Not all is good in the shadow world of California’s hard money commercial lenders and this article seeks to make potential borrowers aware of this fact, so that if and when you want to loan, you’ll know what to look out for.
Firstly, what are private bridge lenders
Private bridge lenders, albeit private money lenders or hard money lenders, differ from banks, credit unions or traditional lending institutions in that they offer you funds based on your collateral rather than on your credit. Banks have become ever more chary of funding applicants whose FICO credit topples 680. Some rejected individuals seek alternatives. And one alternative is the hard money lender.
The wonderful thing about these hard money lenders is that the process is fast and convenient. Ordinarily, banks extend the cash (that is if they do) within 60 days or more. By that time, the property may have been sold. They also string borrowers through a gruelling process of forms and bureaucracy. Lenders do none of that. They flex your terms and bend themselves in pleasing you.
The flip side of these commercial private lenders is their hefty repayment rate – double that of banks. They tend to charge you a min.15% annual fee and retain your property if you default.
Most private hard money lenders insist that they don’t want to do this. Why do they need, they rhetorically ask, your house or car?
But there are bad sharks out there.
Here’s what to be aware of.
Towards the end of 2015, Bloomberg’s business report noted the phenomena of the Bear Market in the shadows.
Back in the economically harsh year of 2007 when banks were falling and nontraditional lenders twisted themselves into pretzels with exploitation, the former Pimco economist Paul McCulley coined the term ‘the shadow bankers’ to refer to these disreputable private, non-tariff lenders. They spanned everything from online loan originators, mortgage-finance companies, money-market mutual funds and hedge funds to good old-fashioned pawn shops and loan sharks. And hard money/ bridge/ personal money lenders, too.
What with government regulation and increase in competition that curbs dishonesty, money lenders have largely overcome their notoriety. But this year has seen decline in some quarters.
Regulators have picked up speed.
In California, federal state and local prosecutors have targeted small lenders, real estate brokers, mortgage brokers, appraisers and other individuals for crimes that relate to predatory lending. California federal government and consumer agencies stamped harsh laws discouraging predatory loans.
In California, lenders have to be specifically licensed by national and local agencies to practice. Standards include certifications from associations such as the National Mortgage Licensing System (NMLS). Exams are challenging and can take years to pass. Any failure and broker has to retake until he or she is accepted.
In the early 2000s, FDIC created law 6500 on Consumer Protection which restricts balloon loans so that they cannot mature in less than 5 years. In some cases, such loans are even banned. The Government also bans negative amortization (i.e. extreme interest that makes repayment impossible).
Federal laws also stipulate that the lender can ask for no more than two reasonable sized prepayments although the number and amount depends on the structure of the loan. If the lender exceeds this, the borrower can consult state regulations to determine if the request is lawful and reasonable. If not, he may be able to exit his loan contract at no penalty to himself.
Furthermore, federal laws on consumer protection insist that all lenders must conduct some sort of credit check or income verification before issuing a loan. A lender who proceeds without checking the borrower’s financial ability, or, worse still, lends even though the borrower has a low chance of repaying performs, what is called, a “predatory loan”. Consequences are such that the judge can render such a loan unlawful and dismiss it if it occurs.
Two months ago California’s Department of Business Oversight set itself to looking at the practices of 14 so-called marketplace lenders. The Office of the Comptroller of the Currency noted the explosion of growth in loans to financial firms that don’t take deposits and warned banks to monitor the concentration risk, adding it will “be a focus of our supervision strategies going forward.”
At the same time, the Basel Committee on Bank Supervision is examining “step-in” risks that could force regulated lenders to come to the rescue of shadow banking firms with which they do business. Even investigations into financing to terrorists may pose a risk, according to Compass Point analysts.
How does this effect California’s commercial hard money lending industry?
The results are positive.
Commercial hard money lenders are forced to tighten their scrupulousness.
So with rising interest rates, increased regulatory scrutiny and fresh competition, there’s a good chance that alternative private commercial money lenders in California may be better than ever.
For more information about knowing when your rights apply and if predatory lending does/ not exist in your situation, please contact your local consumer advisor agency. They can provide you with more information.
The right hard money lender can be terrific for you. The wrong one will ruin you.