Private, or hard money, loans are rarely a problem unless and until the borrower experiences financial issues. A borrower’s issues can arise out of the cost overruns, mismanagement, or a downturn in the market, among other things. By their very nature, hard money loans are secured by real estate (or “hard” assets) and are at traditionally lower loan-to-value (LTV) ratios than institutional lenders (since borrower credit worthiness normally excludes lower rate institutional loans). When borrowers find themselves in trouble (and in default under the loan) they often times seek leverage against the lender by filing suit.
In Massachusetts, there are numerous lending statutes which prescribe a myriad of regulations. There are consumer lending and consumer protection statutes (M.G.L. c. 140D, M.G.L. c. 183C and M.G.L. c. 93A) as well as a criminal usury statute (M.G.L. c. 271 s. 49). If private lenders follow the proper procedures, they can avoid liability under these various statutes and provide defenses to prospective claims by borrowers. Borrowers faced with losing their property (and the equity therein) and looking to stave off foreclosure, however, may file suit alleging violations of some or all of these statutory regulations regardless of the precautions taken during underwriting and at the closing table.
Kushner & Marano has been representing private lenders for over a decade in litigation. The first rule of thumb for any private lender is to have proper counsel during the underwriting and closing process. If litigation arises, it is imperative to retain litigation counsel, not just a real estate conveyancing attorney. Although experience trial counsel mounting an aggressive defense is important, a private lender’s best defenses are based on its actions prior to litigation.
To protect against a potential violation of M.G.L. c. 271 s. 49 and exposure under the usury statute, any hard money lender should notify the Massachusetts Attorney General’s office of its intent to provide loans which may exceed the interest rates are proscribed by M.G.L. c. 271 s. 49. A simple notice to the AG’s office prior to making any such loan can make all the difference as to whether said statute has been violated or not.
While the facts in all cases differ, a lender can help protect itself and provide defenses against alleged violations of the Massachusetts Consumer Credit Cost Disclosure Act (M.G.L. c. 140D) and the Predatory Lending Statute (M.G.L. c. 183C) by refusing to provide loans secured by mortgages on owner-occupied properties and/or the principal dwelling of the borrower. Lenders should ensure that all loans involve extensions of credit primarily for business or commercial purposes. Simply because the lender and the borrower call the loan “commercial” or “for business purposes” does not necessarily mean that it is. In determining whether a loan is for a business or commercial purpose, courts will look at the transaction as a whole and the purpose for which the credit was extended.
The above precautions are by no means a guarantee that a lender will avoid litigation or succeed in a lawsuit. Private, or hard money, lenders must be cautious in all facets of lending, intimately aware of the statutory requirements of such lending in Massachusetts and retain experienced counsel for the purposes of closing the loan and if litigation arises.