THE NEW DODD-FRANK/CFPB RULES FOR WRITING SELLER-CARRIES
Post Date: 7/1/2013
THE NEW DODD-FRANK/CFPB RULES FOR WRITING "SELLER-CARRIED CONTRACTS" FOR NEW OR USED RESIDENTIAL SALES
(THEY AWAKEN NEW LISTINGS!)
J. ROBERT ECKLEY
Real Estate and Brokerage Attorney, CFPB Expert
JULY 1, 2013
© 2013, THE ONLINE LAWSTORE, LLC
INTRODUCTION: SHORT SALES ARE PLAYING OUT AND TRADITIONAL LISTINGS ARE SCARCE– SO WHAT IS "PLAN B?"
BINOCULARS: O.K.. Let's assess the emerging 2013-2014 marketing scene: There are TWO market strategies that can make money right now, but one is dying and the other needs help to be born.
MARKET STRATEGY ONE (DYING): THE "STALKING HYENA" There is the now-dying "market of collapse" in which the only object is to bottom-feed for small change on the bodies of the Down-and-Out in such aberrant and (fiduciary-duty-risky) muddles as short-sales where the borrower goes away homeless and financially ruined (that's a "cure"?) and the agent, the allegedly "fiduciary" for the owner-client, goes away with a commission for aiding and abetting an owner's execution…all to the benefit of a non-client buyer. This can be "great for you" if you are the eater of carrion or representing one and can find enough of those deals (for which everyone with a hole in his shoe is competing and actually making the vulture market tighter and driving prices up), but not so good if you are The Eaten or have a better image of yourself and your place as a professional than a stalking Hyena.
The Scavenger Market is not even a "real estate revival." It's a massacre. Many agents went into this business to be the "Smile-Maker." Not the "Undertaker!" The recent market has, however, tended to close the Hyena alternative as prices get higher on depleted inventories and as used home prices (short sales, foreclosures, fix-and-flips) get bid closer to new home production prices and accordingly have reawakened the builders who can produce in that market. Builders are now generating similar product with better competitive attributes, i.e. the homes are newer, have warranties that used homes do not and most builders offer "done deal" liberal finance, courtesy of inside buy-downs by the builder with the lenders. The builder's capacity to generate market-customized finance could spell doom for those used home sales which depend on open market conventional finance, as, outside of builder buy-downs, conventional finance under the new QM rules (see Mr. Eckley's May, 2013 Article) will cost more, appraise the product more harshly, loan less on it and in general become harder for used home borrowers to reach.
MARKET STRATEGY TWO (NOW BIRTHING): "THE CLEVER DETOUR"
THERE IS ONE GREAT ALTERNATIVE TO A NARROWING USED HOME MARKET AND THE COMING DRYING UP OF USED HOME FINANCE AND THE IMPACT OF NEW-HOME MARKET COMPETITION: ITS TIME TO INVENT SOME VIABLE FINANCE AND NEW LISTING PLANS TO DETOUR IT ENTIRELY. AND THAT WOULD INTERPRET AS: LEARN AND USE SELLER-CARRIES! See why as follows.
The Seller-Carry Contract has a lot of creative alternatives to fit the deal and even some fabulous tax-pizzazz to recommend it under any market circumstances, not just a changing or hardening market. Those are probably good subjects for another article (and the Writer has spoken to those before, see "Archives" of past Newsletters at www.eckleylaw.com). This article, however, is limiting itself to explaining what is possible under the Dodd Frank Act ("DFA") and the federal Consumer Financial Protection Bureau ("CFPB", which implements the DFA) Rules which now regulates your practice as a real estate or mortgage broker, title or escrow company or officer and even supersedes your authority if you are a Licensure Regulator in one of these areas (state Regulators are not exempt).
Probably the biggest features for the Seller-Carry in 2013 and to come are these: (1) because seller-carries sell property for more money, faster and on more flexible terms, Seller-Carries can bring out new listings—those potential sellers who are "underwater on equity" because they cannot get their price through the conventional mortgage process—nothing appraises and buyers are not qualifying at the higher standards—and also there are many potential sellers who make too much to be eligible for a short sale or do not want to trash their credit with a short sale—to these the higher prices of Seller-Carries "floats" them into equity are a new and competitive marketability; and (2) they are a financing alternative for used homes that makes them more competitive against the financing deals builders can offer on new homes.
