Why Are Regulators Cracking Down on Hard Money Lenders?
In the past year, regulators have started to crack down on hard money lenders. In September of last year, New York’s Department of Financial Services began an investigation into nine lenders on the charges of potential predatory lending practices.
The state believes that many lenders do engage in legitimate activities; however, it and other regulators have a role to play to ensure that borrowers are not taken advantage of by the lenders. Other states have also began to enact new regulations over hard money lenders and those who provide other types of short term loans, such as payday loans.
Predatory Charges
One of the leading problems that regulators are trying to avoid is people in dire need of money becoming trapped by large loans for which they have to then take out more loans in order to pay off their debt.
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Because hard money lenders look more closely at the collateral offered rather than the ability for the borrower to repay the loan, borrowers are at a higher risk of failing to repay the debt. Because these same borrowers typically cannot qualify for traditional loans, they have to once again turn to the same hard money lender for another loan to avoid defaulting.
The Consumer Financial Protection Bureau reviewed 12 million payday loans and found that 22 percent of borrowers ended up having to renew the loan at least six times, which led to fees adding up to more of the initial loan amount.
Structuring High-Interest Loans
One reason that the nine hard money lenders were targeted in New York is that the state believes they have structured some of their high-interest loans in such a way that some of the terms were designed in order to cause the lenders to enter foreclosure. Regulators want to ensure that consumers are protected from entering into an agreement that sets them up to fail.
The Future for Hard Money Lenders
Although regulators are starting to investigate various procedures and companies that offer short term and hard money loans, they are not looking to get rid of the practice entirely. Instead, they plan to enact certain guidelines and regulations to protect the consumer from taking out more money than they can easily pay off to avoid future financial problems.
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This could include requirements for the lenders to have to verify the customer’s credit history and income, as well as a time period between loans and a limit on the number of loans.
Hard money lenders who practice predatory lending will be the hardest hit by these new regulations. Those who already ensure that they provide services with the borrowers’ best interest in mind will find it easy to adjust to these new regulations.
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