but he knew what he was doing with it. Just remember, that's the story that's going to play out before the jury.

Melissa C. Martorella:

Actually. What if the borrower uses the loan for something other than what they stated was the business purpose use? So this does happen. Remember, it matters at the time that the loan funds. So again, you could all today, I could be making a loan to Anthony. He could be like, yep, I need it for my business. I need it for my business, blah, blah, blah, blah, blah. And I give him the money and the next day he pays medical debt. It mattered when I gave him the money what he was representing that loan to be for. So if they end up using it for something else, I guess that's fine, but remember, this is what's so important to have that application that says what they're going to use it for, getting that business purpose certificate because now it's really mortgage fraud. So if they tried to contest it later down the line to say, oh, this was consumer all along, you have this evidence that says, well then you just committed mortgage fraud to get the loan from me, and that's not okay.

Anthony F. Geraci:

Yeah, you're going to see that a lot in your broker chain, right? They're going to tell, well, I told the broker, and then the broker changes the story and the broker knows bringing it to you. You are not going to do anything but business purpose loans. So that's where again, I really like, and I had a lot of clients do this in the past, and hopefully you guys will adopt this as well, interviewing the borrower, recorded you record them saying, what are you going to use this money for? I'm going to buy the house for $25,000 and get a mortgage on that. I'm going to flip it and it's nine months. And then of course, everything else you've done, including wiring the funds to their business account, you've done everything right and now they use it. That's their problem. And whatever the story they're going to tell the court, you're going to have a nice recording.

You're going to play in court with their voice saying, well, no, I'm going to use this to fix and put this property, and that's why I can't encourage you guys enough. Interview the borrower directly as you start getting this loan, and I don't care what the broker tells you, you can't interview the broker or the borrower, then don't do the loan at all because you're going to want something documented from the borrower saying, this is what you're using it for. You lied to me. Here's your voice, your Honor. What do you want me to do?

Melissa C. Martorella:

Exactly? Next question. If I only do one to two loans a year as a side hustle, am I exempt from TILA and RESPA disclosures? I don't know enough about consumer lending. I would recommend though, if you are making one or two consumer loans a year, probably not to do that. Business purpose loans are always exempt. So if you're going to do a little side hustle for some lending, make them business purpose loans, and you don't have to deal with this at all. Anthony, I don't know if there's one-off exemptions for TILA and respite consumer loans.

Anthony F. Geraci:

It's complicated To answer the question. I mean, I'm going to go with California for instance. There's an exemption for one loan a year unless done for a broker, unless it qualified for hopa. In short, there's no exemptions because especially when you got to get above user exemption, you're going to have to go through a real estate broker anyway, which means the first one you do is going to qualify as a lender under the definitions of the Truth Lending Act. So there's technically an exemption, but at least unless you guys are charging really low rates that I can't imagine you would such that you don't have to use a broker or lender. You're going to be very much qualifying on the first loan through truth lending as a lender. Anyway, a predator.

Melissa C. Martorella:

Next question. What about a loan to consolidate business loans into one loan against an owner occupied property with an individual borrower? That would be fine. If you have three or four business loans out there and the borrower wants to consolidate them and somehow make the secured debt, it sounds like instead of unsecured debts, not smart by the borrower, but that's fine. But yeah, you could definitely do this. You could consolidate those secured by their house, could be an individual borrower, as long as it's very clear that those loans were business loans that you're refinancing, that would be okay.

Anthony F. Geraci:

Yeah, I would just go back to the analysis we've been talking about when we talk about these consolidation. What's the purpose? Again, I hate to hammer that home, but is the purpose just to consolidate? They're not maturing, they're not due. They're just consolidating into it. Sure, it'd be fine, but remember, you're proving that underlying purpose when you refinance those loans. So just be sure you can do that.

Melissa C. Martorella:

Next question. I think I might've confused you all. So are you saying the lender needs a license regardless of the loan going through a DRE license broker and loans to individuals? So that slide I showed you with what states require a lender to be licensed, there are exemptions in many of these states. California is one of them where if the lender is unlicensed but it's arranged through a licensed DRE broker, then you do not need to be licensed as a lender. All of these states, most of them have some sort of exemption, not necessarily like that, but they have exemptions to licensing. So that's just big picture, that signage is big picture. Does a lender need a license to make a business purpose loan in that state? Again, there may be specific exemptions for you like this one.

Another question here. What if the property is owner occupied and owned in arus? Again, doesn't really matter. What is the use of the loan proceeds? Number one question. Got to figure that out. If it's consumer purpose doesn't matter. Could be non-owner occupied into an LLC. We've got to figure out the purpose of the loan proceeds. Next question. Based on what Anthony mentioned initially, what are your comments in the following scenario where the borrowers created a brand new LLC for vesting of their business? Property and office? Condom condominium where my entity finance, their purchase loan and the borrower certified that the funds were to purchase a commercial property with intent to lease it to themselves.

Anthony F. Geraci:

I'm assuming you're weaning the office condominium, in which case it's not one to four family property. If they're weaning their personal property, I mean if they're lease it to themselves and it's for a business, you can't live in an office condominium. I'm guessing if you can, that's a whole different analysis by the way, but assuming it's a traditional office, that would be fine. That'd be commercial purposes.