ASSUMING this concept has the Reader's attention, it is feasible now to turn to the "Ground Rules" to do these kinds of deals, i.e. to examine the considerations, law, rules and guidelines that go into entering and promoting an owner-carry market and having clients and customers enter an owner-carry deal. This examination is only by way of assuring that one understands what is happening in it so one can better market and better explain the owner-carry systems to clients and customers without bumping into law and licensure bounds. In practice, one typically uses an attorney who has mastered this area to co-walk each deal through. Using an attorney to do the hard or complex part of these is not that expensive (the cost is usually shared as a closing cost by the seller and buyer) and shifts transactional liability to "get it right" to the person on whom it should be—legal counsel.
First General Rule: Escrow and title companies CANNOT draft these documents or the required agent disclosures without either a law license or a real estate broker's license by the actual drafter which none of those processors usually have. They (and the real estate broker) are also barred by law from closing transactions that are in violation of the DFA or otherwise need under their state law the blessing of a Licensed Mortgage Originator ("LMO," see below). If escrow or title companies are preparing these, for the most part they are engaging in the unauthorized practice of law or unlicensed real estate activities, both of which are not just against license law, but are felonies in most states. It goes without saying that getting your clients or customers involved in something like that would be an agency violation for YOU.
Second General Rule: A BROKERAGE BARRING THE USE OF SELLER-CARRIES IS IN VIOLATION OF LAW, LICENSURE, ETHICS AND FIDUCAIRY DUTY. THE CLIENTS AND CUSTOMERS HAVE THE ABSOLUTE RIGHT (AND THE LICNESEE HAS THE DUTY) TO BE INTRODUCED TO ANY LAWFUL MECHANISM TO SELL OR BUY REAL ESTATE. DESPITE THE PROPAGANDA OUT THERE, ABSENT AN EXPRESS EXCLUSION FORM THE BROKER'S INSURANCE POLICY, THESE TRANSACTIONS ARE ALSO COVERED BY MOST ALL MALPRACTICE INSURANCE PROVIDERS.
Some real estate brokerages, franchises and licensees have barred sales licensee, client any customer access to seller-carries. They will not list them, they will not inform the clients of the availability of them and the MLS election to offer them or the ability of buyers to buy using them and will in general engage in "steering" the customer away from a valid method of transaction in real estate that is a general sales right and a valid MLS option. This is (1) an unlawful restraint of trade (2) a breach of licensure duties to obey and inform the client and (3) a breach of the fiduciary duty to fully and completely serve the client, to inform he client of any and all information that is pertinent to selling or buying a property, including methods of sale, purchase and methods of financing; and, (4) a violation of NAR Code of Conduct, i.e. full disclosure and vigorous, informed service to the client. For more: See http://eckleylaw.com/article_fullstory.asp?ID=93. Citizens and licensees should report these individuals or firms to the DRE, the FTC, MLS and to Professional Standards. A client or customer who has been so steered and deprived also has a claim for damages against the broker, brokerage and licensee.
Third General Rule: Seller-carries as both a sale and a financial vehicle work on ALL properties and deals, i.e. residential, commercial, industrial, bare land, business, etc.. They can also be fashioned to fit any method or custom need for both seller and buyer, to fit a deal of any size and any number of properties from one to 1000, to flex with any eventuality and to fit almost any business, investment or tax-objective anywhere in the country. They are probably the only instrument that can generate returns to the seller even on a no-equity interest-rate arbitrage, alone, and which can still provide leverage for the buyer.
Here are those "where gold might be" in listing-hungry markets: the owners/sellers who have equity but cannot compete with the down-driven foreclosure and short-sale market and so have held themselves off the market; those parties who have deals they could or would accept, but fruitlessly are seeking reasonable residential jumbos and commercial loans to facilitate them, but have been frustrated by the access hurdles (too much down, too much invasion for privacy to qualify for the loan, willing to pay but the property won't appraise in the current market enough to get conventional money, complexities in source verifications, self-employed, otherwise unable to squeeze into the "one-size-must-fit-all" financial straitjacket uniformly offered by banks etc.); those parties seeking "business opp" loans, those potential buyers who are wanting to move in or up and who are waiting endlessly for the market to bottom, but who would jump if they had better financing options, including options that delayed price computation or "going hard" on price for a few years; those who have one "credit ding" but are otherwise in great current financial shape, "strategic-defaulters", those whose all-cash history has generated no credit rating or history at all, those parties wanting real estate investment leverage but who cannot get it with high bank-required points and downs; those parties buying cash-on-cash investment return cap rates, but cannot get it with high downs and straight amortizations; lenders wanting to sell salvageable paper they are unable to imagineer (or cannot manage by regulation) into working, all with resulting down-pressure. There's more, but that is enough for examples.
