Several federal laws, known as “Regulation Z,” protect borrowers with hard money mortgages from predatory lending. Here are the most important laws to know:
Truth in Lending Disclosures
Federal “Truth in Lending” laws mandate that all lenders, including those making hard money mortgages, disclose specific information to prospective borrowers. Your lender should give you a statement detailing the loan’s annual percentage rate (APR), costs related to taking out the loan, a payment schedule, late payment fee information, and lender’s prepayment policies. Read this information carefully and save a copy for your records.
Read the Law: FDIC Section 226.18
High-Cost Lending Laws (for Second Mortgages)
Many hard money second mortgages fall under special high-cost lending laws. These laws, commonly referred to as “Section 32,” protect borrowers from some of the more harmful lending terms. If your hard money mortgage falls under this category, it cannot have negative amortization (a payment schedule that causes the balance to increase), an increased interest rate after a default, a due-on-demand clause, or a prepayment penalty required beyond five years.
Read the Law: FDIC Section 226.32
Right of Rescission (for Second Mortgages)
If you take out a hard money second mortgage, federal law gives you three days to reverse your decision and cancel the loan. You can choose to rescind your loan for any reason and do not need to explain yourself. Simply fill out the paperwork provided by your lender and return it within three business days (including Saturday). You will be given back all of the money you put towards the loan, including points and other fees.
In almost all cases, these three days will pass before the loan funds are dispersed. However, if you receive any money before choosing to rescind the loan, you must pay it back immediately.
Read the Law: FDIC Section 226.15
In addition to these federal regulations, many states have laws applying to hard money mortgages. If you have any questions about lending laws, consult an attorney in your state for professional advice.