Using a licensed MLO to originate seller financing loans
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
I'd like input and experience on using a licensed MLO to originate loans on my seller finance deals to owner occupant consumers in CA. Does using a licensed MLO to take the application really keep me in compliance with the regs? Who are these MLOs that will do such originations for a fee?
Pat, you're treading on violations on many fronts with side deals done in the time frame of a RE transaction, there is no sneaky way around it that won't or can't get you in trouble.
Best way to find a RMLO is to call the state finance department about a list of regulated lenders. You also need to ask about the origination by RE brokers in CA as you have some exemptions. I also suggest you find a mortgage servicer and assign the servicing the minute it's made.
An attorney can originate the loan, if you can find one who will, they will need to follow prudent lending practices as well and do the processing. :)
The easy way is forget about the $10K and closed the deal. I am sure you will still make a profit.
Joe Gore
Joe Gore
You got the floor carry on.
Joe Gore
Any chance you could 'sell' them something like the appliances, cost of renovations etc etc for $10k, & just hold a promissory note. Failure to pay would result in a lien that is then attached to the property.
We did something similar with some agriculture equipment & the new pole barn that was paid of in 5 yrs @ 12%. We just did another 12% on a newer truck & trailer he owned free & clear. We just added the $10,500 (he need for renovations) as a lien on the truck/trailer. (Although its a depreciating asset he is a good investor friend that has always paid us).
Just throwing it out there.....
Pat, you're treading on violations on many fronts with side deals done in the time frame of a RE transaction, there is no sneaky way around it that won't or can't get you in trouble.
Best way to find a RMLO is to call the state finance department about a list of regulated lenders. You also need to ask about the origination by RE brokers in CA as you have some exemptions. I also suggest you find a mortgage servicer and assign the servicing the minute it's made.
An attorney can originate the loan, if you can find one who will, they will need to follow prudent lending practices as well and do the processing. :)
Guess I wasn't clear. My question isn't how to get the $10K from the buyers. I was using deal in front of me to explore how to legally use a LMLO to originate a seller finance loan. People on message boards and note blogs keep saying using an LMLO to originate their loan makes seller financing compliant with the Safe Act, DF and their state laws. But then no one can say they've done it or how it's done.
@Bill Gulley Not sure why you would suggest an attorney for origination. To be compliant, the loans must be originated by LMLOs. Neither the federal laws or CA laws give attorneys automatic LMLO status. I don't know any attorneys that are LMLOs, though I'm sure they are out there. To be a LMLO you have to be a licensed mortgage broker or an RE agent/broker with a special MLO endorsement. They have to comply with all the regs regarding consumer loans and be specially licensed to show that they supposedly know how to do so. Being an attorney wouldn't cut it here in CA. Do you know if attorneys in MO are considered LMLOs?
I'm looking for real life experience from seller financers and/or mortgage brokers about how to be compliant.
@Rick H. @Ellis San Jose Any suggestions about who to approach to originate my seller finance loans to consumers?
Actually, Attorneys are exempt from the license but must follow the same process, at the federal level and probably at the state level too, many attorneys could probably do brain surgery in many states if they wanted to, there are different rules as they have the leeway to represent their client. But, in the land of Cali, they may not, but I was under the impression RE brokers could originate, I'd think if they could an attorney could. Might check.
There isn't a RMLO on this site that has more real life seller financed or secondary market origination experience than I do, pretty sure of it and being familiar with the issues at hand. If you need state specific, you really need to ask there. :)
Yea, the idea is getting a little crazy. The application is not the same in every state and some of the guru crap is completely ignoring the variety of state licensing that is out there. Some states have a license for the person and require that person to work under the license of a company. Some states do not. So simply getting a licensee to negotiate the loan may not always be compliant if they do not conduct the work properly under the licensed company.
