Determining loan purposes can become especially challenging when proceeds are being used for both business and personal purposes. In those situations, lenders not only have to evaluate how the funds will actually be used, but also whether the structure of the loan still supports a business-purpose designation. For this month’s Ask Me Corner, we asked:

How do you handle mixed-purpose proceeds (some business, some personal)—do you decline, reduce, or require restructuring?

Below is a response from a CMA member sharing how his company approaches this issue:

Richard Mark, RSR Lending, Inc.

“This question really presents two issues: first, verifying how the funds will be used, and second, deciding how to structure the loan. Use of funds is one of the first things we ask about on every intake call or email, and in a mixed-use scenario, we want a detailed description of how much is going where, backed by documentation. We confirm it at intake, before drawing documents, after drawing documents, and a final time when the borrower attests to it in the closing documents. Before funding, our loan file typically includes three to four written statements from the borrower identifying how the proceeds will be used.

“One transaction highlights how difficult verification can be. A borrower wanted cash out on their primary residence to purchase a long-term rental. They also had a HELOC on the home, and about 40% of the proceeds were earmarked to pay it off. On its face, that pushed past our comfort level and likely would have killed the deal. But the borrower explained that the HELOC had been used to fund a trust-deed investment. So, trust but verify. Once we received the promissory note and confirmed that it aligned with the dates and amounts of the HELOC advances, we were back in the game. Had the borrower not been able to provide clear documentation, we likely would have walked away.

“We carry an NMLS endorsement and are equipped to write consumer-purpose loans, but that must be established from the outset, since adding a consumer component changes the compliance requirements and becomes costly to revisit late in the process.

“How we handle these situations depends on the mix and overall structure of the deal. If most of the proceeds are going to a consumer purpose, we write a consumer loan. When it falls into the gray zone, roughly 30% to 50%, we weigh the rest of the deal (including whether the borrower is an entity) the collateral type, and whether the property is owner-occupied, to decide whether to reduce the loan to the business-purpose amount or write it as a consumer loan. Our default is better safe than sorry. If we cannot get comfortable that it is truly a business-purpose loan, we either write it as a consumer loan or pass. And if a borrower misrepresents the use of funds at any point, we decline.”

Thank you to Richard Mark of RSR Lending, Inc. for sharing his insight into this month’s question. His response highlights the importance of careful verification, strong documentation, and being willing to restructure or walk away when the loan purpose is not clear. In mixed-purpose scenarios, a thorough review upfront can help avoid costly compliance issues later.

Next Month’s “Ask Me” Question:

What is the best way to communicate to an investor that you no longer wish to accept their funds or continue the relationship?

If you would like to submit a response for a future Ask Me Corner, please send it to Karen Gledich at karen@resfirstcap.com. We always welcome member participation.