Melissa C. Martorella:

Next, you've emphasized that the borrower should hand write the purpose of the loans. Should we not have a dropdown menu in a digital app where the borrower could select as well as other where they type in the answer? You could do this as part of the initial application. I understand that it's hard, but I think nothing is better than getting the borrower to hand write that out because for a dropdown or check the box or something like that, well, who did it? Or I just checked a box, I didn't even read it or whatever it is, versus them handwriting out. I am purchasing the investment property at 1 2 3 Main Street. That becomes a lot harder to say, oh, I just clicked a box because the broker told me to. Now, oh, the broker directed you to write that thing or somebody becomes a lot harder when you can get that handwritten statement. So that's why whenever possible, I like the handwritten from the borrower versus just a dropdown check the box kind of thing.

Next question, what if it is, I think we already did this, but California owner occupied in a trust business cash up second LA County. Again, as long as it is business purpose, you are clear to go. Next question. So the loan docs shouldn't reference an individual borrower if they are guaranteeing. So this is a big confusion point that we get a lot when we're drawing docs is if I'm making a loan to Anthony individually, Anthony has made a promise to me that he will pay. He cannot then guarantee that loan and then promise that he will promise to pay again. He's a double promise. It's like a super pinky swear. It's nothing. It is meaningless. So in that case, when you have an individual borrower, that individual should not also sign a guarantee. It's useless if you put one in there. I mean, cool, but it means nothing to you,

Anthony F. Geraci:

No disagreement.

Melissa C. Martorella:

There's a clarifying question on that. If there is a separate business, I don't really know what that means. So if you would like to email us what's going on, I will happily look into this for you and try to answer it. I am going to say no to this one. So if there's time left, can you go into the additional federal laws which may apply to loans to individuals for business purpose? I'm going to say no only because it's a lot, but I do have a webinar on it. So what we will do in the follow-up is we will link to that. So you can review that webinar. I believe I did this last month. It's about the federal laws that apply to business purpose loans, and it goes through not only TILA and RESPA, but also Hamda, eCOA and some other things like that too.

In what cases would a right of rescission apply for owner occupied loans? Rights of rescission are only for consumer loans. So remember it's business purpose. You're in the clear what disclosures are absolutely required on a business purpose loan, federal level, there's really not a lot there. There's some requirements depending on property type related to appraisal disclosures and things like that. That other webinar will be very helpful for you. And then state level, there might be things that you will need to add, but otherwise there are no federal disclosures. You don't have to provide the tri statements and all of that kind of thing. None of that. I was told that you don't need a personal guarantee when the bar is an individual because you naturally get a personal guarantee since they're signing the loan under their personal name. If the bar is an entity, if they don't sign a personal guarantee, you can only go after the business assets and not the individuals. Is this not true? That is true. So I'm sorry if you were misled by something we said, but this is true.

Anthony F. Geraci:

Yeah, and this seems to be a little confusion too. If you get a borrower entity, if an entity is signing as a borrower, the individual can sign a personal guarantee. An entity is separate legal entity, so the borrower is not the same as their entity. Those are fine. The borrower can sign a personal guarantee there, or vice versa, depending on how you structured the loan. It's just when you have the same person, as Melissa was saying, if me, for instance, if I'm signing as a borrower and the guarantor, that just doesn't make sense.

Melissa C. Martorella:

Exactly. Someone says here, I bet homestead still applies, probably depending on the state. As I mentioned, Texas, it definitely applies, things like that. So happy to talk to you with your specific scenario. Next question is investment in securities a business purpose? Anthony, you are smiling. You want to take that one?

Anthony F. Geraci:

I'll just welcome to the gray area. This is the little gray area. Investing in securities is stock, for instance, is it business purpose? Is it a consumer purpose? The answer is, I don't know, and nobody really does. It depends on the type of securities you're investing in a private business more towards a business purpose. But if you're going to go get cash out to invest in Apple stock or Google stock, it's an investment purpose. Is that a consumer purpose? Is that business purpose cases have gone both ways. So I don't have a good answer for you other than I would probably lean towards not doing it. If it's just for basic securities like regular stock.

Melissa C. Martorella:

I agree. To me, that sounds like the borrower probably wants to help their retirement or something like that, which to me sounds pretty consumery. If borrowers remodeling a house to beautify it for themselves that he is living in, would that be considered a business purpose loan? No. No, that is absolutely not. That is a consumer purpose loan. You're fixing up the house that you live in, doing improvements, definitely consumer purpose. That said, if you are, for example, putting in a home office, maybe converting the garage into the place where you operate your business out of something like that, converting it into an ADU, those could be business purposes. So happy to talk more details, but this exact scenario, just fixing up the home you live in, that's definitely a consumer purpose loan.