In California:
As a salesperson, once your employment with a properly licensed MLO real estate broker is terminated, your MLO status will be changed from active to inactive and you will have to obtain a MLO license from the DBO in order to continue to work for a CRMLA or CFLL company. For currently licensed real estate brokers, holding an ACTIVE CalBRE MLO license endorsement means that (1) you hold an active MLO license endorsement as a sole proprietor or (2) you are employed as a broker associate by a properly licensed real estate broker which holds an active MLO license endorsement as a sole proprietor, or by a licensed real estate corporation which holds an active MLO license endorsement. As a broker associate, once your employment with a properly licensed MLO real estate broker is terminated, your MLO status will be changed from active to inactive and you will have to obtain a MLO license from the DBO in order to continue to work for a CRMLA or CFLL company.
The next idea to explore deals with whether the Seller is acting as a lender. Running out and getting a licensed MLO to work with your team, if you are in the business of selling homes with seller carry backs will be more like acting as a lender and you the Seller would need to get properly licensed, an MLO will not be sufficient.
B & P Section 10131.1 (b) 1 (C) states that a CalBRE broker license is required when making (funding) eight or more residential property mortgage loans for one to four units from one’s own funds in a year.
If a seller carry-back note is an extension of credit that is arranged by a licensee who is completing the terms of a sale of a property and the activity does not include compensation for residential mortgage loan activity, then a Mortgage Loan Originator License Endorsement will not be required. If the activities include taking an application and negotiating the terms of a residential mortgage loan, and the licensee is compensated for the mortgage loan activity, then a Mortgage Loan Originator License Endorsement will be required.
Also, if you lend your own money, where the only compensation or gain is limited to the interested received on the loan and no fees are charged to a potential borrower then license is not required. The license is required to charge a borrower a fee for the origination.
In California an origination NOT made through a licensee is limited to 10% interest.
So, if you have done less than 8 of these types of deals through the year, you should be safe. One caveat to that idea, is I do not believe the transactions are limited to one state. So if you did 5 in Texas, then you only have 3 left in the eyes of California, as I understand it.
Hope that helps.
Attorneys are not exempt from licensure if they can be deemed "in the business". An attorney, through the normal course of working with their clients can orginate as a function of protecting their clients interests. If the attorney turns to the public with this service and seeks compensation or gain for the act of originating a loan, then they too must obtain a license. That is the case for most states that I know of.
Yes, that's correct, if they aren't in the business, receiving a significant amount of income from such operations, I did assume most were not and acting in the practice of law. :)
I'm curious what attorney would be willing to originate a consumer loan at this point, with or without compensation or gain, with or without a MLO license. It's one thing to protect a client's interest when negotiatingh and originating a seller carryback. It's quite another to take an application, analyze income, credit info, debt ratios and provide the consumer with the 100+ disclosures now required by the regs. The LMLO needs to create a compliant and complete loan file. I know several mortgage lenders and brokers who will no longer lend to consumers since the Safe Act. What attorney would take on originating in this environment?
Even if you do navigate around the MLO requirements you end up with a crappy loan because of the restrictions:
this according to SELLER FINANCING IS ABOUT TO GET UGLY ON JANUARY 10
If a seller carry-back note is an extension of credit that is arranged by a licensee who is completing the terms of a sale of a property and the activity does not include compensation for residential mortgage loan activity, then a Mortgage Loan Originator License Endorsement will not be required. If the activities include taking an application and negotiating the terms of a residential mortgage loan, and the licensee is compensated for the mortgage loan activity, then a Mortgage Loan Originator License Endorsement will be required.
I've read this same info at the CA DRE site several times over the past few years. So if my listing agent or the buyer's agent "arranges" the seller carryback, but isn't compensated for the loan activity, they don't need the MLO endorsement. But if the agent takes an application and negotiates terms and then receives compensation for the loan, they do need to be a LMLO. What's the difference between "arrange" and taking the application and negotiating? Is it just the compensation part that triggers the need for the MLO endorsement?
I don't think it is all that big of a deal really.