TYPES OF SELLER-FINANCE:
There are three sources for that alternative finance: Seller-carries; a private secondary market for owner-carry paper resale; private, non-conventional lenders. In some cases, the he owner-carry is PRIMARY, meaning directly between seller and buyer; in others it can be "SECOND PARTY" such as owner selling to an investor who then leases (many times with option) or sells back to the buyer on an "owner-carry" or "THIRD PARTY" where the investor simply puts up the money to make a seller-buyer deal work in the same way a bank might or even "FOURTH PARTY" as when the paper generated in FIRST OR SECOND PARTY deals is then sold to a paper-buyer. In some cases it can be as simple as owner selling to buyer as a financier who then agrees to lease back from buyer, sometimes with an option to purchase at some point.
TOOLS FOR SELLER-FINANCE:
There are four approach tools and disposal methods for this and these represent nothing more than a return to what worked in the late '80s, the last time the markets plummeted like this and finance evaporated. Here is the "old/new" tools (1) lease/purchase; (2) lease/option; [note: (1) and (2) are NOT THE SAME THING] (3) all inclusive deed of trust; (4) all inclusive mortgage; (5) installment land agreement or land sale contract. Incidentally, seller-carries are exempt from RESPA! RESPA excludes "an all cash sale, a sale where the individual home seller takes back the mortgage (seller-carry), a rental property transaction or other business purpose transaction."
SELLER-CARRIES UNDER THE 2013 DFA AND CFPB:
There are two new federal laws that affect seller financing.
On July 30, 2008, President Bush signed into law the Secure and Fair Enforcement for Mortgage Licensing Act (the "SAFE" Act). The SAFE Act requires licensing or registration of loan originators. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act or "DFA"). The Dodd-Frank Act ("DFA") restructures the oversight of financial regulation and allo9cates the consumer portion of it to a new agency called the Consumer Financial Protection Bureau ("CFPB"). The DFA also includes amendments to the Truth in Lending Act ("TILA") and RESPA. Both of these laws will affect seller financing, except to the extent exempted.
A larger (but still summary) description of the laws follows. After it also follows a list of the transaction styles and sales it DOES NOT cover (and Congress and the banks using it as a scare tactic neglected to mention).
SUMMARY 1: THE SAFE ACT
This act negatively targets not just owner-carry consumers and their owner-carry loans, but also attacks real estate licensees by "a regulatory shot over the head" which suggests that they might be arrangers of credit requiring not just a real estate license but a mortgage license to go about their normal and historic business. Licensing of "loan originators" under State laws enacted pursuant to the SAFE Act and meeting minimum federal requirements is already required and was clear back to the times of the last attack by Congress and the Courts on private property and transaction rights in 1982, when the Garn Act – dealing with due-on-sale clauses – was passed. Anyone involved in loan originations should check out both their own state law and the federal requirements.
The HUD website (where SAFE is explained) has information about the SAFE Act. Informal HUD guidance noted there exempts anyone who provides financing for the sale of their own residence from licensing under the SAFE Act. HUD has proposed a rule to make its guidance official and until that is resolved (and HUD recommendations are usually followed) it is at least an official substantive policy statement on which the real estate community can usually rely. Some state laws provide more flexibility for seller financing than HUD permits, but how HUD will respond is not known. The National Association of Realtors'® (NAR) February 12, 2010, comments on HUD's proposed rule urges a total exemption for seller financing and alternatives that would still provide much needed flexibility. HUD did not issued the final regulations until the latter part of 2012. When the Consumer Financial Protection Bureau (CFPB) went into effect on July 21, 2011, it was to take over SAFE Act implementation from HUD. It did, but it, too, did not come down with any rules under October, 2012 (the first battery) and then January 10, 2013 (the second battery). These are now out and effective.
SUMMARY 2: DODD-FRANK ACT
Title XIV of the Dodd-Frank Act (the "DFA") imposes rules on mortgage originators to promote responsible, affordable mortgage lending (see exemption in next paragraph). "Qualified Mortgages," ("QM") as defined in Title XIV, are subject to fewer requirements. Title XIV establishes extremely complex requirements, and the implementing regulations are needed to interpret the law and provide additional guidance. Title XIV does not completely take effect until final regulations to be issued by the CFPB go into effect and CFPB did not go into effect until the rules were issued (and the CFPB had until January 21, 2013, to issue the final regulations). On January 10, 2013, the first of CFPB's Rules started to come out. According to the statute, they must take effect no later than 12 months after their issuance. Some by terms of the Rules take effect BEFORE then (including seller-carry rules). As to any of the statute that the CFPB missed making any rules on, Title XIV takes effect anyway as to those on January 21, 2013. In a prior article, this Writer covered the new QM Rules. Go to "Archives" at www.eckleylaw.com to find that comprehensive article.
