How hard is it for residential LOs to originate commercial loans?

by Contributor13 Sep 2018

by Jillayne Schlicke

This is the third article in a series on how to become an originator, intended to help readers who are not yet licensed understand what it takes to obtain a loan originator license. This article will answer the most frequently asked questions for residential loan originators considering taking the leap into commercial loan origination.

Licensing
There is no national loan originator licensing system in place for individuals who would like to originate commercial loans, though some states may have licensing requirements.

From The SAFE Mortgage Licensing Act, The term “residential mortgage loan” means any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling (as defined in section 1602(v) of Title 15) or residential real estate upon which is constructed or intended to be constructed a dwelling. Additional laws such as RESPA added to the definition to include 1 to 4 family dwellings, condos, and manufactured homes and states can and do add more specificities to the federal definitions.

Investopedia.com defines a commercial real estate loan as: “a mortgage loan secured by a lien on commercial, rather than residential, property. Commercial real estate (CRE) refers to any income-producing real estate that is used solely for business purposes.”

What about an investor who is purchasing a 1-4 family dwelling for “business” purposes?
Example: A loan is made to an individual who is purchasing a home at a foreclosure auction. In non-judicial foreclosure states, individual purchasers are required to pay all cash at the auction, by way of a cashier’s check. If the individual doesn’t have the cash on hand, then the individual applies for a temporary (bridge) loan that will be secured against the residential real property being purchased at the foreclosure auction. Since these bridge loans come with high rates and fees, the loan is typically replaced with a more traditional “investor” non-owner occupied residential loan very soon after purchase. Do companies and loan originators that make loans to “investors” such as this need to obtain a residential loan originator company and individual license? Refer to the definition of residential lending above. Generally, if the property meets the definition of a residential loan and is not a bridge (temporary) loan, even though the foreclosure auction investor/purchaser might immediately transfer title into an LLC, and hold a belief that this is a “business” loan, the property and the loan still meet the definition of residential lending. In a case against Rain City Capital from the state of Oregon, even though the individuals purchasing homes to fix and flip, or fix and hold for rental income were thinking of themselves as “business owners,” the collateral for the mortgage loan meets the definition of residential real estate and the loan originators and company should become properly licensed in the states in which they are doing business. Check with your state regulator to make sure you are properly licensed. State regulators are a far superior source than any “get rich quick” real estate seminar guru.

Commercial lending
Commercial loans are made to business entities that own commercial real estate such as corporations, partnerships, funds, and trusts. The business entity leases space to the businesses occupying the commercial real estate and repays the loan with the income from the leases and other revenue sources from the commercial activity. Examples of commercial property include hotels, retail buildings, office buildings, a neighborhood center anchored with a grocery and drug store, a big box power center with few other shop tenants, a lifestyle center with a theater, restaurant, and gym, and apartments. The commercial loan becomes a lien against the commercial property that’s being used solely for commercial purposes.

The business entity will submit cash flow statements, leases, future tenant improvement obligations, all income and expenses, rent rolls, pictures, site plans, floor plans, operating statements, and environmental and engineering reports regarding compliance with the Americans with Disabilities Act.

Commercial loan originators are employed at a mortgage bank or a mortgage brokerage. Commercial loan origination includes understanding the financial net worth of the borrower, the borrower’s experience managing commercial property, a credit check, mitigation strategy and underwriting risk. Commercial loan originators must understand how to calculate and analyze net operating income, debt coverage ratios, capitalization rate, and debt yield.

Sources of funding for commercial loans include life insurance companies, pension funds, Real Estate Investment Trusts, commercial banks, conduits from Wall Street, and Government-Sponsored Entities (GSEs) such as Fannie Mae, Freddie Mac, and HUD.

Requirement to notify current employer and NMLS
Because there is no barrier to entry, licensed residential loan originators unfortunately believe they can also originate commercial loans without informing their residential lender/employer and their regulator.

The SAFE Mortgage Licensing Act requires that all licensed LOs inform employers of all employment through the NMLS, not just their current job originating residential loans. Residential mortgage companies are required to supervise their LOs. If an LO is originating commercial loans on the side, he or she must advise his or her employer and the NMLS or face a possible consent order.

Jillayne Schlicke, M.A., researches, writes, and instructs pre-licensing and continuing education courses for the mortgage industry as the owner of Jillayne also provides consulting services in the areas of compliance, mortgage lending law, mortgage fraud, ethics, and communications. Jillayne is an active member of the Washington State Mortgage Bankers Association, will be the keynote speaker on September 18, 2018 at the Spokane Mortgage Lenders Association dinner meeting. Jillayne has received 13 industry awards.

Poll

Should CFPB have more supervision over credit agencies?