Bulletin: TX2020009

Date:
September 30, 2020
To:
All Texas Issuing Offices
RE:
UNDERWRITING - Red Flags in Hard Money Loans

Dear Associates:

This bulletin replaces TX2019007.

We are aware certain features of hard money loans make it easier for fraudulent transactions to occur. This supplements national bulletins SLS2018002 and SLS2020009.

WHAT YOU SHOULD KNOW

I. What is hard money?

A hard money loan is generally a short-term loan, with a higher than current interest rate and a very short term, usually 1-5 years.

- Non-institutional lender
- High loan fees
- Often used in “flip” transactions
- Apparent strong loan-to-value ratio since the loan is based on the strength of the collateral and not the credit of the borrower

What is NOT hard money lending?

Loans by:

- Banks
- Savings associations
- Credit unions
- Governmental or other pension or retirement funds
- Real estate investment trusts
- Governmental agencies
- Insurance companies
- Bona fide seller loans

II. When is a hard money loan a red flag of possible real estate fraud?

- Recent sales, especially uninsured and un-mortgaged properties
- Fast moving estate matters
- Properties with no activities for many years and now a loan
- Orders with no immediately contemplated improvements in an amount substantially in excess of the tax value
- Is the seller never available?
- Is there an over 65 tax exemption and the seller or spouse are obviously well under 65?
- Does either seller appear confused as to the deal or its impact or structure?
- A request to issue an owner policy for an amount not authorized by Procedural Rule P-66. Particularly OTP for 125% of sale price with no repairs, rehabs or remodeling of a property (contemplated improvements).
- Documents not being signed in the title company

III. Due Diligence Steps You Must Take

- Ensure loan proceeds are payable to the borrower/seller only, not to a third party unless:

  • being used to pay off existing encumbrances;
  • being paid to the seller in a non-homestead sale
  • being paid to contractors/suppliers for work on the property; or
  • being paid to another escrow or title company in connection with the borrower's purchase of another property (secure evidence that borrower is the actual purchaser)

- Check that all borrowers' signatures match all documentation.

WHAT YOU SHOULD DO

If your transaction has any of the features mentioned above in item II, please contact a Texas Underwriter to discuss your situation.

Please clearly state in your email THIS IS A HARD MONEY LOAN ISSUE.

Make sure to provide the following information to the Texas Underwriter:

  1. What is the term of the loan?
  2. How is the borrower going to use the property?
  3. Live there? Flip?
  4. How many points are being charged?
  5. What is the interest rate?
  6. What is the current typical interest rate in your area?
  7. How long after the contract was entered or the loan applied for was the approval granted?
  8. Is there a down payment required?
  9. How long has the lender been in business?
  10. How many hard money loans does the lender make per year?
  11. Are the loan documents prepared by a Texas attorney?

Any other information such as the fact you have done business with the hard money lender for an extended time period and how many deals you have closed will be helpful.

Please be aware a hard money lender that refuses to provide the information above is unlikely to be approved. Your Texas Underwriter will determine if additional Extrahazardous Risk review process and approval needs to be obtained per the National Bulletin SLS2020009.

We rely on your intuition and experience in helping to identify possible fraudulent situations. When in doubt, check with your supervisor or a Texas underwriter. We want to expedite legitimate transactions and try to prevent fraudulent transactions.

If you have any questions relating to this or other bulletins, please contact a Stewart Title Guaranty Company underwriter.

For on-line viewing of this and other bulletins, please log onto www.vuwriter.com.

THIS BULLETIN IS FURNISHED TO INFORM YOU OF CURRENT DEVELOPMENTS. AS A REMINDER, YOU ARE CHARGED WITH KNOWLEDGE OF THE CONTENT ON VIRTUAL UNDERWRITER  AS IT EXISTS FROM TIME TO TIME AS IT APPLIES TO YOU, AS WELL AS ANY OTHER INSTRUCTIONS. OUR UNDERWRITING AGREEMENTS DO NOT AUTHORIZE OUR ISSUING AGENTS TO ENGAGE IN SETTLEMENTS OR CLOSINGS ON BEHALF OF STEWART TITLE GUARANTY COMPANY. THIS BULLETIN IS NOT INTENDED TO DIRECT YOUR ESCROW OR SETTLEMENT PRACTICES OR TO CHANGE PROVISIONS OF APPLICABLE UNDERWRITING AGREEMENTS. CONFIDENTIAL, PROPRIETARY, OR NONPUBLIC PERSONAL INFORMATION SHOULD NEVER BE SHARED OR DISSEMINATED EXCEPT AS ALLOWED BY LAW. IF APPLICABLE STATE LAW OR REGULATION IMPOSES ADDITIONAL REQUIREMENTS, YOU SHOULD CONTINUE TO COMPLY WITH THOSE REQUIREMENTS.