As noted, the CFPB did issue regulations, commencing January 10, 2013 and it is clear that by the end of 2013, the DFA and CFPB Rules will govern all seller-carries, with few exceptions (see below). There are also rules powerfully limiting what real estate licensees can do to assist a seller-carry deal and all of those are in effect as of February 8, 2013. What this means for all intent and effect and for safety purposes is that these rules are likely in effect NOW. Though the CFPB does not have jurisdiction over real estate licensees in actual drafting, the CFPB has generated the rules that must be followed to avoid Federal CFPB liability for every other settlement vendor in the chain from mortgage licenses to title and escrow. Moreover, a violation of CFPB rules is in all states a violation of state law giving state jurisdiction over the licensee and an automatic violation of real estate licensure rules. Obviously, all clients and customers caused to violate CFPB Rules by their real estate broker will have malpractice recourse against the licensee. So. Big circle of enforcement, same nasty effect in the end.
The CFPB Rules at the very least the NEW STANDARDS OF CARE and will play strongly not only in evaluating the legality of the service the principals were given by the professions, but will also play strongly in the discounted valuation of the resulting debt instruments. Sub-DFA debt of DFA-deficient debt wil likely suffer a deeper discount than DFA-compliant debt, regardless of when it was generated.
In general the New CFPB Rules provide as follows:
THE NEW CFPB RULES FOR SELLER-CARRIES (AS OF FEBRUARY 8, 2013)
New Rule: What is a "Loan Originator?"
The Consumer Financial Protection Bureau (CFPB) released the original rule on January 20, 2013, as part of its implementation of amendments to the Truth in Lending Act (TILA) made by the DFA on July 21, 2010. The rule takes effect on January 10, 2014, except for two important provisions related to loan originator qualifications that take effect on June 1, 2013. 1 See 12 CFR section 1026.36.
Yes, it is true, the two Acts are actually trying to tell private citizens what they can do with their own property and what transactions they can do with their own money without having also to pay the Banks a percentage of the entire deal to handle it for them. It actually tries to prohibit all private transactions and make Bank intervention mandatory. But, as in all law, after the shock subsides of seeing the Feds with their noses so deeply in the private financing and loan affairs of the average citizen and after some good consumer lawyers look at this, there are places where the Acts miss the mark entirely – and apparently unintentionally – and still permit private transactions.
The new Rules provide in general that only licensed "Loan Originators" (usually called a licensed mortgage originator or "LMO") can approve the borrower's credit or approve certain tough buyer terms in most consumer residential seller-carry transactions, otherwise the transaction itself is void and those who facilitated it without being an LMO are in violation (civil and criminal penalties.
The new Final Rule establishing "Loan Originator Compensation Requirements" not only covers the new "loan originator" definitions, but also sets allowable fees. The Rule applies broadly to loan originators, including seller-financers that do not qualify for an exclusion from the definition of "loan originator." One who falls into the definition of a "loan originator" must then comply with strict licensure requirements and underwriting duties.
After making the general statements, above, there are some exceptions and qualifications.
A Broad Definition:
The definition of a "loan originator" is now very broad. It covers anyone who, for compensation, performs any activities related to the origination of mortgage loans, including (but not limited to): taking an application or offering, arranging, or assisting a consumer in obtaining or applying for credit.
TILA, as amended, and CFPB's implementing regulations exclude from the definition of loan originator some sellers who provide seller financing, but only if they meet narrowly-defined exclusions (below). Because the requirements are extremely complex, unless seller financers qualify for exclusion, they will as a practical matter have to use another approach for financing the sale of the property, including engaging a licensed loan originator ("LMO") without risking penalties for performing loan origination activities themselves. This is similar to the situation under the SAFE Act's loan originator licensing requirements where, unless one is exempt from licensing under the state law enacted to implement the SAFE Act, it is not usually practicable to provide seller financing directly.
Two Seller-Carry Exclusion Categories:
In response to NAR and many other commentators, CFPB provided some flexibility in the new Final Rule by excluding from the definition of "loan originator" two categories of seller financing: (1) those sellers who sell 3 or fewer properties in any 12-month period and (2) those sellers who sell only one in any 12-month period, and in both cases meet other criteria. If a seller sells one property using the less restrictive exclusion rules then one is unable to sell another within 12 months of the first sale, as the first sale would not qualify for the more astringent standards of the "more-than-one-sale-every 12 months" exclusion. Thus, if the seller sells under exclusion 1, above, the single-sale exclusion, then seeks to sell a second property, the safest course would be to wait for the expiration of 12 months after consummation of the first sale before selling the second property. The only other option for the seller if there was any doubt which exclusion to use would be to routinely qualify under the 3-sale exclusion, since in that case the second sale and even third sale is always permissible inside the 12 months. Though the CFPB made minor changes to the statute, such as the one property exclusion noted above and not requiring proof of documentation of a borrower's ability to repay, the Bureau determined to not eliminate the criteria in the seller financing exclusion as defined in the Dodd-Frank Act. Accordingly, credit verifications and ability-to-pay evaluations should continue to be made.
