Q: We are trying to obtain a second mortgage on our house so we can make some renovations. We have been approached by one company that is willing to make us a loan. However, they want us to sign a statement that the loan is to be used "for business purposes." We have been told that this is the only way we will get our loan. We don't want to sign a false statement, but we need the cash. Can you advise?
Q: I am a real estate broker in the District and want to assist a seller with a second trust. What are the second trust laws in the District? Can the seller take back a balloon note?
A: In the District, the current usury ceiling on residential mortgage loans is 15 percent per annum. For loans secured directly or indirectly by a mortgage (deed of trust) other than a first mortgage, the law requires that each payment "shall be equal to, or subsequently equal to, the other payments, and the intervals between payments shall be substantially equal."
This is the balloon note provision of the District law. Oversimplified, balloon notes are prohibited for second deeds of trust, except when:
The loan is being provided by a federally regulated financial institution.
The loan is being provided by the owner-occupant-seller.
Thus, the current law contains what I believe to be an arbitrary distinction between an "owner-occupant" and any other seller. If I own a piece of real estate in the District and want to sell it to you, we can enter into a balloon-payment transaction if I am the owner-occupant. If I have maintained the property as rental property, however, we cannot have a balloon.
A balloon payment is a very desirable transaction from the point of most buyers and seller. If you were to take back a second deed of trust in the amount of $50,000 at a 12 percent interest rate, to pay this off within a five-year period, you would have to pay $1,112 per month. To pay this off in 30 years, you would only have to pay $514. Clearly, the buyer may be unable to pay the high mortgage payment based on the five-year term. On the other hand, you, the lender, do not want to commit your funds for the entire 30-year period.
Balloon notes are designed to handle this problem. The mortgage payments are based on a 30-year payment schedule (or some other term) but the entire balance becomes due within the time period agreed upon -- usually three to five years.
There are some additional exceptions to the District's usury law. There is no usury ceiling, and there are no restrictions (such as balloon provisions) if the borrower is:
A not-for-profit corporation.
Obtaining the loan to acquire or carry on a business, professional or commercial activity.
A religious society.
That's why the first questioner is being asked to state that the loan is for a business purpose. I cannot recommend that this false statement be signed.
When City Councilman John Wilson conducted hearings on this subject recently, he noted that "certain lenders, in order to be able to charge more than 15 percent interest on second trusts, are getting borrowers to sign affidavits that the loans are for business or investment activity, when such is not the case. When the borrower is then granted the loan, but objects to the higher interest rate, he is told that he may sue, but would have to admit in court that he lied when signing the affidavit."
You are obviously in a dilemma. Perhaps the only answer is for the D.C. City Council to give relief for consumers who would prefer to deal with legitimate money lenders.
You are encouraged to send your comments to Councilman Wilson, who is head of the Council's finance and revenue committee. The committee is attempting to modify and amend existing law.