The Overlooked Rules that Apply To Business Purpose Loans: California Edition

Melissa C. Martorella:

Welcome everybody. Thank you for joining us for today's webinar. A few housekeeping items to get started with. First, this is being recorded. It will be available on our website after it's uploaded and all that fun stuff. So if you miss part of it, if you want to forward this to a coworker or a friend or somebody in the industry that you think might benefit from it, hopefully today, if not today, probably tomorrow, it'll be live on our website and you'll be able to circulate that to everyone.

 

So that'll be there. Same with the slides. If you need those, they'll be available afterwards. Finally, at the very end of this webinar, we will have a Q&A session. If you'll see, there should be a task bar in this Zoom webinar. There's a chat box. Please don't put your questions in the chat box. We will not be looking at them, so nothing in the chat box, but there should be another link that says Q&A. So if you have any questions, please put them there and we will go through them as many as we can and to the best of our abilities at the very end of the webinar. So if you can include detail, sometimes I do these and people will say like, "Oh, what did you mean by this?" But then it's 30 minutes later at the end of the webinar and I don't necessarily know.

 

So try to give some context to your questions. That's really helpful. Otherwise, we're looking forward to doing this today. So to get started, we will introduce ourselves. If you don't already know me, my name's Melissa. I'm one of the partners here at Fortra Law. I've been here too long, 11 years and counting, and I help manage our banking and finance team, and I do a lot of compliance advice, compliance work for making business purpose loans nationwide, as well as loan documents and things related to that. And with me today is my colleague, Laine.

Laine Prescott:

Hello everyone. I'm Laine. I'm one of the attorneys on the banking and finance team with Melissa. So I also work on compliance, loan documents, all those fun things, as well as our non-judicial foreclosures for California. Very happy to be here today and excited to walk through all this with everyone.

Melissa C. Martorella:

Awesome. So hopefully you knew what we were talking about when you entered the webinar today, but in case you didn't, the title is here, The Overlooked Rules that Apply to Business Purpose Loans: California Edition. So we'll kind of get into the agenda here. So first, what we're going to do to ground us in the conversation is we are going to do a big picture overview of federal laws that apply to business purpose loans. We'll do it fairly quickly, but it'll help ground the conversation and give us some context. And then we will go into a California specific discussion about rules and requirements for business purpose loans secured by property here in the state. So we'll go over loans that might have some requirements regardless of how they're originated, loans that might have some rules if they're originated by a licensed DRE broker, and then loans that might have some rules if they're originated by a California finance lender.

And Laine will do her best to go through everything with you. It can be complicated, but we promise we will hopefully shed some light at the end of this. So yeah, so that should be a fun one and a lot to learn today. To kick it off, Laine's going to go over an overview of what is a business purpose loan that'll help set the stage for our conversation today.

Laine Prescott:

Thank you, Melissa. As she mentioned, this is very important. We do a lot of work with business purpose loans or really only work with business purpose loans. If you work with us at all, you'll hear us ask sometimes what the business purpose is, or if you work with us on closing, we have a business purpose certificate that we are pretty picky about. And a lot of the reason is because it's just very important when it comes to determining which laws are applicable and what's going on and what compliance items you need to keep in mind when you're making these loans. So essentially, a business purpose loan is any loan that is not primarily for personal, family, or household use. So your big question here is what is the actual purpose of the loan proceeds? How are they going to be applied? So there's some misconception sometimes that, for example, an owner-occupied property, like a primary residence can't be used to secure a business purpose loan.

That's actually not true. You could use it to secure a business purpose loan as long as the loan funds are going to be used for a business purpose. So a great example of this would be somebody who has a lien against their home, but they're going to take those loan funds and they're actually going to be purchasing equipment for their business or paying off business related debt, something that is not for personal family or household use, that would still be considered business purpose. Conversely, you could have a loan that is secured by say an investment property or something that is not their personal home or residence, but the loan proceeds are going to be used to, for example, pay for their child's college education or pay off personal credit card debt. Those are going to be considered consumer purpose loans because the actual funds are being used for a personal or family use.

So you want to make sure this is very clear upfront, get that business purpose certification in your packet, make sure it's very, very clear that it's actually a business purpose and you have that well documented. Otherwise, you could run into some issues down the line if it gets challenged as to which laws you were supposed to comply with that maybe aren't actually applicable, but you don't want to get into litigation over that. So it's a very simple way to just have everything clear upfront and help guide you as you determine what you have to comply with.