Seller Financers—3-Property Exclusion
This exclusion applies to "persons" as defined broadly under TILA to include not only "natural" persons but also a wide range of organizations such as corporations, partnerships, proprietorships, estates, and trusts. To be excluded from the definition of loan originator using the 3-property exclusion, one must meet all of the following criteria:
A. The seller provides financing for the sale of 3 or fewer properties in any 12-month period. Each property must be owned by the seller and serve as security for the financing.
B. The seller has not constructed, or acted as construction contractor for, a residence on the property in the ordinary course of business of the seller.
C. The seller provides seller financing that meets the following requirements:
- The financing is fully amortizing (no balloon mortgages or negative amortization).
- The seller determines in good faith that the consumer (buyer) has a reasonable ability to repay. The regulation does not require documentation of the determination, which significantly eases the regulatory burden, though CFPB points out it may be a good idea in the case questions arise whether the seller made the determination. CFPB's Official Interpretations of the regulation provide guidance on how a seller could make the determination that the buyer has a reasonable ability to repay. This could include considering earnings as evidenced by payroll or earning statements, W-2s, etc.; other income from a federal, state, or local agency providing benefits and entitlements; and/or income earned from assets (such as financial assets or rental property). The value of the dwelling may not be considered as evidence of the buyer's ability to repay. The seller may rely on copies of tax returns.
- The financing has a fixed interest rate or an adjustable interest rate that is adjustable after 5 or more years. If it has an adjustable rate, it must have reasonable annual and lifetime limits on rate increases and provide for the rate to be determined by the addition of a margin to an index rate based on a widely available index such as indices for U.S. Treasury securities or LIBOR. CFPB's Official Interpretations note that an annual rate increase of up to 2 percentage points is reasonable. A lifetime cap of 6 percentage points, subject to a minimum floor and maximum ceiling up to any applicable usury limit, is reasonable. These "safe harbors" are not mandatory, but sellers would be wise to adopt them.
Obviously, the other option is to engage an LMO to qualify the transaction. The LMO review is the "safe harbor."
Note: If the seller is considered a creditor under TILA because the seller makes 2 or 3 high cost loans under the Homeownership and Equity Protection Act (HOEPA), the seller is automatically considered to be a "loan originator" for purposes of the loan originator qualification requirements in 12 CFR section 1026.36(f) and (g) and any other rules applicable to creditors under TILA. This is true even if one is exempt from the definition of loan originator under the 3-property exclusion. Check with an expert to avoid providing seller financing subject to HOEPA, which imposes many more limits and requirements.
Seller Financing—1-Property Exclusion
This more flexible exception applies only to a more narrow definition of "persons" (only natural persons, estates, and trusts) that sell only 1 property in a 12-month period. The exclusion is not available to other organizations, such as corporations, partnerships, or proprietorships. To be exempt from the definition of loan originator using the 1-property exclusion, one must meet the following criteria:
A. The seller provides financing for the sale of only one property in any 12-month period. The property must be owned by the seller and serve as security for the financing.
B. The seller has not constructed, or acted as construction contractor for, a residence on the property in the ordinary course of business of the seller. (This is the same requirement as applies for the 3-property exclusion.)
C. The seller provides seller financing that meets the following requirements:
- The financing has a repayment schedule that does not result in negative amortization. A balloon mortgage is permitted. (NAR sought relief from the prohibition against balloon mortgages.)
- The financing has a fixed interest rate or an adjustable interest rate. If it has an adjustable rate, it must have reasonable annual and lifetime limits on rate increases and provide for the rate to be determined by the addition of a margin to an index rate based on a widely available index such as indices for US. Treasury securities or LIBOR. CFPB's Official Interpretations note that an annual rate increase of up to 2 percentage points is reasonable. A lifetime cap of 6 percentage points, subject to a minimum floor and maximum ceiling up to any applicable usury limit, is reasonable. (This is the same requirement as applies for the 3-property exclusion.)
