The two biggest gripes I hear from note investors is lack of proper documentation and lack of compliance. We previously discussed the importance of all your documents being in order. This ensures that your note has value to prospective buyers, yet, there is another component we cannot overlook- Seller Financing Compliance!
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You’re probably thinking this post is going to be about the SAFE Act. It’s the most debated piece of legislation we’ve seen in real estate in some time. However, there is law from 1974 that all note originators need to be aware of. This post focuses on the Real Estate Settlement Practices Act or RESPA. RESPA was enacted in 1974 as a means of proper disclosure to the consumer. It also eliminates kickbacks in real estate financing transactions. RESPA compliance alone, can determine the enforceability of your note. Here are a few key items you must always put in place:
HUD Information Booklet: HUD put together a small booklet for consumers in an effort to provide education and disclosure about all things related to purchasing with financing. If you are originating seller financed notes I suggest ordering these booklets for your buyers. www.hud.com/booklet.pdf
HUD Settlement Statement: All real estate transactions require a HUD-1 Settlement Statement. It’s an easy to follow overview document identifying all the costs associated with the transaction. It also details how much money is required from the borrower and their starting balance. A HUD-1 template can be downloaded at: www.hud.gov/offices/adm/hudclips/forms/files/1.pdf
Mortgage Servicing Disclosure Statement: This document notifies the borrower of your intention to service the loan or transfer the servicing to another party. In addition, it points out if there is a likelihood the note servicer could change over the life of their loan.
Good Faith Estimate: Along the lines of the HUD-1, but specific to the fees associated with the settlement statement, this estimate gives the borrower an understanding of how their fees break down.
Escrow Account Disclosures: If you are collecting escrow for taxes and insurance and potential association fees, you will have to provide a yearly escrow account analysis to the borrower. There are several servicing software packages out there that can assist you. This form must be sent to the borrower to ensure their funds are distributed as required.
These five items will put you, your note, and your borrower in RESPA compliance. I have interviewed attorneys who have horror stories from investors who are not in RESPA compliance and then find out their note is no longer enforceable if they have to go to court and the borrower uses the RESPA argument.
Compliance is not always the most fun for investors, but when you are in compliance and have solid documentation to back your note. Compliance also strengthens the value of your notes portfolio.
Have a RESPA story to share? Have you seen this law enforced on a note you or someone you know owns? I appreciate your feedback and comments.
Photo: Ctd 2005