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. :)
I know how to qualify the borrower for my purposes, so have no worries on that. There is certain to be specific case law in the future about qualifying borrowers in compliance with the new regs. I do not want to be a jr. lender standing in front of a judge with a defense that says that I relied on the senior lender's loan app and qualifying procedures as my qualifying and documentation process.
This is a great thread! We have been worried for several years that smaller operators were just ignoring or hiding from the changes that are already in place and the ones that are coming and it is apparent that a number of you are actually paying attention.
On the issue of MLOs and Attorneys originating these loans...
We used to recommend this, provided the MLO or the attorney was using the correct system to do so and the correct relationship agreements. When we were asked to get involved, we never found a single MLO or attorney that had set it up correctly. (That does not mean there were not firms or attorneys out there doing it correctly. We can only address the limited sample we were involved with.) As a consequence, we began offering to train MLOs as originators for customers who wanted to use that system, where it was legal. (Important to remember that not all states allowed this.)
In February of 2013, we quit offering this service because of new rules being promulgated by the CFPB. We no longer believe the use of MLOs or attorneys to originate seller financed loans will work.
The reason is simple. There are new rules (CFPB) that are going to make the same demands of servicers and collectors that they make of originators. In effect servicers are going to need to have the same licenses as the originators in order to service loans much as some states already require. Typically the "old plan" was to have the mortgage broker firm or the attorney originate the loan - and if done correctly - to sell the loan to the seller-financier to service and collect. (This is where many fall down. Typically, the MLO firm or the attorney did not have the proper relationship documents in place with the seller financier to correctly establish a legally defensible transaction.) Some state permitted this and many did not, but in the states where it was permitted, done correctly, it worked.
The new federal requirements created by the new rules is eliminating the advantage that existed in some states that did not require licensing for servicing or collecting. In January, even in those states that permitted this type of transaction, the federal rules, being more restrictive, will be the law, no matter what states may or may not do, unless the states want to be even more restrictive.
I am going to post in another thread on this topic with additional information to consider.
Please remember that any information presented in this forum by me, or other employees of our company, is presented as educational material and is not a substitute for competent legal advice from a properly licensed attorney.