Private Or HML--What Could Go Wrong-And How To Qualify A Borrower

[John Thedford]

Hello all:
I posted a couple weeks back about a recent HML I completed. There were several replies that I really enjoyed and I got different points of views, etc. One poster stated something to the effect "don't mistake brains for a bull market" which certainly makes sense. Another poster stated that although I don't offer consumer loans, that the day may come I have to defend myself and lending practices in court. Dodd-Frank tightened lending standards for consumer loans but left the door open for commercial loans. DF requires a lender to qualify the borrower to determine if the borrower will have the ability to repay the loan. Commercial loans are exempt from these qualifications.

What could go wrong? In the short time I have done HML I had one borrower die and another borrower get busted by the FEDS for selling meth from the collateral property. The FEDS moved to seize the property. I was made whole in both circumstances. What IF these were tied up in the courts for months or longer? Would you or I be prepared to deal with these unforseen situations?

More importantly, another poster had stated the possibility of being sued by a borrower for not qualifying them. Commercial loans are exempt, but that is no guarantee a soured borrower won't blame the HML. The main question is: what are the important questions to ask, what documentation should a private lender ask for, and what guidelines might be suggested to prevent problems from arising from a private loan? Finding borrowers is easy..finding ones that will handle the loan in a professional manner is a different story. I just had one guy pay me off that was a TOTAL PITA for months! 

Paging @Jay Hinrichs and other experienced lenders. Thanks in advance.