Co-Author: Jordan J. Bunch, Esq.
Question: Are loans made for the purchase of residential investment properties “residential mortgage loans” under Colorado law?
Quick Answer: The Colorado Board of Mortgage Loan Originators is on a path to regulate loans intended for development, rehabilitation, resale or rental of residential property, potentially hindering access to financing for rehabilitation entrepreneurs.
The definition of a “residential mortgage loan” is crucial to the regulation of mortgage loan originators under Colorado law. Section 12-61-903(1)(a) prohibits anyone from acting as a mortgage loan originator unless they are licensed. Section 12-61-902 defines a mortgage loan originator to be someone who takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan. Therefore, these laws only regulate people who are making “residential mortgage loans.” Section 12-61-902(8) defines a residential mortgage loan to be “a loan that is primarily for personal, family, or household use and that is secured by a mortgage, deed of trust, or other equivalent, consensual security interest on a dwelling or residential real estate upon which is constructed or intended to be constructed a single-family dwelling or multiple-family dwelling of four or fewer units.” [Underline added by author.]
People acquire residential property for a variety of reasons. For example, many people buy houses purely for the purpose of remodeling them and selling them a few months later for a profit. Others invest in houses as rental properties.
Earlier this year, the Colorado Board of Mortgage Loan Originators considered a proposed rulemaking that would expand the definition of a residential mortgage loan to include properties that will not serve as the buyer’s residence. The proposed rule, 4 C.C.R. 725-3:1-1-6, stated, “the Division of Real Estate interprets this definition to include loans secured by a residential property of four or fewer units that is intended for development, rehabilitation, resale, or rental of such property.”
The Board’s proposed definition of a residential mortgage loan is not inevitable. Both Louisiana and Minnesota have statutory definitions for residential mortgage loans that are very similar to Colorado’s definition. Both of these laws have been interpreted to mean that property bought for investment purposes is not “primarily for personal, family, or household use.” Therefore, loans made for the purchase of that property are not residential mortgage loans.
The statutory language supports the conclusion that this law does not cover property that will not be used as the buyer’s residence. The statute states that the loan must be “primarily for personal, family, or household use and that is secured by a mortgage, deed of trust or other equivalent…” In order for a loan to be a residential mortgage loan under this definition it must be used primarily for personal, family, or household reasons. When property is bought purely for the purpose of rehabilitation and resale, or as a business investment in a rental property, it is not being used for personal, family, or household reasons. Therefore, the proposed rule is inconsistent with the language of the statute.
The Board of Mortgage Loan Originators considered this proposed rule in a hearing on February 16, 2011. Based in part, on the foregoing statutory analysis, the Division seemed to decide not to adopt the proposed rule and therefore avoid the attempt to expand regulation to property intended for development, rehabilitation, resale, or rental of such property. However, at the March meeting, the Board seemed to set the stage for changing its mind. The Board set a rule making hearing for June 15, 2011 to again adopt a rule that regulates loans secured by a residential property of four or fewer units “that is intended for development, rehabilitation, resale or rental.” The successful vote to set the hearing to reconsider the rule makes it likely that there are enough votes to adopt the new rule. Whether this purported expansion of regulatory authority will withstand judicial scrutiny remains to be seen.