Next slide please. So there are two major federal consumer laws, TILA and RESPA, Truth in Lending Act and the Real Estate Settlement Procedures Act. These come up quite a bit in that we get asked about them a lot, but the really, really wonderful thing in our world is that these have an exemption for business purpose loans. So these are only applicable to consumer purpose loans, which kind of helps show how that business purpose is really important to determine upfront. If you have to comply with these, there's quite a bit there that you have to do. So you definitely want to make sure if you have that purpose documented, you get this major exemption under both of these and then you really just don't have to worry about them moving forward. But these are just two of the federal loans that are in play or federal laws, I'm sorry, that are kind of in play for loans.

And Melissa will walk through some of the other ones that may actually be applicable for a business purpose loan.

Melissa C. Martorella:

Awesome. Thank you, Laine. So it would be really easy if like TILA, RESPA, the federal government included in all of these other regulations that we're about to go through, "Oh, you're exempt if it's a business purpose loan." Unfortunately, they do not do that and you oftentimes need to look at the type of property that's securing the loan and sometimes it's even a little muddy beyond that. So we'll kind of walk through some others just to make sure that we're grounding the conversation. So the first one that comes up is ECOA or the Equal Credit Opportunity Act. It's also referred to as Reg B. There's a couple different ways that ECOA can apply to a business purpose loan, and it will generally apply to all creditors regardless of loan purpose. It might be limited by property type later and we'll talk about that. But in general, if you are a lender making a loan, you are going to be subject to some part of ECOA.

And the three areas that we'll be in particular discussing is with regards to appraisals, discrimination, and then adverse action letters. And we'll get into each one of them right here. So first for appraisals, the requirements under ECOA will apply to all loans regardless of purpose, so business or consumer purpose loans, if they are secured by a first position lien on a dwelling, and a dwelling is defined as a one to four family property. So if you are making a business purpose loan, but it's secured by a one to four family, maybe it's a fix and flip, a rental property, something like that, business purpose loan, but it's secured by a one to four, then this rule will apply to you if the loan is in first position. So if you're doing junior liens on one to four family properties, doesn't matter to you, but if it's a first position lien, this will matter.

And what the law with regards to appraisals say is that lenders have to provide all written appraisals and valuations to a credit applicant regardless of whether the application is incomplete or withdrawn, and you have to notify applicants of this right within three business days of the submitted loan application. So there's a lot of information there. And the big picture here is it doesn't necessarily have to be an appraisal, like a full blown appraisal from a licensed appraiser. It could be a BPO. It could be you looking on Zillow and trying to determine the property value. It could be something as informal as, "Oh yeah, I'm familiar with this neighborhood. I bet that property's worth $800,000," all the way up to that full-blown appraisal. But whatever you did to value that property, this applies here. So not only do you have to tell the borrower that they have this right to whatever the valuation was, regardless of whether the loan closes within three days of the loan application, but then you also have to provide the valuation, whether it's an appraisal or something else promptly, but at least three days before the loan closes, and you cannot charge the borrower for the cost of the appraisal, I'm sorry, to provide a copy of the appraisal.

So they can pay for the appraisal, but you can't charge for photocopies or sending or compiling it and that sort of thing. The helpful thing here, because that's a lot of timing requirements, within three days of the application, as soon as possible, three days before close, and especially with these business purpose loans, these are moving fast, there's a lot of time to work with here. Thankfully, the borrower can waive that timing requirement for providing the appraisal evaluation. So a helpful recommended practice that we have here is in your loan application package, include a notice about, "Hey, you have this right to the appraisal, so now you've dealt with it. It's right in the loan application package." But have them waive the timing requirement for when you need to provide the appraisal, because that way you're not handcuffed by, "Oh my gosh, we want to close tomorrow, but I just got the appraisal today, but it has to be at least three days before the loan closes.

Now we get to push closing." This waiver will help deal with that. So now if you include the waiver of the timing requirement in that loan application and they can say, "I agree to receive a copy of any appraisal or valuation either at time of closing or if credit is denied." So if lender says, "Hey, I actually don't want to make this loan at all," giving it to them then or at the closing table, providing them a copy of that valuation. So that'll really help you there. And then another helpful reminder is that the borrower does not or the applicant does not need to request a copy of the appraisal or valuation. You have to provide it to them. So it's an affirmative duty by you, the lender. And remember, only applicable if it's a one to four family property in first position, regardless of loan purpose.

So a lot going on there. Happy to chat or help provide a copy of the waiver that you can include in your loan application if you need help with that.