Oh, you are going to have to email me for this one. I give up a lot of free information on webinars, but I'm not going to give everything. So as to California, what are the additional requirements or restrictions when you're doing a business purpose loan to an individual? So quick preview, is there some prepayment penalty issues? Talk to me again, that depends though if it's owner occupied and that sort of thing. So talk to me and we will go in depth because it really matters the facts that you're going through here. Is there any verbiage in the Geraci docs that deal with TILA RESPA guidelines? Yes, we have many, many statements in there. If you look about the nature of the loan proceeds and we have our business purpose certificate and when applicable, we have a non-owner occupancy certificate. So there's a lot of stuff in there that talks about it being a business purpose loan or investment purpose loan. So yes, our docs are good.

Next question, if you have a mix of business purpose and consumer purpose uses, obviously the majority of the net loan proceeds need to be for business purposes, what do you feel a safe percentage breakdown between the two uses to be? My initial thing is first, it depends on whether the property is owner occupied or not. If it's owner occupied, I want to see minimal going to a consumer purpose at all or if any, so 90% should be business purpose, something like that. For a different property investment property, it's going to be the majority. So our risky people would say 51%. I still would probably go more 70% personally, but there's no hard and fast. It's got to be, the majority have to be for a business purpose or that primary purpose of the loan has to be a business purpose. Anthony, I don't know if you have any other feelings there.

Anthony F. Geraci:

The special staff STA commentary for Reg Z as they try to tackle these seven different factors, you'll see the language being mentioned about what is the primary driver and those are the exact words that they use in there. What's the primary driver for this? So of course primary sounds like 51%, right? That sounds normal, but you're, you've got to explain this again, to a judge and a jury of what is a primary driver. Well, yeah, 51% was used for X, but really I was getting it to use this 49% for Y. And so I would agree with the 70% being safe, but again, I don't care if it's 90%. Even if you tell me this property is going to foreclosure and is their primary residence, it could be a dollar to foreclosure, good luck convincing a jury that they didn't use his entire loan to refinance that $1 for foreclosure. So I want to make sure you understand it's not necessarily just a percentage. What is the primary driver of them getting this loan and that's what you really have to prove.

Melissa C. Martorella:

Agreed. Next can provide clarification on whether or not it's okay to use an investment property, commercial or rental, but some funds for consumer personal use, it comes up occasionally. I think we just addressed that. You can absolutely do that. Again, primary driver, majority of the proceeds have to be business purpose. If a borrower dies and has an outstanding loan on a 16 plex in Pennsylvania, what's your first step in general path of movement to make yourself whole? Oh boy. I'm so sorry. If you need help, I have Pennsylvania counsel I could refer you to. There's probably I would assume dealing with administering their estate and things like that that you probably have to wait around for, but that said, probably getting counsel out there to represent you to figure out the next step is probably it. If you need a referral, I'm happy to give one.

Anthony F. Geraci:

Yeah, the good news is it doesn't sound like it's truth lending because it's 16 plex, so I mean dwelling is one to four families, so truth winding doesn't have the property issues as you would think so. But yeah, otherwise, I don't know. It depends on the best path forward there.

Melissa C. Martorella:

Anthony referred to a house hack where the borrower moves into the house as a primary residence where the intent to sell after a few years to take advantage of tax savings is this business purpose. How can we assure the borrower will actually move?

Anthony F. Geraci:

I mean again, take everything we've kind of said here and I'll go with Melissa. The trigger is at the time of the loan, what was the purpose right when you made that loan, what's the purpose of this? And you have all the interviews saying, no, I'm not staying. You know what it's happening is grandma died. I inherited the house. By the way, this is exactly how this comes up. Grandma died. I inherited the house. I don't want to keep it. What I want to do, I want to fix it up. Recapture the value of the property and sell it, is that business purpose depends, right? Did you wind up everything was the primary driver of the funds to remodel the house and yes, he or she moved in temporarily to manage it and had a place to live, but everything is saying they're going to exit the house in one to two years. As soon as the remodel happens is on the market and they're gone again. Can you prove all that if you can't as business purpose? If you can't, then that comes the issue. So what are the best practices? Go all the way back to interview the bar or make sure that, hey, I'm not going to stay in. Even you ask 'em point blank on recording. Do you plan on living here? No, I'm going to move out. I'm going to sell this property call today. Have all that lined up and you'll be fine.

Melissa C. Martorella:

Next question, what if there's a borrower who's using 10 31 exchange funds to buy an investment property? Does that automatically make an business purpose loan since 10 31? Exchanges are for investment purposes. I think the easier way of knowing is that they're buying an investment property. I mean that right there, I don't care if it's 10 31 funds or something else. If they're purchasing an investment property, that is an investment purpose loan

Anthony F. Geraci:

And I'm no expert on 10 31 exchanges, so I wouldn't want to say anything necessarily. I mean assuming it's a business purpose that would work.

