Why is the distinction between business and consumer purpose lending important ? Because both federal and most state government ( s ) have created regulations that require special disclosures and notice / reporting responsibilities for lenders when dealing with consumer purpose borrowers . These additional requirements have extreme punitive consequences for any mistakes or deviations by the lender ( s ) and / or procuring mortgage broker ( s ). These onerous changes have caused many private money lenders to exit consumer lending all together .
What is a business purpose real estate loan ?
Business purpose loans secured by real property are originated where the loan proceeds are used primarily for business purposes . “ Primarily used for business ” is important . What that means is that a portion of the loan proceeds , more than 50 % will be used for business purposes and a portion ( less than 50 %) of the loan proceeds may or may not be used for consumer purposes .
Consumer purpose loans , on the other hand , are made where loan proceeds are used primarily for personal , family , and household purposes .
On the frontend when some borrowers are searching for a loan , they may discover that they can only find lender ( s ) who make business purpose loans . They will often construct a narrative to make their loan into “ business purpose .” Some are legitimate and some are not . Borrowers who represent the need for a loan as business purpose must provide substantial documentation to that effect . Proper documentation evidencing the business purpose in the broker ’ s file is paramount . Conflicts in a borrower ’ s memory may arise about the borrower ’ s frontend representations about purpose of loan in the event of default . Yesterday ’ s business purpose borrower may suddenly become a meek and vulnerable consumer who was taken advantage of by the bigbadwolf mortgage broker . The history of conversations will quickly turn from “ I want a business purpose loan ,” to “ you knew all along that I was really going to use all the proceeds personally and you told me to do it this way .” “ You also knew that I could not afford the payments .” A defaulting borrower may conveniently turn on the broker / lender and blame them as “ he / she told me to do it .” So , when some borrowers default it is your fault Mr ./ Ms . Mortgage Broker . Blaming others for one ’ s own default or problems seems to have become the American way .
The greater the percentage of loan proceeds used for business , the safer for the lender and procuring loan broker in the event of default . What I mean by the term “ safer ” is whether the lender or procuring loan broker could become entangled in an accusation by the borrower that the loan was a really a disguised consumer loan .
Industry participants commonly refer to the “ business purpose exemption .” There is not a stated “ exemption ” in the TruthinLending regulations , but rather just “ not covered ” under the consumer laws . Common practice is that “ not covered ” and “ exempt ” are interchangeable in meaning .
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