Private Lending in Florida - Rules & Regs

[Lupe Santiago]

Hi! I have the opportunity to make some loans to a home flipping business in FL (structured as an LLC) secured by first position mortgages on residential real estate. I've looked through the laws myself ( http://law.onecle.com/florida/regulation-of-trade-commerce-investments-and-solicitations/chapter494.html ) and want to share what I have found about exemptions for individuals lending private money secured by mortgages on residential property. I am not asking for legal advice, just opinions and peoples' experience with private lending in FL. I am not a broker or any kind of licensed real estate professional - just an individual looking to park my money in some investments. I would be directly lending to the company and taking points + interest (all within usury limits).

Anyway, here goes with what I've found:

• Mortgage Lender: “A person Making a Mortgage Loan or Servicing a Mortgage Loan for others, or, for compensation or gain, directly or indirectly, selling or offering to sell a Mortgage Loan to a Non-Institutional Investor.

• Mortgage Loan: Any:
• Residential Loan primarily for personal, family, or household use which is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a Dwelling, as defined in s. 103(v) of the federal Truth in Lending Act (TILA), OR for the purchase of residential real estate upon which a dwelling is to be constructed (raw land);
• Dwelling (TILA): “a residential structure or mobile home which contains one to four family housing units, or individual units of condominiums or cooperatives.”

• Making a Mortgage Loan: “Closing a Mortgage Loan in a PERSONAL NAME, advancing funds, offering to advance funds, or making a commitment to advance funds to an applicant for a Mortgage Loan.”

• Exemption: “The following are exempt from regulation under this part (Part I – ‘General Provisions’) and Parts II and III ( II – Mortgage Brokers, III – Mortgage Lenders )
• (2) The following persons ARE exempt from regulation under Part III (Mortgage Lenders) of this chapter:
• (e) An individual Making or Acquiring a Mortgage Loan using his or her OWN FUNDS for his or her OWN INVESTMENT, AND who does NOT hold himself or herself out to the public as being in the mortgage lending business.
• (f) An individual selling a mortgage that was made or purchased with that individual’s funds for his or her own investment, AND who does NOT hold himself or herself out to the public as being in the mortgage lending business.

So my thoughts are that it looks like I can make the loan to the company and charges points in addition to interest. Not only that, it appears that I can sell the note. Am I missing something here, or is FL pretty loose with the laws? I know there's always the great debate about intended use of the loan (business purpose, non-owner occupied) vs. the nature of the asset underlying the loan (residential whether owner-occupied or not vs. commercial). To me, FL makes it look clear that private unlicensed lending on non-owner occupied residential real estate is OK.

Thoughts? Am I missing something here? Other regulations or rules to be concerned about before pulling the trigger on this? Also, what are the boundaries of "holding oneself out to the public as being in the mortgage lending business" ?? Wow, long post - thanks for taking the time to read :)

[John Thedford]

Pawnbrokering in Florida allows 304% APR. Tough to beat in any manner! In fact, as late as the late 1950's, pawn shops used to be the main source of credit for most American households. Pawnbrokering is often referred to as the second oldest profession. They take collateral and lend against it. If the loan is not paid, after a certain point the collateral becomes the property of the pawnbroker. Great business in the right location!

[Bill Gulley]

Begin with the Uniform Commercial Code, there are other federal laws in finance and banking define points and fees. You may not find where it say's private lender's can't, you may in state laws, but you'll see where charging up front fees come under loan sharking except for registered lenders.

There are all kinds of laws that apply to lending, money laundering, advertising, servicing, etc. and the agencies involved are an alphabet soup that can regulate and investigate.

Again, selling a note after making it is a brokerage operation, that is not investing for your own portfolio as it doesn't sound like you'll have a portfolio, that's just churning notes, especially at par.

If you have money to lend you have money to see a good attorney, if you don't see a good attorney, you'll want enough money left over to pay fines and fight suits, there is a cost of doing business. :)

[Joe Harper]

@bill gulley thank you, man, for that simple English explanation. I have seven private mortgages and was fretting that I was violating some sort of regulation. But I see now that the onus of compliance is on the mortgagee. All of my mortgagees are from word of mouth or longtime friends.

[Dion DePaoli]

I didn't read this whole thread, only glanced on the way down. I have been a broker, a Principal Broker and operated two lending companies one a Mortgage Broker Business and one a Correspondent Lender in the state of Florida.