The second area where ECOA will apply to all business purpose loans is with regards to discrimination. ECOA prohibits discrimination with respect to any aspect of a credit transaction based on the following things on the screen. The reality here is most business purpose lenders, you're evaluating factors like collateral, credit score, project type experience, things like that. Obviously, hopefully you are not discriminating, but this is the reality is you're looking at the project, you're looking at the loan when you're deciding to make the loan or not. But a recommended practice that I would have for you all here to make sure you're compliant with ECOA is. Oh, I didn't realize that this was copied over from the last one, but the recommended practice that I would recommend here is doing a post-close audit of your loan transactions to see if you are accidentally discriminating based on some factor like this.

So you unintentionally denying applicant's credit and consistently it's a certain type of applicant. If so, you might want to look at your application process and that sort of thing to make sure you're not unintentionally discriminating, but in general, don't discriminate. If you have a good practice of here's how we evaluate our loan files, you're probably fine here, but that's the other way that ECOA, this federal law will apply to your business purpose loans.

The last one for adverse action letters. So an adverse action occurs when a lender denies or revokes credit, changes the term of credit or refuses to grant credit. It doesn't apply if a lender decides not to extend additional credit to a current borrower beyond what's been previously agreed to or if the borrower's in default. So basically if you go through and you have this loan application and you decide to deny it, you're like, no, this isn't for me. The borrower doesn't have the right project type experience. This loan is kind of large and maybe based on their past experience, this seems like too much for this borrower to chew. They don't seem to have the experience, whatever it is, you can go through and you've denied the loan, which is totally fine, but now that's what's called an adverse action. If a lender takes an adverse action like that, denying that credit, you have to provide that applicant or borrower with a written notice stating the reasons why within 30 days of taking that action.

The recommended practice here is to give a notice to applicants, to your potential borrowers with that application package that says if the credit is denied, they have a right to request the reason and then that puts the burden on the borrower to request the reasoning. Otherwise, you can just simply provide an adverse action letter every single time you deny a loan or take an adverse action, but otherwise this puts that burden on the borrower to be like, "Hey, you denied my loan. Why did you do that?" And then you can respond within that 30-day timeframe. So that's just the last little bit here where ECOA will apply to business purpose loans.

The next applicable law in federal land here is HMDA or the Home Mortgage Disclosure Act. This requires certain financial institutions to collect, report, and disclose aspects of their mortgage lending activity. And a lot of the reporting requirements deal with demographic and loan type information. This will apply to any extension of credit that's secured by a lien on a dwelling. And if you remember before, under ECOA, dwelling was defined as a first position loan secured by a one to four family. Now it's changed again, which is very frustrating, wish the federal government would be consistent, but they are not. So a dwelling here means it can be a one to four family property, but it can also be multifamily structures, manufactured homes, condos. Even sometimes if it's construction to build some of these residential properties, it will apply. So something to pay attention to here. It's not just the SFR or the one to four, it's expanded here, the types of loans that need to be reported under HMDA.

And just to further reiterate, property type rather than loan purpose is relevant for reporting. So it doesn't matter business purpose, consumer purpose. If you're making loans secured by this type of property, then you will need to comply with HMDA.

But what you do, so if you are a lender and you have made at least 25 closed end mortgage loans in each of the last two years or 100 open-ended credit lines in each of the last two years, then you must comply with HMDA. A closed end mortgage is just a loan with a maturity date and a fixed amount. So it's $100,000 loan due in 12 months. There you go. Credit lines can be a little bit more ambiguous here. They're usually larger. You can borrow, re-borrow, and there might not be a specific maturity date. They might just be available for a particular amount of time. So the differences are there. However, most of you, if you're private lenders, you're going to be following under that first category. So if you're making at least 25 loans in each of the last two years and loans secured by that type of property, then HMDA will apply to you.

And what that means is once you have met that threshold, you then need to submit a loan activity register to the CFPB each year once you meet that threshold. So in year one, if you do 23 loans, that year doesn't count. The next year you do 26 loans. That'll be your first year for reporting purposes. If the next year after that you do 21 loans, it doesn't count and you would start that timeframe over. But if you've done 27 loans year one and you do 29 loans in year two, now you need to comply with HMDA and the following year you will report based on those two years of loans. Where this gets frustrating is, I mean, I don't know about you, but I don't necessarily remember what I ate for breakfast yesterday, let alone all of these fields about demographics, borrower type, loan amounts and all of this other stuff from two years ago.