I think the core issue or barrier to this going the way that some of the guru's describe is that the SELLER actually acts as a LENDER. That is the key, IMO. If you are acting as a Lender, you will need a license that allows you to lend. Being a licensed LENDER is not the same as being a licensed MLO. The acronym for MLO get's throw around in many cases incorrectly for that.
For instance, I have been a licensed Florida mortgage broker for many years, however I can not lend, my company has to obtain a Lender License from the state, then have to put my license under it and then I can lend. Technically, I (the natural person) am not the lender, the company is. My broker license allows me to collect a fee for service, the service being negotiating the loan between the two parties which includes taking application.
While state and federal rules do require some specific paperwork, there is not really too much new stuff. More revisions than anything and that is not really anything new for the industry. Regulation Z has always been around and is not going anywhere. It was just updated, but it just calls for brokers to do a better job at their job. Something, IMO, that was needed as the integrity of the disclosures required under the rule was diminished. We all heard stories that the GFE didn't match the HUD. There was always a rule around the variance allowance and when an updated GFE had to be issued. Now the regulators have some teeth and the rule is a little clearer on when and how much calls for redisclosure and what needs to be considered in disclosure.
I know many are all up at arms about all of this but I still simply think it is not too far from what use to be with a little twist. 10 years ago, many were concerned about similar ramifications with "mortgage processors" and whether some states required license for what was usually considered an administrative task. Now, most states actually do require them to hold license. We use to have policies that prevent our processors from speaking to a potential borrower so there was no crossing the line of negotiating terms with the client as our state did not require license back then. For instance, now California also requires license for processors and underwriters regardless of borrower interaction or the lack of term negotiations.
I would also conclude that those moving away from activities that require license, is they simply don't want to go get licensed properly. I don't think there is more risk. If I am a licensed MLO working for a Mortgage Broker Business, a broker house not a lender, not too much changes in the world. A MBB only acts as intermediary between lender and borrower. The lender lends the money making the loan, not the MBB. So the fee paid is for the action of taking application and negotiating terms. MBB is not a universally used term in all states but I think it speaks to the concept and helps bring an understanding of what I am contrasting. In most cases, people just like to complain I suppose.
this according to SELLER FINANCING IS ABOUT TO GET UGLY ON JANUARY 10
To be honest, my note needs are modest. I just want to use seller financing to facilitate sales and create note income. I don't need points or fees. I don't need balloons. I don't need adjustable rates. It's all the other stuff that has me concerned.
What about seller carryback 2nds on SFHs to consumers? Even if there are no points and fees, and no LMLO is required, will the seller really have to analyze income and debt ratios? Can they make it a 36 month loan, or is the minimum term 5 years in order to comply with the fixed rate requirement? Gah.
In a purchase money second the lender making the first mortgage must be informed of the amount, terms and duration as well as the payment as THEY qualify the borrower with the second mortgage being involved. I'd say you can rely on that determination as to being qualified on these exempt transactions. If a borrower doesn't qualify under secondary guidelines you may have a problem, if they do, the borrower has already been held to a higher standard than required under the SAFE Act. :)
@Account Closed
I don't know if I agree with the position of that article. I think to some extent it is crying pretty loud the sky is falling and it is not.
The QM rule points out 8 concepts as a minimal consideration for a QM loan:
The rule does not disallow un-Qualified Mortgages, it provides for a standard to presume the criteria was considered to some level of detail that the borrower can repay. You know, prudent lending practices.
The rule recognizes that UQM loans will be made and it made a point to talk about those loans. Even so far as to carve out some additional characteristics around loans which are not considered QM loans but are prudently underwritten. For instance, a balloon note mortgage can still be made and even expects them to be made where creditor areas with little credit service can do business, like remote rural areas. "Creditors are only eligible to make rural balloon-payment qualified mortgages if they originate at least 50 percent of their first-lien mortgages in counties that are rural or underserved, have less than $2 billion in assets, and (along with their affiliates) originate no more than 500 first-lien mortgages per year."