Other Requirements Apply Even if One is Not Classified as a "Loan Originator":
Even if the seller is excluded from the definition of loan originator, the seller are only exempt from the loan originator requirements of the regulation. An exempt person would still be subject to the rule prohibiting anyone from paying a loan originator compensation based on the terms of the transaction (e.g., higher payments for loans with higher interest rates). This would occur if a seller financer engages a loan originator to assist with setting up the financing for the seller financing. In addition, the limits on mandatory arbitration would also apply, i.e. the contract or other agreement for any credit transaction, including any seller financing, may not require arbitration or other non-judicial procedures to resolve disputes. After a dispute arises, however, the parties may agree to use arbitration or other non-judicial procedure.
Exclusion of Professional Real Estate Activities from Loan Originator Compensation Rule
The new Final Rule establishing Loan Originator Compensation Requirements applies broadly to loan originators, excluding licensed persons engaged solely in real estate brokerage activities. Loan origination for a fee is not one of those activities. The Consumer Financial Protection Bureau (CFPB) released the rule on January 20, 2013, as part of its implementation of amendments to the Truth in Lending Act (TILA) made by the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted on July 21, 2010. The rule takes effect on January 10, 2014. See 12 CFR section 1026.36. As has been noted, above, though, this exclusion for real estate brokers is meaningless when a violation of it will nonetheless lead to licensure and civil liability.
As noted, above, the definition of "loan originator" is broad and imposes many requirements on anyone covered by the rule. The test is not only by the confines of one's licensure in other areas than mortgage brokering. The test also includes the acts that are done, irrespectively of what the parties may call it. Accordingly, the definition includes anyone who, for compensation, performs any activities related to the origination of mortgage loans, including: taking an application; assisting a consumer in obtaining or applying to obtain a loan; offering or negotiating terms of a loan; or advertising any of these services. The real estate activities exclusion applies to licensed persons performing only real estate brokerage activities, unless compensated by a creditor or loan originator for a particular consumer credit transaction covered by the rule. Providing clients with uncompensated general information about mortgages or lists of reputable lenders does not appear to bring a broker/agent under the definition of loan originator.
The CFPB has provided guidance clarifying that compensation paid by a creditor or loan originator to a real estate broker/agent does not transform a real estate brokerage activity into a loan originator activity.
The CFPB explains:
- A person paid solely for real estate brokerage activities by a loan originator or creditor is not covered by the definition of loan originator.
- When a real estate broker/agent sells a property owned by a creditor (such as an REO), the commission does not turn the real estate brokerage activity into a loan originator activity.
- Even if State law provides that loan origination activities are eligible real estate brokerage activities, the real estate broker/agent is nevertheless considered to be a loan originator under the final rule if engaged in loan originator activities as defined under the final rule—federal law superseding state law.
- A broker/agent is a loan originator when paid for performing creditor, mortgage broker, or consumer credit referral activities.
- If a broker affiliated with a creditor pays an agent for origination activities, such as for taking the consumer's credit application and performing other functions related to origination of the loan, the agent is a loan originator.
But care is needed. CFPB also notes:
Assuming these SAFE and DFA rules might be or remain in effect, there are properties and deals they do not prohibit as written. Those are, collectively:
BY PROPERTY TYPE:
- Single sale of a seller's primary residence to another (HUD exclusion under SAFE and DFA)
- A residential property to a family member (HUD exclusion under SAFE
- A residential property to someone who will use it as a rental or vacation home (SAFE/HUD exclusion and appears to be a DFA exclusion, i.e. the "character" of the transaction is not just how the seller uses the property but also how the buyer uses it—applies only to buyers who are "consumers," not to investors-buyers doing a commercial transaction.)
- A non-residential property, meaning a residential property not lived in by the seller and/or sold for rental or investment, bare land, a commercial property of any kind, business, commercial rental, office, industrial, farm, etc. (excluded both under SAFE/HUD and DFA)
BY TRANSACTION TYPE, REGARDLESS OF PROPERTY TYPE:
- The rules cover only transactions which qualify as "installment sales" and the act speaks only of trust deeds, mortgages and sale contracts, contracts for deeds and leases under $25,000, but does not list any the more modern alternate quasi-financing instruments such as real property leases or options of more than $25,000. (not covered in SAFE/HUD or DFA except for consumer leases under $25,000).
- The rules do not apply when the transaction is not one with a "consumer buyer" or is not otherwise a "consumer transaction." Transactions between seller-buyer business entities as a business transaction (like commercial transactions, transactions between artificial business entities such as corporations, LLCs, etc., where the property at least in the hands of the buyer is "non-consumer") do not qualify as a "consumer" or a "consumer transaction" under the TILA, Regulation Z and Regulation M and thus appear to be excluded under both Acts, which are recited according to their terms as being designed to protect buyers who qualify as "consumers" in transactions that qualify as a "consumer transactions." These, of course, cannot be shams.
