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Dodd-Frank Drives Hard Money Firm Out of OO Lending

Lending requirements too onerous

Dec. 9, 2013

By Mortgage Daily staff

Requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act are forcing at least one hard money lender to abandon owner-occupied transactions.

Capella Mortgage claims to be one of the largest providers of hard money home loans in the Southwest.

The Las Vegas-based firm also says that it is one of the few lenders who will lend hard money to owner occupants.

But that's about to change.

A statement from Capella Mortgage indicates that it will stop lending to borrowers on owner-occupied properties on Jan. 10, 2014 -- which it says is when Section XIV of the Dodd-Frank rules become effective.

According to statement, the final rule on high-cost loans makes it too onerous for Capella Mortgage continue making hard money loans secured by owner-occupied properties.

It will abandon both purchase financing and refinance transactions.

"This final rule states that a high cost loan on a 'consumer dwelling' must have two appraisals, the homeowner must receive HUD approved counseling prior to closing the loan, the late fee cannot be greater than 4 percent, default interest cannot be charged, ability-to-repay cannot be greater than 41 percent, and no balloon payments are allowed," the statement said. "Capella Mortgage already complies with the mandatory five-year balloon provision put into place Jan. 21, 2013, and the ability to repay rule, but these final rules -- especially the two appraisal rule, the 'no default interest' rule and the 'no balloon' rule -- are either too onerous on the consumer, or too onerous on the investor to continue making these types of loans."

The company claims that it doesn't make sense to require two appraisals with down payments of between 30 percent and 80 percent.

"One appraisal on an $80k house is unnecessary, two are ridiculous," the company said.

Another factor is that hard money investors are typically retired and find it unrealistic to make loans beyond five years, Capella Mortgage said.

In addition, by prohibiting balloons, borrowers are forced into fully amortized loans that push the payment and the debt-to-income ratio beyond what is allowed by the Ability-to-Repay rule.

The statement went on to say that hard money loans provide quick capital for people in distressed situations. It also puts people with huge down payments who might not otherwise qualify into homes.

"The government has decided in its infinite wisdom that no one, not even those who aren't U.S. citizens, shall have the opportunity to pull funds out of their free and clear property, or buy a property with over 30 percent down payment," the statement says. "This is despite the fact that hard money lenders who do lend to owner occupants rarely foreclose on those loans.

"In fact, Capella Mortgage has never filed a foreclosure on an owner occupant in 17 years in business."

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