Florida has enacted a law to crack down on mortgage creditors circumventing residential mortgage licensing and disclosure requirements beneath the guise of creating business-reason loans.
On July 1, 2019, Florida’s House Bill 935 (HB 935) will take effect.1 HB 935 makes it a prison to without delay or not directly misrepresent a residential mortgage loan as a commercial enterprise-reason loan. The bill, which became permitted with the aid of Governor Rick Scott on March 21, 2018, also clarifies an current licensing exemption for investors who make or acquire a mortgage loan using their personal price range, or sell the sort of loan mortgage.
An Overview of Florida’s Licensing Requirements
Unless in any other case exempt, a loan lender license is required in Florida to make a loan mortgage, provider a mortgage mortgage for others, or, for compensation or advantage, or in the expectation of repayment or advantage, either directly or indirectly, sell or provide to sell a mortgage loan to a noninstitutional investor.2 For purposes of this requirement, a “loan loan” method any:
Residential loan often for non-public, family, or household use that’s secured by means of a mortgage, deed of trust, or different equivalent consensual protection hobby on a residing, as described within the Truth in Lending Act (TILA), or for the acquisition of residential real property upon which a residing is to be constructed;
Loan on commercial real belongings if the borrower is an person or the lender is a noninstitutional investor; or
Loan on advanced real assets inclusive of five or more living devices if the borrower is an individual or the lender is a noninstitutional investor.Three
if it’s miles commonly for personal, family or household use. As stated inside the Staff Analysis of HB 935, licensure isn’t always required while the residential mortgage mortgage is made for a business cause.Four
The New Law
Original legislation associated with this invoice was precipitated via reports of lending entities presenting residential loans with usurious interest costs and high costs, and avoiding licensing and disclosure necessities, below the guise of “business reason” loans. In 2017, the Florida legislature surpassed a invoice that, amongst different things, might have eliminated from the definition of “mortgage loan” the requirement that such loans be generally for non-public, own family, or family use.5 As a end result, debtors obtaining residential loans for enterprise purposes might have had the same patron protections as though the loan loan was usually for a non-public, own family, or family purpose. Significantly, men and women making, brokering or originating enterprise-cause loan loans could were problem to licensure, until otherwise exempt. However, the invoice became ultimately vetoed with the aid of Governor Rick Scott on June 26, 2017.6 Similar provisions have been proposed within the authentic version of HB 935, despite the fact that the invoice changed into modified appreciably before passage.
While HB 935 does now not adjust the definition of “mortgage mortgage,” at the coronary heart of the invoice are new provisions that make it illegal to misrepresent a residential loan mortgage as a business cause mortgage. For functions of this prohibition, a “business purpose loan” means a “mortgage mortgage, the proceeds of which the borrower intends to use ordinarily for a enterprise cause and now not typically for a non-public, family, or household motive. In figuring out if the loan is for a business cause, someone need to refer to the reputable interpretation through the Consumer Financial Protection Bureau of 12 C.F.R. § 1026.3(a).”7
In different phrases, the brand new regulation consists of the 5-aspect test located in Regulation Z, the implementing regulation of TILA, for determination of whether or not a loan is “often for a commercial enterprise cause.” These elements are:
The relationship of the borrower’s number one profession to the purchase. The more intently related, the much more likely it’s miles to be commercial enterprise cause.
The degree to which the borrower will personally manipulate the acquisition. The extra non-public involvement there is, the more likely it is to be business reason.
The ratio of profits from the acquisition to the entire income of the borrower. The higher the ratio, the more likely it is to be enterprise motive.
The length of the transaction. The large the transaction, the much more likely it’s miles to be enterprise cause.
The borrower’s declaration of motive for the loan.8
Consideration of those elements, and which includes supporting documentation inside the mortgage documents, might be important to figuring out whether a loan is “business motive” underneath the brand new Florida law. A violation of this prohibition is a 3rd-diploma criminal. If the full value of money and assets unlawfully obtained exceeds $50,000 and there are 5 or extra sufferers, it is a first-diploma felony.
Finally, HB 935 clarifies an exemption beneath cutting-edge Florida law9 that lets in an individual investor to make or accumulate a mortgage mortgage with his or her own finances, or to sell such loan mortgage, without being certified as a mortgage lender, as long as the character does not “preserve himself or herself out to the general public as being inside the loan lending business.”10
Takeaways
As evidenced by way of HB 935 and early legislation tied to the invoice, states are more and more scrutinizing enterprise-cause mortgage interest because the marketplace for enterprise-motive residential lending proliferates. Since law varies substantially by country, creditors making business-reason loans and traders purchasing such loans need to cautiously assessment and remember the licensing necessities in every of the jurisdictions wherein they do commercial enterprise, in addition to other patron safety laws that would potentially follow to commercial enterprise-cause mortgage loans. In addition to mortgage cause, other elements which can effect the licensing evaluation are whether or not the loan is made to an individual or an entity, the type of collateral securing the loan, and the occupancy repute of the property.
When a lender is looking for to depend on a commercial enterprise-reason exclusion or exemption from licensing or regulatory necessities, it’s miles critical to carefully examine and file the enterprise-purpose nature of the mortgage, consisting of attention of the five-factor take a look at set forth above. Participants in the secondary loan market, along with buyers and purchasers, must additionally take those concerns into consideration, conduct due diligence for these unique commercial enterprise-motive requirements, and keep to reveal traits in state law that would make bigger the loan lending sports which are situation to licensing and different policies.