- Covered transactions must be where the buyer or borrower acting in the transaction is legally defined as acting to effect "a purchase for the personal, family or household use of the buyer or borrower" under the TILA and other federal protective regulations. For example, the sale of a single family detached home between an LLC seller-investor and an LLC buyer-investor is not clearly a "consumer transaction" between "consumers".
- Assumptions of underlying conventional loans are not covered by either Act.
- Sales and loans that pre-date the effective dates are not covered by the Acts, (though current refinances or resales of those might be)
- Use of any possession-transferring instrument that does not confer a title equity and affect back a security interest in a title equity of the transferee is exempt as not been a mortgage-loan-like instrument (such as a free-standing lease with a free-standing all-cash-at-exercise option that confers no equity except when exercised and when exercised, must be exercised for full payoff and results in a free and clear transfer between transferor and transferee without an remaining financing between them).
- Private use of licensed private mortgage broker: One safe harbor for those who want a general "safe pass" in the deal that meets both SAFE and DFA rules or for those who are bumping directly into the SAFE/DFA regulations or for those who have used up their "3 transactional freebies," is associating a "licensed mortgage originator" ("LMO") – this seems to bless the deal entirely.
- The Rules also not appear to affect leases or lease-options when the owner retains title and there is no actual "equity"—these instruments are not common "security interests" and thus do not appear within the DFA's definition of "security interests" which recites more pedestrian instruments such mortgages, trust deeds and land sale contracts. This is an enormous "gap" for the use of creative leases and especially when leases can be exempt from due-on-sale restrictions, where applicable. See Writer's article on due-on-sale clauses at www.eckleylaw.com under "Articles."
See more on the NAR® Website: http://www.realtor.org/government_affairs/seller_financing
California adopted a state version of most of the DFA (particularly the insurance and securities portions) by SB 1216, signed into law October 2, 2012. Arizona has adopted the mortgage licensing portions in 2010-2011. It does not matter whether the state adopts the DFA and CFPB in any event, since the DFA/CFPB are federal law and thus pre-empt state law, in any event.
ABILITY-TO-PAY DUE DILIGENCE:
As was noted above, for either conventional, VA and GSE loans or for qualifying under seller-carries where the rules require an LMO, the borrowers "ability to pay" is a significant part of the required loan or transactional due-diligence. The borrower qualification in underwriting for seller carries is as noted above LESS than for the traditional third-party mortgage lending. Here is the what is required for third-party lending (less documentation and verification for seller-carries).
For traditional third-party mortgage loans:
- These rules will take effect January 10, 2014:
- The rules require mortgage lenders to verify a borrower's "ability to repay" a mortgage with substantive documentation. Lenders must consider and confirm the following eight factors in assessing the borrower's ability to repay:
- LMO/LMB FEES: There are fee limits which probably so apply to LMO or LMB charges in either scenario, traditional loans or seller-carries (though it is doubtful that seller-carries should bear these kind of fees, since no money is being generated and the LMO due-diligence and liability is substantially less). The rules limit any points and fees to 3 percent of the loan amount, and limit the borrower's mortgage payments to 43% of the borrower's income. These rules may restrict mortgage lending and therefore make home ownership more difficult on third-party loans, making the arguments for seller-carried ones all the stronger.
- DOWN PAYMENTS: The debate in Washington is continuing as to the amount of federally required minimum down payments. Other regulators (including the Federal Reserve, FDIC, HUD, and FHFA) may issue rules later this year establishing minimum requirements for down payments on traditional third-party home mortgages. Proposed down payment requirements have ranged from as low as 5% to as high as 20%.. Seller-carries have no such minimums.
> (1) Current income or assets;
> (2) Current employment status;
> (3) Credit history;
> (4) The monthly payment for the mortgage;
> (5) The monthly payments on any other loans associated with the property;
> (6) The monthly payment for other mortgage-related obligations (e.g., property taxes);
> (7) Other debt obligations; and
> (8) The monthly debt-to-income ratio the borrower will have.
THE WINDUP—THE ANSWER FOR AVOIDANCE OF THIS OBSTACLE IS IN IDENTIFYING THE SAFE HARBORS AND MOORING THE DEAL IN THEM!
IN OPERATION: Most owner-financed residential sales with qualify under the "1-sale per year" rule, above, and will be easy to write up with almost no restrictions. The brokers should, however, develop a form in which the seller qualifies himself as a "1-timer" or more, since this status and intent has to be verified or else, if the seller in a "1-time" deal sells later that year or has already sold (and not disclosed that he or she did) in the last year prior to this sale, either this sale, the last sale or next will disqualify and severe sanctions could apply, even retroactively, to all sales, including this one. The broker should ask a good attorney to accompany the deal write-up on his or her first trip into this regulatory forest. It's only hard the first time.
