[Ginji244]

I am hoping for some guidance related to due diligence requirements when taking an assignment of a note and an assignment of the lien on the underlying real estate. We have several customers who provide financing for the purchase of homestead properties and then pledge the note and lien to their line of credit financed at our bank. We recently had an FDIC exam and they said that since we are taking an assignment of the lien, we are required to perform due diligence on the documentation/disclosures used to close the consumer real estate loan. However, they could not provide us any with guidance on the scope of due diligence we should do. Do you or anyone have any guidance on this or maybe a checklist or procedures?

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[kmeade]

Following!

[rcooper]

Are these loans for a family member to purchase the homestead?

I don’t know of any specific guidance. I’ll ask Jack to weigh in with info he might have. Off the top of head, I think creating a checklist to include legal documents to ensure the collateral is enforceable, determine any disclosures that might be necessary, look at the viability of the loan, consider any potential compliance issues (BSA, privacy, FCRA are a few that come to mind that you might need to deal with and there are probably more). There does seem to potentially be a lot of risk here on various levels and taking these without any due diligence only increases the risk. I’d work with an attorney to determine the bank has what it needs to be able to rely on the collateral.

[Ginji244]

Thank you Robin, no these are better described as hard money lender loans to consumers to purchase their homestead. I am currently doing a full review like I would on a mortgage loan that our bank is financing. It is very time consuming, frequently incorrect and very frustrating.

[jholzknecht]

The question is whether the original lender is a “creditor” or or not. The definition of creditor has several elements, one of which is, does the person extend credit “regularly.” The Commentary states, “A person regularly extends consumer credit only if it extended credit (other than credit subject to the requirements of § 1026.32) more than 25 times (or more than 5 times for transactions secured by a dwelling) in the preceding calendar year. If a person did not meet these numerical standards in the preceding calendar year, the numerical standards shall be applied to the current calendar year. A person regularly extends consumer credit if, in any 12-month period, the person originates more than one credit extension that is subject to the requirements of §1026.32 or one or more such credit extensions through a mortgage broker.” If the person makes a single loan subject to Section 32 they are a creditor. If not subject to Section 32, then if the person extends credit more than 5 times in the preceding year, he or she is a creditor.

If the person is a creditor then they must comply with all of the requirements of Regulation Z. When your bank purchases a loan from another creditor it is liable for any errors obvious on the face of the disclosure.

[Author]

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