I think that would be very difficult. So the thing to think about is if you think you might be getting close to this sort of thing based on your business and your general activities is start collecting this data now so that in two years when you're like, oh man, we did really well, we need to start reporting, you have this information readily available to you. So the recommended practice here is to revise your loan application to capture relevant field data that you'll have to report under HMDA. You can either do that by manually revising the application or something that's very, very helpful is that 1003 mortgage application form. It's generally used for consumer loans or if you're buying your house, they'll give you a 1003. What you can do is there's a modified 1003 that you can use as a basis for a loan application or there's an addendum to that that's specific to HMDA collection data and you can add that, just slap it into the loan application package that you have and that'll collect the relevant data for HMDA for you so that when you do need to report, you have that information for each loan.

And then when you do report, there's all sorts of software you can use to do the reporting for you. That's very helpful and I would recommend that.

The next federal law that will apply to business purpose loans is the Fair Housing Act. It's very similar to part of ECOA in that it prohibits discrimination based on sex, familial status, race, color, religion, national origin, disability for transactions involving dwellings. Yet again, this lovely definition of a dwelling, what does it mean here? For the Fair Housing Act, it's dwellings are defined as any building occupied or intending to be occupied as a residence by one or more families or land sold for the construction of such a building. So not just the one to four, not just multifamily, anything that could potentially have people living in that, this is going to apply. And again, it depends on that property type, not loan purpose. Big picture though, similar to ECOA, just don't discriminate. It's not a good look and pretty bad. And then otherwise just do a post-close audit of your files to say, "Hey, what's been going on here?

Am I unintentionally discriminating or doing something like that based on the files that I'm denying or approving and all of that?" Chances are you're not because similar with ECOA, you're looking at the loan and the project and all of that other stuff, but just in case it's good to do that postmortem of the files to take a peek.

The next federal law is the FCRA or the Fair Credit Reporting Act that regulates the preparation, distribution and use of credit reports. It does apply to all business purpose loans. It does not discriminate with regards to loan type, property type, anything like that. Just if you're extending credit and you want to run somebody's credit, you have to comply with this. And basically what you need to do is make sure you have the correct authorization prior to obtaining credit reports. So for example, where this comes up, and this kind of goes into our recommended practice here, is who is your borrower and who is the person you are trying to pull credit for? So oftentimes with a loan application package and for these business purpose loans, a lot of you are dealing with companies, you're dealing with corporations, LLCs, that sort of thing, and that's your borrower.

But if you have your borrower complete a credit pull, well, who are you arguably pulling credit on? There's some state law that says maybe the manager or the majority member and that sort of thing. But really to be certain, if the borrower that I'm lending to is ABC LLC and Laine is the manager and the member and I want to pull Laine's credit, I should do a separate authorization that says, "Hey Laine, do you consent for me to pull credit? And if so, get her to sign that." So that's what you're looking for. You don't want to have a form that's like to ABC LLC that Laine has signed. Arguably, yes, Laine has consented to the pull of that credit based on her status as the manager and the member of that entity, but it's much more clear to make sure that you have got Laine's authorization to pull Laine's credit.

So just when you're sending out these loan application packages, be very clear about who is authorizing you to get their credit pulled.

I think this might be the last one. The last federal one is the SCRA or the Service Members Civil Relief Act. This provides financial protections to service members who are on active duty when the service member borrower has a change in military status. The important thing here is the change has to be from off duty or reserve status to active duty for the law to apply. And the service member borrower has an affirmative duty to notify the lender of their change in status. Where this really comes into play a lot of the time though is when there's a loan default, and you'll see us talking about this in the recommended practice here. So you're trying to enforce the loan. Borrower hasn't paid, maturity dates passed, something's going on here and there's an issue with your loan. This is where this oftentimes pops up. And generally what you'll see, say you want to start foreclosing something like that, the first thing that you'll want to be doing is just doing a quick search.

You can literally go on the Department of Defense website and search for Laine Prescott and see, is Laine an active member of the military? It'll tell you. If I see that and I see yes, active duty, remember this change had to have been from off duty or reserve to active duty for this to apply. So if she was active duty the entire time when she asked for the loan, I gave her the loan, she's active duty, she's still on active duty, this won't apply. But if she was off duty, got this loan, but then she was pulled into active duty, now we have to deal with this. And yes, while that service member borrower has the affirmative duty to be like, "Hey lender, I'm going on active duty. I am subject to the SCRA and the interest rate protections and default protections under this statute." If they don't, generally I would say it's a pretty bad look to continue foreclosure, accruing default interest, that sort of thing to a service member.

So even though they have not done that affirmative duty of telling you, that might not be the first thing on their mind, if you see that, the best next step is to inquire to be like, "Hey Laine, you're in default. I do see that you're an active military member. Is this status new?" And following up that way because then you can figure out, do I need to deal with the SCRA and give default protections, reduced interest rates, all of that stuff, or has she always been active duty and I can just proceed with my foreclosure or whatever loss mitigation effort I have? So that's kind of how you'll want to deal with this. And again, it doesn't matter the property type, it doesn't matter the loan type. This is going to deal with all service member borrowers for this to apply. And now that was a lot of me talking about the federal laws here.