IN SUBSTANCE: In sum, licensees and parties should craft the transaction to fit the property types or transaction types that are excluded, use the financing methods that are other than specifically identified as the targeted "installment sales", and use the transaction party-types (artificial parties) that are not qualified as "consumers" engaged in "consumer loans or transactions" – any one of which escapes the worst of SAFE/DFA. If the present status does not fit in one of those categories, then consider changing the pre-closing status to fit one or all of the exclusions. For example: The home may be a regulated personal residence to the seller but sold as a non-regulated investment property to the buyer; the transaction might currently call for a regulated AIDT, but it can be converted into a non-regulated lease-option bearing all of the same economics and tax affects with artful drafting. With these ruby slippers, then, Dorothy can still get back to Kansas. Just not on a bicycle or a balloon.
BUT THERE IS AN EVEN BETTER PLAN IF THE SAFE ACT AND DFA CANNOT BE AVOIDED: Simply contract a Licensed Mortgage Originator (an "LMO") to bless the non-conforming deal! THIS UPSHOT OF THESE LAWS IS NOT THAT DEALS NOT BLESSED BY THEM ARE UNLAWFUL. IT IS ONLY THAT DEALS THAT DO NOT FIT THEIR EXCLUSIONS MUST BE FINALIZED BY A LMO. LMOs can be engaged for reasonable, small set fee that just feel like "points" in a conventional deal and then the otherwise SAFE/DFA non-conforming deal can go forth!
Market Point: It is apparent by recent trends that the use of lease-options for private consumer transactional finance has now become the "medium of the moment" among the various owner-carry methods for residential property. Reason: It just might be the ONLY medium left for residential finance during slim times (though it has always been great for all times and forums, including commercial)
Yes, it's all changed in the residential real estate business. As the Economists in the business news are now fond of saying: "We have entered the 'New Normal' and it's not going back." All the rules have changed and the old ones have been repealed so they are as about as "legally dead" as gone can get.
In the 10-year analyses, people will own smaller homes costing less which are secured by a smaller mortgage, leaving more equity. And a larger group than what has historically been the case will be permanent or longer-term tenants, many with no interest in buying whatsoever (let alone the capacity to do so).
In the shorter term "today" analyses, the "bottomed-out market" has reversed course in some regions a little and in others a lot. But one must exercise caution not to take the current market surge too seriously as a longer-term trend, as it is not. It still has yet to reach the true middle class and has definitely not percolated up to the jumbo class nor will it at any time, soon. But as the lower third of the used home market tops out by butting into the ability of the builders to build for the same price (when the smart investor money stops), the middle third—where the largest population of potential sellers are now—hasn't enough (or even any) equity under current appraisal standards to sell. So it sits at the sidelines waiting for a valuation rise which cannot come when there are no comps to raise it unless it starts moving. If it waits long enough, the resale rescue boat will be missed completely, as in 2014 the more onerous new mortgage underwriting rules kick in, as also will the higher interest rates the Fed is predicting.
The time to make a sale move for the middle class and middle class home is NOW and the ONLY way to do that is with SELLER-CARRIES and the great terms and creativity they offer that that will increase sale prices ("terms make price") and which do not rely on FICOs and appraisals. Free of these negatives in the marketplace, this will encourage sellers to list and buyers to buy. The smart players who learn and know Seller-Carries will get there first and make the most money. The slow or resistant ones will be changing careers to enter the janitorial arts.
Will it take time to learn and master the New Normal? It better! Steep grades to success make sure all of the weak and ignorant fall by the wayside so the strong and the educated can make all of the money and get all the glory at the top of the hill.
Seller-Carries. LEARN THEM! USE THEM! Then pick out the colors for your new Bentley.
LET US TAKE YOU THROUGH YOUR FIRST SELLER-CARRY DEAL!
There's no way to get around it! It's easier to get back once you have been there and it's easier to get there when you go there the first time with the experts! For a flat fee, you can get the assistance of experts with brokerage and legal backgrounds to walk you through:
- Obtaining the listing
- Analyzing Property and Price
- Doing the "Wrap" Where Applicable
- Seller and Buyer Counseling
- Writing Up s Solid Legal Offer
- Writing Up Solid Legal Acceptances
- Qualifying the Parties
- Walking the Deal Through
- Use of an LMO if Your Deal Needs It
- Forms and the Use of Forms
- Drafting the Contract and Closing
- Post-Deal Follows-Ups
- One=-Stop DFA/CFPB, TILA and RESPA Compliance
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