California Assembly Bill 3108, enacted recently, significantly impacts bridge lending for real estate transactions. This legislation aims to protect consumers while clarifying the boundaries between business-purpose and consumer loans.
Understanding AB 3108 is crucial for investors navigating California's bridge loan market.
What AB 3108 Changes
The bill makes it a felony to mischaracterize consumer loans as business-purpose loans to circumvent regulations. This targets predatory lending practices while preserving legitimate business lending.
For owner-occupied properties, the law strictly defines permissible bridge loans:
- Must be temporary (one year or less maturity)
- Used exclusively for acquiring or constructing new principal residence
- Cannot be used for "bridge-to-sale" on current residence
This effectively prohibits certain owner-occupied bridge loans that were previously available, such as loans to renovate before selling your primary residence.
Business-Purpose Loans Remain Unchanged
Investment property bridge loans operate normally under AB 3108. The law specifically protects legitimate business-purpose lending:
- Non-owner-occupied rentals
- Fix-and-flip projects
- Commercial properties
- 1031 exchanges
- Portfolio acquisitions
These transactions maintain the speed and flexibility that make bridge loans valuable for investors.
Determining Business Purpose
The distinction between business and consumer purpose is critical:
Clear Business Purpose:
- Property generates rental income
- Property held for appreciation
- Property used in trade or business
- Borrower is entity (LLC, Corporation)
- Part of 1031 exchange
Consumer Purpose (Regulated):
- Primary residence
- Second homes without rental income
- Family member occupancy without rent
Mixed-use requires careful analysis. If you live in one unit of a fourplex while renting three units, the primary purpose determines classification.
Documentation Requirements
AB 3108 increases documentation needs for compliance:
- Written attestation of business purpose
- Proof of rental income or intent
- Entity formation documents
- Property management agreements
- Historical tax returns showing rental income
Lenders now require more extensive files to prove business purpose. This protects both borrower and lender from potential violations.
Impact on Lending Practices
- Legitimate lenders have adapted to AB 3108 by:
- Implementing robust compliance procedures
- Clearly distinguishing product offerings
- Training staff on proper classification
- Declining questionable transactions
Some lenders exited owner-occupied lending entirely, focusing exclusively on investment properties. Others created separate divisions with appropriate licensing for consumer loans.
Penalties for Violations
- AB 3108 carries serious consequences:
- Felony charges for intentional misclassification
- Civil penalties and damages
- License revocation for lenders
- Personal liability for loan officers
These penalties ensure market participants take classification seriously.
What This Means for Investors
For legitimate real estate investors, AB 3108 actually improves the market:
- Eliminates predatory lenders
- Clarifies rules and expectations
- Protects business-purpose lending
- Maintains speed for investment loans
Professional investors conducting genuine business shouldn't notice significant changes beyond additional documentation.
Red Flags to Avoid
Watch for lenders who:
- Suggest misrepresenting loan purpose
- Avoid documentation requirements
- Promise owner-occupied loans without proper licensing
- Claim "creative ways around" regulations
These indicate potential violations that could jeopardize your transaction.
Best Practices for Compliance
Maintain clear records showing business purpose. If converting personal residence to rental, establish rental intent before financing. Use entity structures (LLCs) for investment properties. Work with experienced, reputable lenders.
Be honest about intended property use. Attempting to disguise consumer loans as business-purpose isn't worth the risk. If you need owner-occupied financing, work with properly licensed lenders.
Planning Your Strategy
Structure investments to clearly qualify as business-purpose:
- Form LLC or partnership for holdings
- Maintain separate books and records
- Document investment intent from day one
- Keep personal and investment properties distinct
Future Implications
AB 3108 signals California's commitment to consumer protection while preserving legitimate business lending. Expect continued refinement of regulations and potentially stricter enforcement.
The professional investment community generally supports AB 3108. Clear rules benefit everyone—investors, lenders, and consumers. Eliminating bad actors improves the entire industry's reputation.
At Capital Direct Funding, we've always maintained strict compliance standards. AB 3108 aligns with our commitment to transparent, legitimate business-purpose lending. We help investors structure transactions properly while maintaining the speed you need.
Call (626) 796-1680 or visit capitaldf.com to work with a fully compliant bridge lender.