Melissa C. Martorella:

Two questions here. Are there LTV restrictions for business purpose loans? It depends. California. If it's DRE arranged loan, yes. If not, then if it's a CFL loan, then no other states may have other restrictions. Happy to chat with you about them. And then are there interest rate restrictions for business purpose loans? Yes, many states, California as Anthony alluded to, it's 10%, but then there are exemptions if the loans arrange by a licensed lender or broker. Other states, it depends on, sometimes it's business purpose loans, sometimes it's property type. Sometimes there are no exemptions. So reach out. I'm happy to talk to you about your specific scenario

Regarding going after a borrower's personal guarantee. If we foreclosed on a mid-construction property, then it didn't sell at foreclosure. If we take the property back, finish it ourselves and sell it a few months later and end up not recouping our full principle, can we at that point now see the borrower for our remaining money back using the pg? I believe actually you don't even have to do all of that. I mean, Anthony, correct me if I'm wrong, but I believe if you took that property back at foreclosure and say there's a $500,000 balance, you don't necessarily have to wait until you fix it all up and sell it to kind of recoup. You could go after the guarantor at that point for the deficiency

Anthony F. Geraci:

And it really depends, right? And here's some mistakes that some kinds made you go after. So you have a note, and by the way, I'm assuming they're not the same kind of what we're talking about the sham guarantee, so I'm going to say it was a million dollar note, but then at foreclosure sale you build a million dollars what's called a full credit bid. You have now shot yourself in the foot because what you've told the world is that the auction, that property is worth a million dollars so therefore you have no damages against the borrower. So clearly never do a full credit bid and then an auction because what you're saying at an auction, that's the public, that's the fair market value of the property and instead of course, make sure you to show up, have a representative show up or have a bidding process in place to bid if you want that property back and so you have a million dollar note and it sells at auction for $300,000, you can get it back. The difference is now your damages. Now you may have some additional damages for waste. It depends what the scenario is. There may be some other things you can go after, but at a minimum you now have that difference to sue for the pg, which is that $700,000

Melissa C. Martorella:

And they might argue that because you fixed it up and that kind of thing, it shouldn't be the full 700, but you can still go for that amount at least initially, and then Steve can help walk you through and defend you to get that full amount back.

Anthony F. Geraci:

For sure.

Melissa C. Martorella:

What is our risk profile if we fund a purchase loan in an escrow fallout emergency funding and the borrower advises they will not move into the purchase property until they have refinanced out of our hard money loan. That sounds like a consumer purpose loan all day long, but maybe I'm missing something here.

Anthony F. Geraci:

No, I mean literally you're saying they're moving in, but not until they've refinanced this out a hard money loan. It's like now you actually have an intention, they're moving in and they're trying to get the bail out of the foreclosure. You're going to have a hard time convincing somebody that was not consumer purpose.

Melissa C. Martorella:

Agreed. If you refinance a home for an individual living in the house with no cash out, is it okay? It depends. What if maybe I own my home free and clear and then I took out a small business purpose loan and now I'm coming to you to refinance that business purpose loan. That would be fine, but if it's anything else, if it's refinancing the consumer loan I took out to purchase that property, that might be a big problem. So it depends on what that loan you're refinancing, what the purpose of that loan was.

Anthony F. Geraci:

Loan is recurring in amount and there's no other reason, but you're the only person who's going to refinance it. Are you refinancing to refinance the underlying purpose? Are you trying to get bailed out? These are the questions ask us at that time, happy to research and find for you.

Melissa C. Martorella:

Licensing question. Nevada requires that account executives be licensed as MLO does is also apply to business purpose loans. So fun fact, Nevada is the most strict state with regard to licensing. So I don't know the answer to this specific question. However, I do know that business purpose loans in Nevada do require licensing. There are some nominal exemptions to that, but any loan in Nevada is going to be regulated and requires a license.

Anthony F. Geraci:

And I can break this down. So when you talk about MLO, that's very much a very specific term. Mortgage one originator, which is covered at NMLS and mortgage one originator endorsements are only for consumer purpose, one to four families. So they don't need an MLO endorsement, but I want to be clear, that's an endorsement, right? That does not mean do you need to be licensed. What Melissa said, you say it still may need a license, whether a real estate mortgage lender, whatever that is. Same thing in California, you're still going to need a license, but you won't need an MLL endorsement to your license to do these types of loans.

Melissa C. Martorella:

Are there specific rates or terms needed for business purpose loans in regards to usury? I know you're not supposed to go over prime, but I was not sure if the rates or terms might be different for business purpose versus a commercial purpose loan. It depends on the state. So California's 10% in Utah, there is none or maybe it's 40%, forget something crazy high for a business purpose loan. Other states it depends on the loan size. Sometimes it's property type, so it really depends. So if you want to reach out to me with your specific loan scenario, I can look into it for you and let you know what usury is there and whether or not your loan is either exempt from usury or if it does apply to your scenario.

Anthony F. Geraci:

Yeah, the only thing I want to comment on is I would delete the reference of prime. I can't think of a single USY that ties it to Prime California ties over 10% or above 5% above the Fed funds rate. So that would be the USY stuff that you'd want to go over, but don't worry about prime. The question will be the USY in each state,

Melissa C. Martorella:

Except if it's Tennessee, which is 4% over the average prime offering rate, but they do codify choice of law. So as long as you're not in Tennessee, you're fine. Happy to talk about it.

Anthony F. Geraci:

There you go.