The Department of Financial Regulation supervises the broker and lender license for real property for the state. The chapter dealing with lending and brokering is Chapter 494.

The terminology in the rule is crafted carefully and meant to be a little ambiguous. "Holding oneself out to the public" is you the potential lender taking actions to cause the public to take notice of you. Holding yourself out to the public also means allowing the public to engage you in a unrestricted manner.

A private person can make a loan, within the usury limits, that is not considered a High Cost Loan and be exempt from license. A licensed mortgage broker, working for a licensed mortgage lender or broker company can assist with the origination of said loan provided the proper set of steps, paperwork and procedure are followed which includes application, TILA, GFE and appraisal. We use to do this with private capital we raised.

The property is the residential distinction not the borrowing entity. Just because you lend to an LLC does not mean the loan is commercial. Any 1 to 4 unit is residential, along with all the other typical residential properties. The intent debate is not all that deep and is mostly meaningless. The occupancy status of said property also does not alter the type of loan. Primary Residences in Florida are protected though as evolved through some of the predatory lending rules that have come along.

The Mortgagee can certainly sell the note off in the secondary market. There is no issue there.

The short term maturity can be problematic. Short term lending falls under the regulations of the predatory lending which can be found in the Florida Fair Lending Act. Short term loans are allowed, but have some caveats to them. The fees collected also have some guides to follow. A short term loan in Florida is termed a "Bridge Loan" by the regulations and is any mortgage with a term of less than 18 months. Things like restrictions on prepayment penalty or default interest rates or even Due on Sale clauses are governed by this rule. There is also certain disclosures that must accompany the loan.

A high cost loan must contain the language even for the sale of said loan in the secondary market a phrase similar to the following: "Notice: This is a mortgage subject to the provisions of the Florida Fair Lending Act. Purchasers and assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage which the borrower could assert against the creditor."

Max rate on loans under $500k is 18% and 25% above $500k.

Bill is correct with the IRS overview. That always comes up.

Holding oneself out to the public does not have anything to do with selling the loan in the secondary market. The secondary market transaction is for investment purposes and is not governed by these lending rules. These are for the protection of the common public as debtors. There is no minimum time frame to hold the mortgage prior to selling in the secondary market.

Now, holding the loan out as an investment to the public under a basis of return or yield is a whole other can of worms. You would need proper licensing and would likely get attention from both DOF and FINRA. Simply don't do this.

There is a provision which looks for a pattern of predatory lending and outsourced risk.

There is a proper way to calculate the A.P.R. (Annual Percentage Rate) as per Regulation Z. Generally any charge which is specific to the extension of credit for that certain loan should be included in the calculation. This can include the charges of third party service providers if a borrower is forced to use that party opposed to one of their selection. Point is, it is not simply interest rate and points that can set you over the usury limit. Home Ownership and Equity Protection Act (HOEPA) also defines rules for high cost loans which are also referred to as "Section 32" loans which deal with refinance loans on the Primary Residence. (purchase mortgages are not included in HOEPA)

As to the amount of capital needed to enter into the market. This varies, even in Florida by location. $50k might work in some portions of central, north and southwest Florida but might not be all that great to work with in some places closer to SE Florida.

One terminology distinction, a loan is collateralized by the real property not securitized. Securitization is the act of taking illiquid assets and pooling them to create a security. The do not mean the same thing. A loan is secured by real property but a loan is not securitized until it enters into a security.

The high cost lending calculation is being confused. It is true that interest and fees go into the calculation but not as being mentioned. If the loan has a 7% interest rate with a 6 month maturity, the loan has an APR of 7% not 14%, that is simply the wrong math. The APR will be greater than the interest rate once all of the costs associated with the extension of credit are sum up. If that same loan has 2% in fees those what need to be include over the life of the loan, if the life of the loan is short, the impact of the fees will increase the APR of the loan. So 2% in 6 months is closer to 4%. 2% over 10 years is closer to 0.20%.

There are other things to consider when evaluating high cost loans. In an example, there are cases in Florida body of law which have a lender using the face rate of the note but by the way the capital was distributed to the borrower the usury rate was exceeded. This has happened several times in fix and flip private money loans. A withholding of construction money, a collection of an interest payment at closing, all of these things count against the usury rate.