Laine is going to take it back and she's going to guide us through a California specific discussion. Take it away, Laine.

Laine Prescott:

Thank you again, Melissa. Okay, so as Melissa just walked through all these federal laws that are applicable to various loans and all these things, each state also has laws in play that you should be paying attention to. We're going to walk through California, but if you do loans outside of California, you should also try and figure out what's applicable in whatever state you're working in. But today we're going to walk through laws that are applicable to loans regardless of how they're originated versus loans that are originated by brokers or loans that are originated by California finance lenders, so these CFL lenders.

So first we're going to walk through prepayment penalties. This applies to owner-occupied properties. So it does say owner-occupied business purpose loans. This just applies. Anytime you have, say, a primary residence or the owner's occupying whatever property, you are able to enforce a prepayment penalty or prepayment charge for these types of loans. However, they are limited. So as you can kind of read through on here, there's a lot of words, but functionally, you're allowed to impose a prepayment penalty for any prepayments that exceed 20% of the original principal balance. So if you've modified or whatever, it might be a little bit different, you might pay attention to that, but 20% of the original principal balance. And that charge cannot exceed six months of advanced interest on the amount prepaid. So a great example here would be you make a $1 million loan, borrower prepays say $500,000.

Your prepayment penalty limit is six months of interest on that $500,000 that they have prepaid on the loan. And this is really just designed to protect homeowners from what they've deemed aggressive prepayment penalties and allow them to really easily be able to refinance their residences. So there's just some public policy behind this, but it's good to keep in mind if you are working with owner-occupied properties to pay attention to your prepayment penalties on these.

Next, we are going to get into per diem interest restrictions. This is going to be applicable for one to four family properties. We have another California statute here that's in play, and it just says that you can't charge per diem interest until the day before the loan actually funds to the borrower. So the day that escrow disperses out to the borrower, you can't charge per diem until the day before that happens. There are some exceptions that are kind of limited circumstances, but most commonly is when a borrower has requested funding to happen following a weekend. So say on Monday they want to have funding happen or following a holiday. So say Tuesday after Labor Day, they really want to fund that day. In that case, lenders typically have to actually fund into escrow several days prior to that. So before the weekend happens, which can be three or four days ahead of time.

But if you want to do this and you want to charge per diem interest, there's a form that the borrower should sign and you should make sure you have this in your file showing that they requested that specific day. Otherwise, you just can't charge the per diem interest for those extra days after you've funded, but before they get the funds.

And California also has restrictions on hazard insurance requirements. And basically what this says is that a lender cannot require a borrower to hold hazard insurance in an amount that exceeds the replacement value of the improvements on the property. So a lot of times your hazard insurance coverage amount's going to be lower than your loan amount. And this is very concerning for lenders sometimes, but it's actually very normal. And if you think about it, even if something happens, say you have this piece of property and all of the buildings burned down on the property, well, you still have the underlying land and that land has value. Say you have 10 acres up in Malibu that overlooks the ocean, that land's very, very, very valuable all on its own without the structures. So this is kind of designed to limit what borrower has to have in place because you don't necessarily have to replace land, you'll never be replacing land, it's just kind of there.

But they would have to replace the structures potentially if there was a house that burned down or something like that. It just limits the insurance so that they only have to pay for the replacement value of that home, for example, to rebuild that. But as I mentioned, it does set off some alarm bells sometimes for people when they say, "Oh, but my hazard insurance doesn't cover the full loan amount or the full property value." And that's completely okay. You just want to make sure it has the replacement value for the improvements on the property and then you're all set to go and that's the limit that you have to follow anyway.

So all of that was applicable to loans regardless of how they're originated. So whether by broker, CFO lender, you're an unlicensed lender, no matter what's going on, you have to keep all those in mind. These are going to be applicable for loans originated by a DRE license broker. And the first one's going to be your late charge limit. You have to include a minimum of a 10-day grace period. So if your payment's due on the first, you can't do anything, no late charges until the 11th, for example. And the amount is capped at 10% or $5, whichever one's higher. Something that comes up very frequently, we get a lot of questions on this day-to-day, is about late charges on balloon payments, which are not allowed. We have clients who like to have that language put into their loan documents for the late charge, but even if you have it in there, if it ever were to be challenged, it is extremely likely that that's going to be struck down by a court.