Melissa C. Martorella:

Do the same rules apply to foreign national borrowers? So for anytime you have a foreign national, I think the biggest thing is is now you're really underwriting the property, even if it's an LLC owned by foreign nationals because that's going to be very hard to go after them personally if they just decide not to show up back in the United States. So really look at your property when you're making loans to foreign nationals because that's going to be ultimately your recourse here. So you might make the loans a little bit more conservatively than you would otherwise because your true recourse is just the property. Next question, lightning Docks provides an anti-money laundering declaration. Are we also supposed to have an A ML program to supplement this and check out the individual borrower? I don't know if you'd like to send me an email, we can do some research and dig into that for you, but the truth is I do not know off the top of my head. Anthony, I don't know if you happen to know this.

Anthony F. Geraci:

Not off the top of my head. I mean there's some red flags and it depends on how you collect information and documents, but I can't think of it off the top behind

Melissa C. Martorella:

From the map you showed, is it generally true that restrictions are correlated to judicial or non-judicial states? Unfortunately, no. It's all over the place, so happy to, you'll have the slides and happy to reach out and answer any specific questions that you have later. We already answered that question. Okay. Can you do a first mortgage refinance on an owner occupied property that was originally taken out for consumer purposes when they purchased the home, even though the proceeds from the refinance are a hundred percent business purpose? I think Anthony touched upon this one a little while ago, but I think, I guess technically yes if it's your practice as a lender to be in first position and all of that, but there's a lot of other factors at play. How much time is remaining on that loan? What are the terms of that loan? If they're really favorable, if they got that loan in 2021 when rates were super low, that's going to be tough to say that it should have been refinanced. So there's a lot of factors that go into that. If they're taking cash out for a business purpose, does escrow have to deposit funds into a business bank account? Best practices? I would say yes, but if they don't have one and that kind of thing, depending on the circumstances, that might be okay that they don't. But if it's truly they're like, I need it for my business. Well, their business should probably have a bank account then and you should probably deposit it there

Anthony F. Geraci:

And remember, I love the scenario, but keep in mind this is a story you're telling the judge at the end of the day, right, and this could happen three years from now. Does the story make sense? Of course, if you deposit business bank account, that's now an added thing in your armor of bulletproofing you from a lawsuit. If you don't, it's not the end of the world. It's just again, now you have to explain, well why wasn't there a business bank account, that kind of stuff.

Melissa C. Martorella:

If a borrower originally purchased a home as a primary but has moved to a new one, can I refinance the original property and extend cash out? This is a great question, Anthony, you want to take that one? You smiled.

Anthony F. Geraci:

Yeah, this is the hardest question to answer because this is the only time, and I'm assuming by the way that this is some sort of bridge that's being loaned. This is the only time that a borrower has two primary residences, which is the old one and the new one when they're moving out of the house, but they're buying and using the funds to buy their new primary residence. Those are the two consumer purpose owner occupied properties at the same time. Now you did say refinance the original property. Now if this is not happening simultaneously like this has happened in the past, then of course, yeah, the old property is not owner occupied anymore, so now it's not occupied. So that'd be the question that you're asking. But there's two ways to take this scenario. I'm taking it simultaneously. They're moving into the new residence and these funds are being used to buy the new residents. They're both the old and new or primary residences. If this happens after the fact, then only the new one is primary residence and the old one is now non occupied.

Melissa C. Martorella:

Exactly. And that scenario does happen frequently where somebody purchases a new property to live in and then their old primary, they want to use that as a rental, but they're like, Hey, I want to fix this place up before I do that. That makes sense. The use of that property has changed now, so that makes more sense. But like Anthony said, it's very fact specific and time specific.

My borrower is a three member LLC. Each member is also its own LLC. When I ask for a personal guarantee from the managing member, I'm being told, okay, we'll do it. But the PG strength is minimal in court. Please explain. I might need more information there, but here, I mean it might be because the personal guarantee that you're going for, in this case, that entity may not have a lot of other assets. Maybe that's what it is and you want the individual instead, but this seems very fact specific, so if you'd like to reach out to us, we could look into that for you.

Anthony F. Geraci:

Yeah, what goes into this one? Is it manager manage? Is it member manage? There's just a lot of missing information here. The only thing I can think of also is if you have a three member LLC, assuming this LLC owns other things, maybe you don't get a tax to shares. I don't know. I don't know the scenario you were told. Unfortunately,

Melissa C. Martorella:

If we get the borrower before closing to notarize that the funds are for specific business purpose, would that bulletproof things? Unfortunately, no. It helps certainly, but there's no silver bullet here that you can just be like, dismiss my lawsuit, a notary signed. There's nothing like that unfortunately. I wish there was, but there's not.

Anthony F. Geraci:

Say California, we have under penalty of perjury. You represent all the above is true, and that is by this way, the same thing in California as a notary would be. That's just one document of many. If you have five other documents saying consumer purpose and I'm going to live there and I'm going to use money to pay medical bills, remember you've got battle documents. What do you believe? And the court's going to be like, well, why don't you call to control this?