They adopted an additional stance:
"...category of qualified mortgages for certain loans originated and held in portfolio for at least three years (subject to certain limited exceptions) by small creditors, even if they do not operate predominantly in rural or underserved areas. The loans must meet the general restrictions on qualified mortgages with regard to loan features and points and fees, and creditors must evaluate consumers’ debt-to-income ratio or residual income. However, the loans are not subject to a specific debt-to-income ratio as they would be under the general qualified mortgage definition."
The rule expands what use to be governance over "High Priced Loans" or "Section 32" loans. The main thing the common public seems to be missing is Hard Money loans or Private Money loan would be exempt. So a loan to an investor on a rehab is exempt from QM. The key difference is the rule protects the "owner occupied" home.
To some extent I believe we need to put some of the ideas in check in regard to sub-prime lending practices. I think that is what the rule will do. The concepts are in opposite to each other and I have always found it a little funny. The people with the worst borrower attributes have to pay the most so they can continue to be the least likely to pay the loan back. Should we be making 10% loans to folks with 450 credit, a job at McDonalds for 20 hours a week? (No) So, then does the rule really remove the base of potential client/borrowers? No, I don't think so. I think it helps put a circle around those folks and says you can lend to them, but you have to make sure they can pay the loan back. That goes for institutional lenders and private folks. Stop making loans to people who can't afford them.
In short, to address K. Marie's question. You, as the maker of the loan should take steps to ensure the borrower can pay you back. I would say look at it more like a guide rather than a burden.
this according to SELLER FINANCING IS ABOUT TO GET UGLY ON JANUARY 10
To be honest, my note needs are modest. I just want to use seller financing to facilitate sales and create note income. I don't need points or fees. I don't need balloons. I don't need adjustable rates. It's all the other stuff that has me concerned.
What about seller carryback 2nds on SFHs to consumers? Even if there are no points and fees, and no LMLO is required, will the seller really have to analyze income and debt ratios? Can they make it a 36 month loan, or is the minimum term 5 years in order to comply with the fixed rate requirement? Gah.
I stay away from consumer loans so SAFE/Dodd-Frank/et al doesn't matter much to me, and I haven't paid much attention. When it comes to seller financing, the way I look at it is that it all comes down to buyers ability to pay. I haven't done seller financing but it seems to me if the buyer isn't getting a conventional loan it's probably because they don't have the ability to pay, and when the seller financing goes sideways borrower can easily cry that they never had the ability to pay.
Honestly @Dion DePaoli , I've ready your posts in this thread and I can't follow them.
One thing I will comment on is your statement "I would also conclude that those moving away from activities that require license, is they simply don't want to go get licensed properly." I think it's more that they can't afford the cost of compliance, and simply don't need the hassle. Lending laws are already ill defined and it's only getting worse. I like what @Bill Gulley said in another thread, something like if it's not a pure commercial loan, you are probably violation some law.
One thing I will comment on is your statement "I would also conclude that those moving away from activities that require license, is they simply don't want to go get licensed properly." I think it's more that they can't afford the cost of compliance, and simply don't need the hassle. Lending laws are already ill defined and it's only getting worse. I like what @Bill Gulley said in another thread, something like if it's not a pure commercial loan, you are probably violation some law.
Please don't take that as commercial lending being easier without compliance concerns, you can still get hung there too! :)
I didn't take it that way. I took it as commercial lending laws aren't as ambiguous therefore easier. Compliance isn't an issue in my mind. It's the difficulty in interpreting the laws that bothers me.
I didn't take it that way. I took it as commercial lending laws aren't as ambiguous therefore easier. Compliance isn't an issue in my mind. It's the difficulty in interpreting the laws that bothers me.
LOL, Okay, well, that's for another thread, many issues are as clear as mud. :)
I recommend that you ask this question over at brokeroutpost.com. Real practicing mortgage originators hang out there, whereas they simply do not hang out on BP. (I can't think of a single one. Mortgage originators must not like to invest in real estate, LOL.)