Memo MRM97-2
Date: October 30, 1997
RE: Commercial lending with personal residence as secondary collateral
Facts:
As part of a commercial loan transaction, a lender may obtain a first mortgage on the personal residence of an officer, director or individual guarantor of the company. The mortgage is not the primary collateral for the commercial loan, but instead is additional collateral, taken as an abundance of caution. Does such a transaction require the lender to be licensed under the Kansas Mortgage Business Act (KMBA)?
Discussion:
K.S.A. 9-2201(b) defines "mortgage business" as:
"engaging in, or holding out to the public as willing to engage in, for compensation or gain, or in the expectation of compensation or gain, directly or indirectly, the business of making, originating, servicing, soliciting, placing, negotiating, acquiring, selling, or arranging for others, or offering to solicit, place, negotiate, acquire, sell or arrange for others, five or more mortgage loans in a calendar year"
The central question is whether the loan described above meets the definition of "mortgage loan" in the statute.
"Mortgage loan" is defined in K.S.A. 9-2201(c) as:
"a loan made to a natural person which is secured by a first mortgage or other similar instrument or document, and which creates a first lien on a one-to-four family dwelling, located in this state, occupied or intended to be occupied for residential purposes by the owner, including the renewal or refinancing of such a loan" (underline added)
The type of commercial loan described above is secured by a first mortgage and creates a lien on a one-to-four family dwelling, intended to be occupied for residential purposes by the owner. However, because the loan is made to a company and not to a "natural person", the transaction does not meet the definition of "mortgage loan" in K.S.A. 2201(c). Since a commercial loan to a company that results in a lien on a principal officer's personal residence is explicitly outside the scope of Act, the lender would not need to be licensed pursuant to the KMBA.
If the loan had been made to a natural person, and a first lien on residential real estate resulted from the loan transaction, it would not fall explicitly outside the scope of the Act. However, this office is of the opinion that the intent of the Act is primarily to protect Kansas home buyers. Commercial borrowers can be expected to possess a level of sophistication in credit and financial matters above that of an ordinary home buyer. Therefore, so long as the loan is for a commercial purpose and neither the loan decision nor the loan amount is based on the equity or market value of the residential property taken as collateral (the property is taken as an abundance of caution), the lender would not be required to obtain a license pursuant to the KMBA.