Melissa C. Martorella:

If some of the funds in a business purpose loan are going to paying off property taxes, does that imply the loan is no longer business purpose? It depends balance of the proceeds, percentages, that whole thing. If it's I need money for my business and also I'm 10 grand behind on my property taxes for the house I live in, that depends on what it is. Kind of similar to the foreclosure rescue. Is there an imminent tax sale if I don't get my taxes paid up current? That might be consumer purpose, but if it's just maybe business has been bad and I'm like, I need this money to do this, but then also I might pay my taxes for the 5% balance here. That might be more, okay, so it's really facts specific on that one. It's my understanding when making a business purpose loan in California, more than 50% of the loan amount must be for a business use. In other words, 20 to 30 can be for non-business and it's still considered business purpose loan. Is that not the case? That is the case. You nailed it. And it's not just for California. That would be for anywhere majority of the loan proceeds business purpose.

Anthony F. Geraci:

But again, I would still have the caveat. I don't care if it's 5% of the loan proceeds if that house is going to foreclosure and this is the only thing stopping from foreclosure, good luck convincing a jury. This was business purpose.

Melissa C. Martorella:

Next question. Borrower owns her primary free and clear wants to purchase an investment property down payment will come from her primary and half on the investment property. It would be a blanket on both borrower's willing to open an LLC to purchase the investment the loan would be given to the LLC borrower, the only member properties in Florida. There's not a real question here, but I would say it sounds like a business purpose line, and this is a very common scenario. You own your home free and clear. Maybe this person's retired or something and looking to do something with their retirement and they see the property down the street that they are like, this would be a great house to purchase and rent out, but I don't have quite all of the proceeds, so I need to use some of the equity from the house I live in to purchase this investment property and they're going to do it the right way with an LLC and that whole thing. That sounds good. That sounds fairly business purpose. I mean there might be other factors that say no to that, but if that's the scenario, it sounds like that's a business purpose loan.

Is there a percentage threshold of proceeds used for consumer debt purposes if 99% is for business and 1% for personal credit card debt? Again, it's the same kind of thing that Anthony said. There's some huge problem with the personal debt. That's the impetus for this whole thing, then it's probably problematic, otherwise this would be okay. So it's really fact specific on what's going on.

Anthony F. Geraci:

Yeah, and I'll remember remind you guys of words, it comes down to primary driver. So there's no percentage test necessarily. That's one test courts have used. But again, primary driver, why are you doing this in the first place? That's what you got to convince court. And of course you as the lender

Melissa C. Martorella:

Taking your example of a hundred thousand dollars loan for business purpose on borrower's existing business, in order to secure the second position, you have to pay off a $20,000 IRS lien on the property from the a hundred thousand. Is it still business purpose? Again, what is the primary driver? As Anthony just said, if the primary driver is to pay this IRS lien and they're like, oh yeah, I might as well expand my business at the same time, I don't know. That sounds kind of problematic versus if they're really doing this for their business and it just so happens, well then that might make more sense. So it depends on the facts and the scenario that was brought to you.

Is it a valid business purpose if a cash out loan is made on an owner occupied SFR for the purpose of building an ADU that will be rented to a third party? Yeah, that sounds great to me, but I would with the caveat of that is make sure that they're truly planning to rent it out and to a third party and at market rents. So sometimes this'll happen and then they're like, oh yeah, but then my mother-in-law moved in and we charge her a hundred bucks a month. It's like, well, that's not really an investment purpose, so make sure it's very clear that it is going to be rented out before you do something like this.

I have a thing here that says a little more color. We were threatened by an attorney for paying off an FHA loan on a duplex where one unit was rented, the other was demoed. There argument is we should not have paid off a lower cost loan. That sounds like a good argument. I alluded to it earlier. If the loan that you're refinancing, even if it's your practice to only be in first position for example, but that loan that you're refinancing, that consumer loan was really good rates. That's going to be a very strong argument that you probably should not have done that sort of thing and they should have just found another lender that was okay with a second. So I don't remember. You might've put a different question 30 questions ago and I don't remember how we got here. Apologies. If you want to email me, we can try to look at that.

Anthony F. Geraci:

I was going to say I don't remember the original scenario. So sorry.

Melissa C. Martorella:

Can loan processors be held liable for processing a business purpose loan that they suspect is truly a consumer loan? I mean, I don't believe so. Especially your processor working for the lender. It would be the lender's problem if it ended up truly being a consumer purpose loan. You're just working as your job, especially if you're somebody who's unlicensed and you don't need a license to be if you're just drawing docs or organizing a file, collecting information, that's,

Anthony F. Geraci:

I'll play devil's advocate. Let's just say you're independent loan processor and you have a contract saying you guarantee this is a business purpose loan. You may have some contractual liability. That would be the only place I could see that. But I mean assuming you're one process that works for the lender, you individually don't have it.

