Can you sue a hard money lender for fraud?
Hard money loans have been expanding in popularity in recent years, especially as interest rates in general rise. In a hard money loan, a borrower secures the loan with property, usually real estate, in exchange for the funding. Hard money loans usually feature higher interest rates and higher fees than do traditional loans because, for whatever, reason, a borrower is unable or unwilling to meet the terms offered by traditional lenders.
Hard money lenders could be sued under a variety of different legal grounds. There is definitely legal recourse if a lender engages in a fraudulent practice. It is important to note that there are both state and federal laws that apply to hard money lenders that provide protection to borrowers.
On a state level, there are laws that govern lending, some of which would apply to hard money lenders. Although hard money lenders do not have the same degree of legal obligations that traditional lenders have, there are some state law protections afforded to borrowers. The foremost of these protections is usury laws that govern interest rates charged by borrowers. The definition of credit contained in usury laws is broad enough to encompass hard money loans. However, usury laws vary sharply among states, meaning that their application is not a certainty. Some states have a hard cap on interest rates for any loan while other states allow parties that have a formal written contract to exceed the cap. Other states exempt loans from usury laws that are made for a commercial, investment or business purpose. Finally, some states exempt loans that are secured by real estate from usury laws.
State laws also would govern common-law fraud claims which arise from case law. Hard money lenders are not exempt from claims alleging simple fraud. Borrowers should keep in mind that there is a high bar for proving a fraud claim, not the least of which involves a showing that the lender acted willfully.
On a federal level, there are numerous regulations that govern lending, some of may make a lender liable in a legal action. First, the Dodd-Frank Act of 2010 changed lending laws and business transactions like reverse triangular merger transactions. The requirements contained in this act apply to all “loan originators.” A loan originator is anyone who extends credit to consumers or holds themselves out as being able to do so.
In 2016, the Consumer Financial Protection Bureau enacted new rules that govern loans with interest rates that are higher than certain thresholds. In addition, loans with high fees that exceed the threshold are also subject to these rules. The requirement of these rules is for lenders to provide borrowers with certain disclosures, including fees, loan terms and other costs. Lenders must also provide counseling to borrowers regarding high cost loans. There are further disclosure rules that require lenders to provide borrowers with additional information and disclosures regarding their loans. If the lenders fail to provide this information they will be legally liable in an enforcement action and quite possibly a civil action.
Borrowers that feel that they have been overcharged, either with regard to fees or interest rates, should contact a lawyer to determine whether they have a viable cause of action against a lender. Additionally, borrowers who believe that they were misled in the loan process should consult with an attorney as to whether they have a case for fraud against the lender.