How Hard Money Loan Borrowers Are Protected from Lending Scams

Hard money loans are issued against a parcel of real estate. The loans have very high interest rates, and they typically have a low loan-to-value ratio compared to the land collateral. Hard money loans are similar to bridge loans and often used for the same purpose. You may take this form of loan when you purchase real estate with the intent to build a property on the land. Since these loans are very high risk, they are rarely offered by traditional lenders such as commercial banks and finance companies. Hard money loans are also risky to the borrower, leading to state and federal regulation.

Balloon Loan Limitations

A balloon loan has a unique structure that allows the borrower to make only small payments as the loan matures. Once it has reached the maturity date, the borrower must pay a substantial sum to resolve the debt completely. Balloon loans are risky if the borrower is not disciplined in preparing for this final payment. The result is often default. To protect borrowers, law 6500 on Consumer Protection was created within the FDIC's guidelines. It restricts balloon loans so they cannot mature in less than 5 years. In some cases, balloon loans will be banned.

Negative Amortization Bans

Negative amortization is banned on hard money loans and mortgage loans. Negative amortization means the payments made do not keep up with the interest being charged. As a result, a borrower is going further into debt despite making payments. This is not to be confused with an upside-down loan, which occurs when the value of the collateral drops below the value of the loan. Upside down loans occur as a result of market conditions combined with other factors. Negative amortization loans lose value independent of market conditions.

Loans in Disregard of Ability to Pay

A lender must consider the borrower's ability to pay when making a loan according to federal laws on consumer protection. A loan with no credit check or no income verification is considered predatory. Further, a judge may review a loan and determine that a lender, even though a credit check was used, issued a loan that had a very low chance of being repaid. This is the strictest definition of predatory lending, and the loan can be rendered unlawful and therefore dismissed if it occurs. If you got a "no credit check" hard money loan, you may be entitled to a complete dismissal of the debt under this regulation.

Up-Front Payments

It is common for a hard money lender to require a large amount of finance fees up front. This can include a certain sum of interest and installment payments in advance. This may be limited to only two payments depending on the structure of a loan. If your lender asks you to pay more than two payments up front on your debt, look into the regulation to determine if the request is lawful and reasonable. If not, you may be able to exit your loan contract at no penalty to you.

blog comments powered by Disqus