Melissa C. Martorella:

First position on acquisition plus rehab, how practical is it to collect on cross collateral in several states where the first position lien is in its own state? I'm a little bit confused. So I'm assuming here you have a loan that's going to be in first to buy and rehab this property, but then maybe you crossed it with another property that's in a different state. It's a little complicated in the sense that you have to figure out where you want to go first and what you want to deal with first. I would probably recommend, for example, say the property in the other state is their primary, I'd probably go after the investment property first. That makes you look better with the courts and everything like that. Go after that and then pursue the other property, personal guarantee, that kind of thing. That's probably the order that I would do it in, but this sounds very fact specific to record the borrower interview. Do I need to get permission or something in writing to record or can the permission begin an orally right at the start of the recording? I believe you need permission in writing to do that sort of thing.

Anthony F. Geraci:

Depends on the state. Yeah, some states only one party needs to know some takes two parties. I'd research it beforehand.

Melissa C. Martorella:

Yeah. Anthony mentioned all documents stating business purpose for use of funds. We usually ask for the handwritten letter upfront, but there are many emails that go back and forth during the due diligence period, the do not such as credit borrower authorization, et cetera. Or is he referring to the closing docs in addition to the upfront letter and confirmation of funds use at the end if all docs need it. Do we add a disclaimer at the footer of all docs? Now, I've heard you in the past mention that the percentage of the use of funds will be analyzed when determining legality. Are these percentages still accurate? So two things here. First I think he's just talking about the application upfront thing and then the reaffirmation at a time of loan signing. So all these emails, that's fine. You can add that as additional things I would say is potentially if you ever need a letter of explanation, if things are not adding up, then maybe you want that to be handwritten, but otherwise all of the emails and everything, that's totally fine. And then as we were talking about the percentages, it's also the primary driver test and even if there's a percentages test, there's no true this percentage amount. It's really fact specific.

Anthony F. Geraci:

Yeah, the only thing I'd comment also is with all documents what Melissa said, but keep in mind if you get one email and they say, well, yeah, as you know, I'm trying to pay my medical bills with this, yada, yada, yada, and then you respond, well, we won't finance that. Did I say medical bills? What I meant to say was investment property guys, if that email gets discovered, it is part of the file, right? I don't care what you sign. This is all part of the story from start to finish. If you get a couple of emails that say, otherwise this is evidence that you should have known this through purpose and you should not have done this loan. So keep in mind you've got to tell this entire story to a judge at the end of the day.

Melissa C. Martorella:

Next up here, do you recommend a guarantee from the entity that will receive the loan proceeds? Individual owns the owner occupied SFR. In California, proceeds are being used to buy another business that the PARER has a history of owning or suggestion was to have the proceeds wire directly to that entity and obtain personal guarantees from the members of the LLC benefiting from the proceeds. Great question. So I would structure this loan as follows, I would make the loan to the LLC. That is really the company that is using the money benefiting it. The individual who I'm assuming is a member of that LLC or a manager of that LLC has property that they own individually that they're like, Hey, I'll put this up as collateral. Okay, so you do what's called a third party trust deed and that individual pledges that property as collateral for the loan to the LLC and that individual can also personally guarantee the loan. So it's a little bit different of a structure, but that is probably how I would do that. So that the borrower is your borrower, which is really that LLC and not the individual. How many collateralized first lien loans per year would you require an LLC for me as I lend from liquid cash stack, not S-D-I-R-A or other sources?

Anthony F. Geraci:

I don't. I'm not sure. I'm not sure I understand the question.

Melissa C. Martorella:

If you want to email us, we can try to answer that for you. But if a broker originates a business purpose loan for me, that turns out to be a consumer loan. Who takes a loss if litigation ensues?

Anthony F. Geraci:

Great question. I'll take that one. You do as the lender. Now here's the 40,000 caveats to that depends on do you have a broker agreement, right? Well, what is in that broker agreement? Do they indemnify you for these types of things? I want to be very, very, very clear. Truth Lending Act and CCF PB looks at you as a lender as taking the loss. It is your responsibility. You're lending the funds, you will take the loss. Now how do you recover against that loss? That's what it comes down to. These broker agreements. Do you have indemnification? Do you have reps and warrants from these? And this should all, generally speaking, especially if you're in the business, you should have these broker agreements with your brokers making them sign on, Hey, you're indemnifying me that what you tell me is true and correct and if to find out otherwise, then you're going to help pay the damages or whatever that looks like.

So broker agreements are very key in this business. I highly, highly recommend that you guys get them with people you work with. Again, remember the chain, right? You got more than one broker in the whole transaction. Probably have a broker agreement with each and every broker because here's what's going to happen. That first broker tells the second broker. Second broker doesn't tell you second broker tonight's everything. He didn't know anything, but you only have an agreement with a second broker. So this is where these contracts and agreements really come into play in shape because you as the lender will take the loss guaranteed.

Melissa C. Martorella:

Next one. Can you define business purpose regarding the state license requirements? For example, will a license be required to make a loan to a home builder to acquire land repl into multiple watts and build SFRs and Idaho? So the business purpose question doesn't matter what state. That's the question you ask for the whole thing. This is clearly a business purpose though. Doing something like this. Idaho though does have some restrictions on licensing even for a business purpose loan. When the collateral is a one to four family property, I have a feeling this is likely exempt from that because you're purchasing land and then subdividing it in that whole thing. However, if you want to reach out, we can dig into the statute with you and I can see if you would be exempt from licensing in Idaho for this sort of loan on the business purpose. If it's not handwritten, but on a document at closing and notarized, that might be okay. But again, I just much prefer a handwritten thing than something that's just a checkbox or something like that.