And that's not just for California, that's actually pretty much across the entire country. So something to keep that in mind. Late charges are really for monthly installment payments, not for your balloon payments that you have. Licensed brokers also have LTV limitations. When we get to the next slide, you'll see a whole chart that's from the California Business and Professions Code, and these are applicable based on your property type. And there's a little bit of owner-occupied versus non-owner occupied for one to four properties that come into play as well. But this is really meant to protect the lender's interest and make sure that they're not lending way more than what the property is worth. And you can exceed these, but you really, really need to be documenting why you want to do that. So if we could go to the next slide and you'll be able to see these different, this is straight from the business and professions code, a little bit different format, but essentially the same thing.

You can see for single family residents, owner occupied, you have an 80% limit versus something like a commercial property, you have a 65% limit. And while this is something that is really more of a concern for a licensed broker, it can affect your loans, especially for construction loans. It can affect your structure as well, even if you're a lender or a borrower. So if we could go to the next slide really quick. Thank you so much. So construction loans in California, when they're arranged by a DRE license broker, even if you're also a CFL lender, if you have a broker that's involved in this, this becomes very important for your loan. And it looks at the current value of the property versus the after repair or the ARV, after repair value, and to see how those play into those LTV restrictions. So if the current value of the property, say you have a construction loan that's arranged by a DRE broker, but it's really a pretty minor fix and flip, the current value is pretty close.

It's going to help fall within those LTV restrictions. You might not be too concerned about this. You do still need to check it, but this comes into play a lot for ground up construction when you have to look at the after repair value because the current value is mostly the land and so the current value might not be able to get you in those LTV limitations. So if the broker has to look at after repair value in order to fall under those LTV limits and your construction holdback is $100,000 or less, you have all of these additional restrictions for your loan, one being that it has to be fully funded, so you can't net fund anything. You have to have an actual appraisal done, so you can't do a BPO, you can't do Zillow, you can't do, oh, I think this property is worth this because I know the neighborhood, it's not going to work for these types of loans.

The loan documents have to have specific instructions for what happens when there's a default under the loan. So if you're using our loan documents, you're all good on that. We have it all in there for you already. You have to have a detailed draw schedule, so you want to make sure you have that in place. And again, if you're using our loan documents, we have a little exhibit thing for you to pop that right in, makes it really easy. But the one that kind of comes up, especially for these Southern California properties that can be very expensive is that the loan amount cannot exceed 2.5 million. So what happens when you have say a $10 million loan that you have a very large, so you have a $2.5 million construction hold back on, what you would have to do is split that loan into two loans.

You would have one loan for just the construction portion. So it'd be say a $2.5 million loan with the full amount being held back, and then you'd have the other 7.5 million as a second lien, or you could flip it around, have that first lien and construction second lien. You can discuss that with your counsel if that comes up. But you do have to keep this in mind, and this is why I mentioned, even though the LTV is kind of more of a broker issue, obviously splitting up a loan can really impact the lender and the borrower and cost for all these things like title, you have to get multiple title reports potentially or title policies. So that's something to just keep in mind even if you're not a broker and you're here as a lender or whatever other type of party you are.

There is a little bit more to this though. So if you have the same thing, your broker's relying on after repair value, but in this case, if your holdback is greater than $100,000, so if you have this $2.5 million holdback, you actually have all of those same requirements plus these two extra. So a third party funds control has to be used to administer the holdback, and you have to have a licensed party coming to inspect the work completed at the property as it's being done every time you disperse or however frequently is necessary. Fortunately, the fund control companies typically are able to also provide those licensed parties to do the inspections. So definitely recommend if you have to use a funds control company to just reach out and see if that's something they can just double up on, makes it really easy for you. But something to keep in mind when you're doing these very large construction loans with a dairy broker to just make sure you have all of this in place, or if you're not really sure, just reach out to your counsel, whoever you're using and they can help walk you through it.

Lastly here, we have this restriction or requirement, I guess, for loans originated by CFL licensed lenders, and it's just no broker daisy chains. So can't be a lender and going, "Hey, broker one, I'm trying to make this loan or I have all this funds, I'm trying to find a borrower. Can you hook me up? Can you find somebody?" And then broker one goes to broker two and go, "Hey, I have this loan that we want to do. I'm trying to find somebody for this and I want to collect a fee. Broker one wants to collect a fee, but if you help me out, you can collect a fee too." And then broker two goes to broker three and go, "Hey, I'm trying to find somebody for this loan. I want to collect a fee. The broker one wants to collect a fee. You can collect a fee too." And you're just not allowed to do that.

