This is “risky business”. While there are exceptions in Reg Z that will allow you to make this kind of loan and stay outside of HOEPA and non-qualified mortgage areas, it is by no means crystal clear that this is something you should happily do again and again.
Here’s the issue. The Dodd Frank Act and the subsequent CFPB rules and interpretations are pretty crystal clear in their primary intent, to protect a borrower’s principal residence, his homestead. I don’t think any of us would argue that point, after all it is called the “Consumer Financial Protection Bureau.”
This is a classic situation of ambiguity. If you take Reg Z’s exception at face value, you might end up OK. The operative word is “might”.
You can protect yourself and improve your chances of surviving a regulator challenge to this type of loan by following this simple procedure.
- Require the borrower to sign an affidavit at application, acknowledging that they intend for this loan to be for a proper business purpose, and that none of the proceeds will be used for anything other than that.
- Then, at your closing, have them execute the same disclosure again, this time with a notary present.
- If you retain these two documents in your files, and the customer’s business fails, and he then says that you steered him into putting his residence at risk, you have an argument.
It may be persuasive enough to keep you out of trouble.
If you just make the loan, and rely on the exception, it may imply you really did not investigate and thus failed some duty of care.
Look, like some of my policies I offer you, this is an optional one. But no one ever failed an audit for being too concerned with protecting consumers. That is exactly what this policy does.
If you want to learn more, call me at the number below. If you are not my client, perhaps you should think about it.
That’s it for now.
Nelson A. Locke, Esq.