This one I'm going to tell you to go back and re-listen to the webinar, define the difference between business purpose and a personal investment. Business purposes is for your business, whatever it is, I am a flipper and I'm purchasing a new investment property that I'm going to flip or I'm an attorney and I need proceeds because something my business is in tough times right now or whatever it is. It's got to just be clearly in a business purpose versus a personal investment or personal purpose, paying medical bills, whatever that is. So come back to the webinar or you can also go as Anthony has alluded to, the commentary for TILA and RESPA. They have a lot of examples and that might be a good helpful starting place as well.

Writing a loan now for someone to purchase a commercial building and I'm getting them to cross pledge a flip house, are there any forms and lightning docks that cover multiple properties pledge to one loan? Lightning docks can definitely cover this for you and depending on the state, there might be additional documents that pop into place. Also, if the properties are in different counties, you'll get multiple security instruments, but otherwise it seems very fact specific. But this is very normal and something that lightning docks can't handle. What state disclosures are required for California? You said there's an upcoming seminar on this when, so if you want to reach out to me, it depends on whether, if you are a DRE broker, there are disclosures that have to go out. If you're not and you're a California finance lender, then there's really not much of anything. So it depends on who you are in this transaction. If you want to reach out to me, I can talk to you about it and there will be upcoming seminars on the capital raise side and dealing with a mortgage fund that might be making these kinds of loans. And also on the litigation side when you're cleaning up a mess that might've happened because of one of these. I don't know when those are, but they are forthcoming.

Please discuss document printing when the titling of a property is requested in an entity, but the underwrite is actually on the borrower guarantor, not the entity who's being identified on all docs as a borrower. So this one's even more interesting. It's like the opposite of the one that I just answered before. If the borrower, the person who's asking for the money is an individual, so Anthony individually needs the money for his business and he doesn't have a business entity for some reason, but then he's like, Hey, I have a company unrelated to this that owns a piece of property over here. They're going to pledge that as collateral. You can make the loan individually to Anthony and have that company pledge the collateral and maybe have that company personally guaranteed that loan. You could do that in that way. I always like whoever the party is that is meeting the proceeds, that should really be your borrower and then structure around that. That makes more sense than doing something like giving money to that person who's really maybe a guarantor or just because they're pledging the property. So if you want to reach out to me, I can help you try to figure out how to structure this on. Our occupied individual wants to build an ADU for investment purpose. Okay? Yes, Sandy, it is okay. It's okay. I've talked to you about it. Sandy, it's good with the caveats that I put in before.

If the loan docs for an existing business purpose loan incorrectly contain references to a consumer purpose loan, what course of action should the lender take to remediate? Ooh, that is gross. I would probably just try to do a refinance on proper docs. This is why your documents are super important. We've seen this a lot of times when people will use consumer purpose loan documents and try to fit them for business purpose. It does not work. Reach out to us. We're happy to draw docs for you that are for business purpose. There are also other services out there if you don't like us for whatever reason, but like to listen to us talk, go to them, get business purpose docs. Do not try to fit consumer purpose docs for this purpose. We have two more minutes in 10 questions. We're going to try to do it in California. We buy loans, endorsed note and assigned deed of trust from a broker. We are not licensed. Are we counted as a lender or a note buyer? Are we protected for much of this? Reach out to me because there are, it's short. Long story short, probably you are subject to a lot of this and there's definitely ways we're purchasing these loans. You have to make sure it's done properly, so reach out to us and we can make sure you're all right.

Collateral is commercial property, but the use of funds are consumer use. Is this a no-go? I would say yes if you know. I mean technically, right? Sheila and RESPA, they say form, it's got to be all this other, and technically maybe you could be exempt here. I say, no, this is ripe for litigation. Don't do this.

Anthony F. Geraci:

Add a minimum. You got disclosure requirements.

Melissa C. Martorella:

Yeah. What is the best way to prove or document that the loan you're refinancing is truly business purpose loan. We talked about this. Get that handwritten statement, get the reaffirmation at closing. That's handwritten. Do all of that and if you have any concerns, letter of explanations can be your friend to you. Which state is the most lender friendly for these types of loans? Look at that map or the two maps that are in these slides. Compare them, the ones that don't require a license at all for business purpose loans. And then also say they don't care if it's an individual. Those are going to be your most friendly loan or estates. Specifically is it okay to do a business purpose construction loan for the ADU? Yes, as long as you clearly are showing that the proceeds are for the ADU, not the main house and all of that fun stuff and the other ADU things that I mentioned. Unfortunately, I have five questions left, but it is one o'clock and we do have a hard stop. So if I didn't get to your question, send us an email. I'm happy to try to answer them for you. Thank you for the great questions. It's been a pleasure today, Anthony and I had a great time. Have a wonderful afternoon.

Anthony F. Geraci:

Take care everybody. Great to see you.