Dan J. Harkey

Educator & Private Money Lending Consultant

Frequently, the Mortgage Broker Must Help Clean Up The Borrower’s Mess To Close The loan.

A good mortgage broker is worth their professional designation as a real pro, and to earn a handsome fee when they handle technical problems to achieve an adequate solution to get the loan approved

by Dan J. Harkey

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🏛️ Navigating Complex Borrower Obligations: When the Lender Must Help Clean Up the Mess

Loaning to Borrowers with Multiple Liens, Encumbrances, and Judgments

🔍 Key Definitions

Lien
A lien is a legal claim against real property, typically recorded through a deed of trust or mortgage. It secures a monetary obligation and restricts the sale or transfer of the property until the debt is satisfied.

Encumbrance
An encumbrance is any legal restriction or claim on a property that may arise from municipal violations, court orders, or association agreements. While all liens are encumbrances, not all encumbrances are liens.

Judgment
A judgment is a court-issued decision regarding legal liabilities. It requires enforcement actions—such as asset seizure or wage garnishment—to be effective, often involving significant time and expense.

🧾 The Loan Request

A borrower with substantial equity in multiple properties seeks an interim loan to settle financial obligations arising from a divorce and the dissolution of a business partnership.

The proposed loan would:

  • Pay off the ex-wife
  • Settle with the ex-business partner
  • Address a corporate tax lien

The borrower refers to this as a “fresh start loan.”

🧠 Lender’s Considerations

Upon reviewing the file, the lender raised several questions:

  • Is there a court order for the ex-wife’s payout?
  • Is there a formal dissolution agreement with the ex-partner?
  • Is the tax lien personal or corporate?

These distinctions are critical, as they determine whether the loan is classified as a consumer or business purpose, which in turn affects the regulatory compliance requirements of the Federal Truth in Lending Act.

⚖️ Consumer vs. Business Purpose Lending

Business-Purpose Loans
Used for 1–4 unit real properties where proceeds support business activities. These loans are not subject to consumer lending regulations.

Consumer-Purpose Loans
Used for personal, family, or household needs. These loans require extensive disclosures and compliance under federal and state law, including the Truth in Lending Act (Reg Z).

Note: While industry professionals often refer to a “business purpose exemption,” the correct interpretation is that business-purpose loans are “not covered” under consumer lending laws.

💼 Loan Structure and Feasibility

The borrower has sufficient equity across four properties to secure the required $ 1.4 million.

Proposed allocations:

  • $400,000 – Ex-wife (consumer purpose)
  • $500,000 – Ex-partner (business purpose)
  • $200,000 – Borrower’s share of corporate tax lien (business purpose)
  • The remaining proceeds will be allocated to the borrower’s business to reposition it for a more technology-driven company and successful future.

The ex-partner’s settlement includes $250,000 to satisfy their portion of the lien. Remaining funds will support business repositioning.

Loan Classification:
72% Business Purpose
28% Consumer Purpose
✅ Compliant with business-purpose lending standards

⏳ Timeline and Recommendations

Without the IRS lien, the loan is expected to close in approximately two weeks. However, due to the IRS’s slow processing of updated demands, the timeline may extend to four months.

Recommendation:
The borrower should retain a tax attorney experienced in negotiating with the IRS to expedite lien resolution and avoid delays.

📌 Final Thoughts

Lenders must exercise caution when borrowers present complex financial obligations. Proper classification of loan purpose, thorough documentation, and proactive legal support are essential to mitigate risk and ensure compliance.