Letter to the editor: How do I tell the difference between a business and consumer mortgage?

Question: What is the difference between a business and consumer mortgage loan?

Answer: A business mortgage — also known as a commercial loan — is a separate category of mortgage controlled by California rules and practices than a consumer mortgage controlled by Federal rules, differentiated based on both the use of the funds and the property securing the mortgage.

A consumer mortgage is a loan secured by a one-to-four-unit residential dwelling acquired and made primarily for funding a:

• personal;
• household; or
• family use. [12 Code of Federal Regulations §1026.2]

In contrast to consumer mortgages, business mortgages are made for other than personal, household or family use and are secured by any type of real estate, including a one-to-four-unit residential property.

Business mortgages are not regulated by federal law with the exception of due-on clause enforcement. [12 United States Code §1701j-3(e)]

MLBs originate business mortgages

A Department of Real Estate (DRE)-licensed broker and their agents with a mortgage loan originator (MLO) endorsement may negotiate both consumer mortgages and business mortgages. [See RPI ebook: Mortgage Loan Brokering and Lending: Chapter 40]

Thus, in California, a DRE licensee holding an MLO endorsement has the authority to offer services as a mortgage loan broker (MLB) able to originate both consumer and business mortgages. This authority to arrange and receive a fee for all variety of mortgage funding secured directly or indirectly by any type of real estate and borrowed for any purpose enables an MLB to continue earning income from various sources when traditional mortgage originations are few — in other words, recession proof.

However, an MLB who limits their practice to making or arranging business mortgages — not consumer mortgages — does not need an MLO endorsement. [Calif. Business & Professions Code §10166.01(b)(1); §10131(d)]

An MLB, with or without an MLO endorsement, may:

• arrange a business mortgage, negotiating the terms on behalf of an investor and with the lender who funds the mortgage, often an individual, individual retirement account (IRA), pension fund or small local bank;
• originate a business mortgage using their own funds; and
• operate as a trust deed broker to negotiate the sale or purchase of an existing trust deed note on their own behalf or for a client.

Business mortgages and other non-consumer mortgage-related transactions include arrangements such as:

• representing hard money or private lending to originate business category mortgages;
• mortgage-backed loans (MBLs) — when a trust deed note is assigned as security, not the property directly;
• carryback financing; and
• trust deed investments other than consumer mortgages.

When originating a business mortgage, the MLB may also be employed by the lender to act as a servicing agent or contract collection agent on the mortgage for an additional fee. [Bus & P C §10233]

Related article:

MLO recession survival guide Part 4: Arranging mortgage originations for investors

 

An example

Consider a buyer who hires a real estate broker to locate a single family residence (SFR) to be owned and operated as an investment property for income.

The buyer agrees to pay a separate fee to the broker to arrange a mortgage to fund the purchase of the investment property.

The broker locates a suitable SFR property and a mortgage lender, and a transaction is closed. The broker is paid for both activities. The seller pays the fee on the sale; the buyer pays the fee on the mortgage origination. And as always, the total fees are disclosed to the buyer-client.

Based on this transaction, is this a business or consumer mortgage?

This is a business mortgage. While the SFR property is considered a dwelling, the buyer used the mortgage proceeds for a business purpose, not a consumer purpose. A consumer mortgage must both:

• fund a consumer purpose, such as the buyer’s use of the SFR acquired as a dwelling for their family, and
• be secured by the dwelling purchased with the mortgage funds.

Thus, the mortgage in this scenario is a business-purpose mortgage as the funds are used for investment purposes, not a consumer-use purpose, and does not trigger MLO licensing requirements to permit the originating broker to receive a fee.

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