The limit, I don't know if it's one or two, but there's a limit of either one or two brokers that are allowed. So they just don't want these huge broker chains where borrower's going to pay three, four different broker fees. So if you're a CFL licensed lender, recommendation is just to keep it to one broker, one broker, one broker fee. Otherwise, CFL lenders do not have very many restrictions. We just walk through all this construction loan things, but that's only applicable for dairy brokers. So that's something that I was just asked about last week. I get asked pretty frequently when this comes up. If you're a CFL license lender, you don't have to worry about things like LTV, all that other stuff. You are actually pretty free when it comes to this. You just have to keep in mind those laws we already talked about that are applicable no matter how anything's originated.

You want to definitely keep those in mind still.

Melissa C. Martorella:

Awesome. Well, thank you Laine for that. That kind of wraps up our presentation today. So some takeaways that we have for you. These federal consumer laws will still apply to some business purpose loans. So keep this presentation as soon as it's uploaded, have it as a reference. I believe we also have some materials that will go out that talk about a lot of this stuff. If you're ever wondering, does this weird federal law apply to me? Reach out to us. We're happy to help you to figure that out. As Laine mentioned, there can be additional state level requirements that apply to business purpose loans. Don't assume that business purpose loans are automatically exempt. Laine went through a lot of that California stuff today, depending on how the loans originated, but other states may also have additional requirements. So if you're not just in California and somewhere else, let us know and we can help guide you in the right direction too.

And then big picture, when in doubt, just ask. We're here to help. This is all we do, a lot of this compliance stuff. So don't just rely on ChatGPT or I've always done it that way or whatever it is. Feel free to reach out to us. We are more than happy to answer your questions. So once again, we'll click. Here is our contact information. So write that down. If you have any questions, feel free to reach out to us. Otherwise, we'll go through some of the Q&A now and we'll probably just split it based on the type of question. So the first one that I have here from Matt Williams, "Do you have an appraisal waiver form that you can send out or add a link to Q&A that we can use? Thanks." I do have a form, so if you want to email me, I can provide that to you and we can talk a little bit if you need it.

Happy to go through that with you. Thank you for asking.

The next one I'll also take. Oh, I wasn't going to do this one. I skipped it. That's okay. I'll still take this one. When we comply with HMDA, what if we're a CFL lender and we're buying loans from originating brokers? It's a great question because it does matter that 25 loans in each of the last two years, but you have to be the decision maker on whether to extend that credit. So if you are truly just purchasing closed loans, then you do not have to deal with the HMDA reporting. If you are only buying loans, doesn't matter. But if you are still funding the loan, then you have to determine, okay, the DRE broker might have brought you the loan, but are they making some sort of decision about whether or not to extend credit or are you doing that? If you are doing that and you are funding that loan, then you have to comply with HMDA.

But if you are not making the decision about whether or not to fund that loan, then you would not have to comply. And so similarly, if you are just purchasing a loan that's already been closed and originated, then you would not have to comply with HMDA compliance.

And another one on HMDA, how is reporting compliance with HMDA monitored and enforced? Great question. I feel like nobody knows. And with the current state of the CFPB, a lot of these compliance measures, I haven't seen a lot of the enforcement to date. That said, just because they seem to be inactive or less so doesn't mean that these things don't apply to you and that they couldn't enforce it down the line. There's usually enforcement actions where they'll reach out to you for the evidence of the reports and the information that you were supposed to provide. It can be associated with fines and things like that. That said, haven't seen it lately because I think of the state of the CFPB, but I suppose that's your risk to take if you don't want to comply with HMDA, but I would recommend you do because there's nothing saying that they won't be enforcing it.

Laine Prescott:

Okay. I can take this next one. Matt asked if the loan is originated by a DRE licensee, but the lender has a CFL license, do the same rules apply in California regarding the ARV and LTV values? Yes, they do. If you're just a CFL lender, there's no broker involved. You don't have to worry about it. But if you do have a DRE licensed broker that brought you the loan, even if you're a CFL lender, you do still need to look at those, make sure the LTV. Well, really the broker needs to make sure the LTV is good and works for the restrictions, but you do need to pay attention to whether the current value or the ARV is being used for that LTV and make sure your loan is structured and all that accordingly.

Melissa C. Martorella:

Next one. When we comply with the adverse action notice, what if we're a CFL lender and we're buying loans from originating brokers? So remember for the adverse action to apply, it has to be something about denying credit or refusing to extend credit that was already agreed upon, so in a line of credit, that sort of thing. So if you're purchasing a loan that it's just a $300,000 loan, it's fully advanced and you're just purchasing that loan, there's really no adverse action there. So even if the borrower comes to you and says, "Hey, I want another $100,000," but there's nothing obligating you in that note to advance that $100,000, there's no adverse action there. Similarly, if they're in default and they're asking for more time and all of that other stuff, you're not taking an adverse action there because they're in default. So likely if you're purchasing closed loans, unless there is some sort of tranche funding component or something like that where you might be obligated to make advances down the line, this is likely not relevant to you.