The state language around the calculation of interest:
"...…any payment or property charged…as an advance…which is in the nature of, and taken into account in the calculation of, interest shall be valued as of date received and shall be spread over the stated term of the loan…for the purpose of determining the rate of interest. The spreading of any such advance…for the purpose of computing the rate of interest shall be calculated by first computing the advance…as a percentage of the total stated amount of such loan….This percentage shall then be divided by the number of years, and fractions thereof, of the loan…according to its stated maturity date, without regard to early maturity in the event of default. The resulting annual percentage rate shall then be added to the stated annual percentage of interest to produce the effective rate of interest for purposes of this chapter.”

In general, this loan at 12.5% with 3.5% in 6 months is usury. That also doesn't include the other fees but the points equal 7% plus the note rate of 12.5% puts you at 19.5%. Usury is not limited to residential or commercial, it is limited by loan amount, so this loan under $500k fails the test.

Usury can be a felony charge. I recommend you take it seriously. At the worst, the note and mortgage can be nullified and unenforceable.

Even further, a bond year is 360, the annual percentage rate by rule of law is 365. The term "annual" generally refers to a year of 365 days and that is what the consumer gets according to the state Attorney General.

The profit on the sale of a loan in the secondary market is not subject to any regulation. Whether you make 1% or 100%, it does not matter.

Prepaid interest is any interest including fees such as broker fee or origination fee or buydown fees along with per diem interest paid at the time of closing. The interest is 'prepaid' or paid before the interest has accrued for use of the funds during the time the funds were possessed by the borrower.

[Lupe Santiago]

Dion DePaoli, GREAT post! That was really clear. I was not aware of the additional regulations of a bridge loan, as indeed my loan will be for less than 18 months. I'll have to look into this - the main concern is if there are any limitations to due on sale because that's when I would be paid off. Although, it doesn't make sense that the borrower wouldn't pay it off at the time it's flipped to a home buyer because home buyer wouldn't be able to receive it free and clear. Nonetheless, it's good to be aware of other arms of regulation. Thanks!

[John Thedford]

Update: Dodd-Frank .....has left many private lenders choosing to stop. I no longer lend on SFR..only commercial or vacant land which I believe are exempt from Dodd-Frank.

[Lawrence Ellis]

i am seeking private funds for fixing and flipping houses in Florida.  I'm in the Orlando area.  Please tell me your guidelines.  I'm seeking a lender who doesn't require a lot out of my pocket as long as the deal is solid. I find all kinds of great deals I just need a lender/partner to with the funds to transact. I will make you money on your money. Email me if [email protected]

[Account Closed]

The Dodd Frank has really screwed up private lending for small investors Since it is so new you have to worry about many legal challenges to your loan Much better to lend on goods,cars,business etc

[Russ Goodman]

(My reply was to an earlier post I didn't see a subsequent on wthat WAS very good.)

No.

If I may interject, what is not being calculated clearly is the cashflow. 12% for 6 months with 3 pts. calculates to a pmt of 17254.84, an APR of 22.72%, and Yes usury under florida law as far as I can recall.

However, earlier in the post, Lupe posted that a lender was at 6.25 % . Let's use this rate for arguments sake. therefore 6 months 100,000 comes in at a pmt of 16,971.80 with a little more that 3 point and NOT be usurious. The discount to 18% comes to 96,691.52. So the take away from this is yes schedule for a year as stated above. The difference is about 300 per month pmt bewteen the two cashflow examples is minor but yet the lender is making 3 points with less money coming out of his pocket to make the deal . though the 6 monthds of 300 more cash )( 1800) he is trading off to avoid usury.

[Levi Collins]

A friend borrowed money from our grandmother and used the deed for his house as collateral and has since defaulted on the loan. He hasn't made any attempt to pay back anything and is avoiding speaking with our grandmother. The loan was signed before a notary, what are her options?

[Steve Babiak]

Quote from @Levi Collins:

A friend borrowed money from our grandmother and used the deed for his house as collateral and has since defaulted on the loan. He hasn't made any attempt to pay back anything and is avoiding speaking with our grandmother. The loan was signed before a notary, what are her options?

Was there a mortgage document that was also signed? If so, was that mortgage document recorded with the county courthouse (recorder of deeds or register of deeds is the typical department name)? If yes to both of those, then foreclosure should commence, and that usually is initiated by sending a notice of default.

If this wasn’t initially handled with assistance from legal counsel, the documents might not include the things needed to enforce the loan.

[Shawn Krieger]

Quote from @Kevin Rain:

Generally, how much is needed to get into private lending? $50k? $100k?

 i can borrow as little as 50k