What Recent CFPB Rules Mean for the Private Lender

shutterstock_440924311There are many potential advantages to private mortgages, for lenders and borrowers alike.  Borrowers can benefit from lower interest rates, more flexibility in repaying the loan, less paperwork, and fewer closing costs, while lenders can enjoy a steady income stream (if all goes well) and the satisfaction of helping a friend or family member buy a property.  But putting aside the risk of non-payment and prospect of attendant relationship issues, one possibility that just about everybody would put in the “Con” column is exposure to onerous mortgage lending regulations.

So when the Consumer Financial Protection Bureau issued two new rules in the past several years concerning requirements for loan originators and disclosure practices for creditors, many were left wondering (or maybe should have been wondering) if these rules applied to their private lending plans.

TILA-RESPA Rule

In effect since October 3, 2015, the TILA-RESPA Rule establishes new disclosure requirements for most mortgages.  The aim of the rule is to help consumers understand important aspects of, and therefore make informed decisions about, their mortgage loans.  While the rule has caused considerable compliance challenges for many lenders in its inaugural year, the text of the rule provides clear assurance that its requirements do not apply to the family member or friend making a one-time mortgage loan.  Rather, the requirements apply only to “creditors,” meaning those who “regularly extend consumer credit,” and the rule explains, “A person regularly extends consumer credit only if it extended credit… more than 5 times for transactions secured by a dwelling” in the preceding or current calendar year.

Loan Originator Rule

The Loan Originator Rule, on the other hand, does not afford the same level of clarity.  Effective since January 1, 2014, this rule regulates the compensation, qualification, and identification of loan originators.  The rule states that various actions make an organization or individual a loan originator, including arranging a credit transaction, assisting a consumer in applying for credit, offering or negotiating credit terms, making an extension of credit, and more.  The definition is purposely broader than the definitions of loan originator used in earlier regulations, which were limited to those who regularly accepted mortgage loan applications.  While the rule does make certain very specific exceptions, including an exception for certain seller financing transactions and a categorical exemption from the compensation requirements (i.e. how a loan originator can be paid) for creditors that make loans from their own funds, the outer bounds of the rule’s scope remains unclear.

One camp of commentators has adopted a cautious interpretation of the rule, one that understands broadly the language about triggering loan originator actions and takes a dim view of the possibility that other state and federal regulations provide a safe harbor for individuals and entities that do not regularly make mortgage loans.  Although the one-time or infrequent private lender may be a low enforcement priority for the CFPB, this camp concludes, the risk of violating federal loan originator regulations remains.

Others in the legal and financial services communities have taken a different position.  Some contend that the rule only requires compliance with other state and federal laws regarding the license and registration of loan originators.  Under the SAFE Act, for example, the Department of Housing and Urban Development has issued a rule clarifying that only those loan originators that habitually or repetitively engage in the business of loan origination require licensure.  The analog Massachusetts statute is even more specific, exempting from the requirement of licensure those selling their own primary residence and those who make a mortgage loan with an immediate family member (defined as “a spouse, child, step child, adopted child, sibling, step sibling, adopted sibling, parent, step parent, adopted parent, grandparent, or grandchild”).

As the legal landscape continues to shift for institutional lenders and traditional loan originators in the wake of the mortgage crisis, so too does it shift for the aunt looking to offer her niece a low-interest loan for the purchase of the niece’s first house.  No matter how benevolent the intentions, private lenders should take care to understand the evolving rules regarding mortgage loans and the potential compliance risks these loans create.  We recommend seeking counsel on the particular circumstances of your mortgage loan to determine whether any regulatory landmines exist.

About Spencer Holland

Spencer joined Mirick O’Connell in October 2015 as an associate in the Firm’s Land Use and Environmental Law Group and the Public and Municipal Law Group. Prior to joining the Firm, he was an associate with Goldman & Pease, LLC in Needham, MA. The main focus of Spencer’s practice is representing entities buying, selling and financing real estate. He also represents landlords as well as tenants in commercial space lease transactions and ground lease transactions.
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