But I'm happy to chat with you if you have specific. It sounds like a very specific scenario, so if you want to reach out to me, I'm happy to go through that too.

Another question from Jackie here for the valuation, is showing the estimated value on the LOI sufficient for disclosure or do we need to provide it separately? If that's all it was, I mean, you do have to provide where the valuation came from. So if you're like, "Oh yeah, the estimated value is $800,000," you have to let them know where it came from. So was that Zillow? Is it a BPO? Is it an appraisal? What is that? And whatever that is that you relied on, you also have to provide that information. So it could be literally a copy of the Zillow listing or the comps that you looked at for that neighborhood and that sort of thing. Whatever you looked at, you have to provide that. So you can include that estimated value, but you also need to provide how you arrived at that value.

Laine Prescott:

Okay. I can take this one. Can you charge a late fee on the carryover balances after the loan has matured? In this scenario, borrower has made payments after the maturity, lender accepted them, but then borrower stopped paying after four months past the maturity date. Now we're at nine months after maturity. I believe you should be. If you're using lighting docs, like you mentioned, I think the wording is any late thing. I'm going to look into that unless Melissa, unless you have thoughts on that, but I don't think it would be a

Melissa C. Martorella:

Problem. Yeah. So if you're just talking about say. Okay, so we're nine months post-maturity, so you can continue to charge a monthly late charge. So just throwing the facts out here and we'll just reinvent this and hopefully this is what you mean, but feel free to reach out to us because it sounds very specific. But that said, say it's a 12-month loan and it matured on June 1st of this year. The borrower made a July 1st payment though, they made that monthly payment even though they didn't make the balloon payment. You should be telling the borrower, "Hey, I will accept this payment. However, the loan's technically in default because your past maturity and default interest is accruing," so you can do all of that. Then the next month there's another installment payment due. So we'll say it's July, so let's say August 1st is an installment payment due, and that might be based off default interest rate.

If the borrower doesn't make that payment, you can charge a late charge on that payment. So even if it's at the default interest rate already, you can charge it for that specific amount. You can't do it on the whole balloon payment amount, but you can charge it on every monthly installment that's due, you can do that, but you can't tack on and balloon out or snowball these late charges. It has to be on what was due the first of that month for the installment amount, and then you can charge a late charge on that. So hopefully that answered your question. Happy to talk about it more though, if that's helpful.

Next question here, what defines the loan application? Is it the first call to you, your visit to the property where you agree to make the loan, receipt of a 1003 type loan application, which can be days later? What is a loan application? And this is where it is very helpful to have a little wiggle room here because it's what is an application to you? So if for you, it's probably not that first phone call, you don't have enough information to know whether or not you're making this loan. It's probably when you're receiving that 1003 or whatever that documentation is where you're like, "Hey, I need to know all of this about you, about the property, all of this," and collecting that information to make a decision. What is everything you need as a broker or a lender to say, "Hey, I want to make this loan or not." That is the application, and it's different for everybody.

Some people, it might just be emails back and forth, but whatever that thing is that's, "Okay, I have enough information to decide here," that's your loan application. It is much more helpful if you have a form application and you get that back and that's very clear, but if you don't, then it can be a little bit wigglier. But in general, that's what it is, is what is that moment when you have everything that you need to make a decision that's a completed loan application.

And then I can jump on this one really quickly. So in California, we have a comment here, brokers must provide the MLDS, the mortgage loan disclosure statement. Is there anything similar for a CFL? So we didn't go into the DRE specific disclosures. We will have a webinar on that. I believe it's either going to be in December or early next year. I will chat with people. We will have one on DRE reporting requirements, disclosure requirements, that sort of thing. We didn't want to get into that today because we could probably do a whole series of webinars on DRE compliance. But to answer this question, no, there is no similar requirement to the California finance lenders that it's specific to DRE brokers and the CFL is a beautiful license and has much less requirements for reporting and disclosures. And that's it. No more questions. Thank you all.

This was a wonderful webinar. Like I said, if you have other questions, our contact information is here. Please feel free to reach out to us. We are more than happy to help you. And then as soon as this is all uploaded, we are happy to get these links circulated to you all and have that free reference. So I hope you all have a wonderful Thursday and a great rest of the week. Thank you.