In a bid to diversify their portfolio, most hard money lenders whose primary focus is on business-purpose loans consider consumer bridge loans at some point. However, most still find it difficult to understand what qualifies as a bridge loan and apply consumer protection regulations.
According to Regulation Z, a consumer bridge loan is a 12-month or shorter loan that allows consumers to purchase a new property before selling their previous one or a ground-up construction loan. For any of the categories of definition, the intention of the lender must be properly documented.
All bridge loans are exempt from various Regulation Z provisions, including the prohibition on balloon payments, ability to repay rule, and appraisal requirement. However, depending on the type of property encumbered by the bridge loan, the 3-Day Cancel Rule may or may not apply. Another aspect of Regulation Z, which many bridge loans still have to contend with, is Section 32 due to their short duration. As a result, Section frequently classifies bridge loans as high-cost mortgages.
A lender must also keep in mind that, like other consumer loans, bridge loans are subject to TRID disclosures. Therefore, all applicable federal and state lending requirements must be considered from the point of application to ensure that compliance difficulties do not develop down the road.
As we can see, several rules and regulations guide bridge loans, which, if well documented and considered, could make bridge loans a highly profitable business for hard money lenders. Click here to read more on the regulations surrounding bridge loans.
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