The Idaho Residential Mortgage Practices Act (the “Act”) requires a license when a person[1] engages in “mortgage lending activities” which are, in essence, activities wherein a lender accepts or offers to accept applications for residential mortgage loans with the expectation of making a profit or gain.[2] As used in the Act, the term “residential mortgage loan” means “any loan that is secured by a mortgage, deed of trust or other equivalent consensual security interest on a dwelling[3] as defined in section 103(w) of the truth in lending act, located in Idaho, or on residential real estate[4].”[5] Recently, the Idaho Department of Finance (the “Department”) published a newsletter offering guidance on the potential necessity for licensure under the Act in certain general commercial and construction lending scenarios. The Department’s guidance[6] is set forth below.

Scenario 1

Lender 1 makes a series of loans to a contractor who intends to build residential homes in a subdivision. The contractor does not live in any of the residential homes to be constructed, the loans are made directly to the contractor, and the loans are only for commercial purposes. The proceeds of each loan are used by the contractor to finance the cost of constructing an individual residential home. Each loan is secured by the vacant real property, the materials, and all improvements to the real property for which the particular loan was made. When the contractor sells a completed residential home, that particular home is released from the collateral for the corresponding loan.

Scenario 2

Same facts as for Lender 1, except that Lender 2 makes a single loan that is used to finance the cost of construction for all of the residential homes within the subdivision. The loan is secured by all of the vacant real property, the materials, and all improvements to the real property within the subdivision. When the contractor sells a completed residential home, that particular home is released from the collateral for the loan.

Scenario 3

Lender 3 makes a single loan to a residential real estate investor that is used to finance the cost of acquisition and rehabilitation for an existing residential property. The residential real estate investor does not live in the residential home to be renovated. The loan is secured by the vacant real property, the materials, and all improvements to the real property. The residential real estate investor either sells the renovated residential home or refinances the renovated residential home to be held as an investment property (e.g. rental portfolio).

Scenario 4

Lender 4 makes a single loan to a residential real estate investor that is used to finance the cost of rehabilitation for an existing residential property already owned by the residential property investor. The residential real estate investor does not live in the residential home to be renovated. The loan is secured by the vacant real property, the materials, and all improvements to the real property. The residential real estate investor either sells the renovated residential home or refinances the renovated residential home to be held as an investment property (e.g. rental portfolio).

In short, in Scenarios 1, 3, and 4, the lender needs to be licensed. In Scenario 2, the lender is not making a residential mortgage loan and is not required to be licensed.

As explained by the Department, in Scenario 1 the lender is making a series of loans to a builder and each loan is used to construct a single residential family structure. Thus, the lender needs to be licensed. In Scenarios 3 and 4, the lender is making a single loan that the borrower is using to acquire and rehabilitate (Scenario 3) or rehabilitate (Scenario 4) a single residential family structure. In each of these Scenarios, the lenders are engaged in the practice of mortgage lending activities and must be licensed. However, in Scenario 2, the lender is making one loan and the proceeds are used to finance the cost of more than one residential family structure. Accordingly, a license is not required. In addition, as noted by the Department, if a lender uses a licensed broker who transacts the loan with the borrower, then the lender would be exempt from the licensing requirement.[7]

In summary, if a lender makes a single loan to a borrower who intends to construct or rehabilitate a single residential family structure with the proceeds, the lender is making a residential mortgage loan and must be licensed. If, however, the lender makes a single loan to a borrower who uses the proceeds to construct or rehabilitate more than one residential family structure with the proceeds, the lender is not making a residential mortgage loan and need not be licensed. By understanding these nuances and paying attention to a borrower’s intended use of loan proceeds, a lender can ensure compliance with its licensure obligations under the Act.

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[1] A “person” under the Act “means a natural person, corporation, company, limited liability company, partnership or association.”  Idaho Code § 26-31-102(11).

[2] See Idaho Code § 26-31-201(7).

[3] A “dwelling,” as defined in the Truth in Lending Act, is a residential structure or mobile home which contains one to four family housing units, or individual units of condominiums or cooperatives. 12 U.S.C. § 1602(w).

[4] The Act defines “residential real estate” as “any real property located in Idaho upon which is constructed or intended to be constructed a dwelling as defined in section 103(w) of the truth in lending act.” Idaho Code § 26-31-102(16) (emphasis added).

[5] Idaho Code § 26-31-102(15).

[6] Commercial and Construction Lending Scenarios, The Idaho Compliance Connection (Idaho Department of Finance), Summer 2016, at 2.

[7] Idaho Code § 26-31-202(11) states as follows: “Any person who funds a residential mortgage loan which has been originated and processed by a licensee under this part or by an exempt person under this part, who does not directly or indirectly solicit borrowers in this state for the purpose of making residential mortgage loans, and who does not participate in the negotiation of residential mortgage loans with the borrower. For the purpose of this subsection ‘negotiation of residential mortgage loans’ does not include setting the terms under which a person may buy or fund a residential mortgage loan originated by a licensee under this part or an exempt person under this part.”