Land-Home business turn around input? all CFD and non Dodd Frank compliant

14 Replies

Hi MHP/mobile folks. I'm looking to buy a 50+ mobile home park in GA this year. Along the way a broker presented a large land-mobile home deal, around 50 or more land-homes. A land-home operator is similar to a lot rent park, but the mobile homes titled on land are like sub-divisions / neighborhoods where an operator owns some, most or all of the real properties and the homes. In the old days the operator would use a contract for deed CFD at 15% or so to owner occupants.

My reading and discussions in MHP discussion boards finds that Dodd Frank's impact to the park's past practice of being the captive seller of homes has come to an end. Most are saying no changes are needed... Same is true in my view with the land-home operators. All those CFD's are now fairly toxic to buy.

I checked public records... This operator is doing table top CFD's no registering anything on each property. Only his name is on the warrantee deeds. Those land-home owners have no public record of any dealings with this operator... Which why Dodd Frank was written in part.

For park owners / want to be owners: http://recenter.tamu.edu/pdf/2052.pdf

http://www.mobilehomeinvesting.net/mobile-home-blog/2014-safe-act-and-dodd-frank-for-mobile-home-investors
The above's point is that if you owner finance 3 or less deals in 12 months and follow new steps you have an exemption from having to be a licensed mortgage originator.  But parks and land-home operators need to originate dozens of owner-occupied notes per year which is where they will get in trouble.  I don't believe doing 3 per entity will pass the it's a duck test by the state banking regulators.  If it walks like like a duck, talks like a duck, then it's doing business as if it's an un-licensed bank, limiting to 3 per entity or not...  No case law on this yet, but I can see this is where the "3 per entity vs 3 per natural person" debate will be settled, from the abusers like the parks.

My question to Dodd Frank / Park experts here is, if I where to buy this land-home operator, what would you do to change the business model to be Dodd Frank compliant. What steps. IE what would you do immediately post purchase to the 50 some CFD's / owners, 2nd step etc.

@Bill Gulley  ll

@Brian Gibbons

Thanks for help in formulating a business turn around plan.

Curt Smith, Sweetgum Properties | [email protected] | 678‑948‑7151 | http://GaREIA.com

Ok, so that was a bit much eh?   How about simplifying the problem.  

What might a business person do to fix their (prior) business model of selling in GA on contract for deed to un-verified borrowers re their ability to repay?

Should I have mail the borrower a letter on company letterhead saying we want to re write the terms of the sale from a table top CFD to a lawyer closing using a LMO to originate the loan, 1st lien including Dodd Frank compliance. If Ability To Repay and 43% DTI can't be met at that time the CFD is left in place but a "hold harmless for the CFD not meeting ATR" is signed and the business is left with 2 track system. 1'st liens / notes and CFDs for those who couldn't pass ATR but signed a hold harmless.

Thoughts?

@Bill Gulley  

Curt Smith, Sweetgum Properties | [email protected] | 678‑948‑7151 | http://GaREIA.com

Definitely interested to see what the knowledgeable experienced folks on here have to say. Obviously being compliant going forward is important, but I can see figuring out how to clean up past messes (ethically and legally of course) could be profitable if you know what you're doing.

Curt,

If it was me, I think I'd leave the ones alone that are already done, and just do it right going forward. 

@Leslie

See your signature says mobile home note buyer.  That's pretty specific and targeting this niche.  

Have you been reading up on Dodd Frank re when you buy owner financed (originated) notes that the Dodd Frank compliance risk transfers to the new note buyer?  This is my concern.

But I've been known to over think an issue before.  :)

Curt Smith, Sweetgum Properties | [email protected] | 678‑948‑7151 | http://GaREIA.com

Curt, I probably shouldn't even have weighed in.  I really have no great knowledge. 

If I were buying a note today, I would only buy compliant notes.  So, I guess, in a sense, you are buying those existing CFDs and I see why you're concerned. 

How many of the CFDs are post Dodd-Frank and SAFE Act?  I imagine redoing non-compliant loans would be quite the ordeal.  Those buyers won't have a clue what you're trying to do, I bet. 

I'd like to think you'd be okay just letting them be, but of course, I don't know that.

This is far too complicated to deal with in a brief response or two.

Bluntly, you need professional help to do legally what you want to do. You either need to hire a law firm that specializes in finance regulatory law, or a consultancy like ours to help you through the process or both.

First, someone needs to do an audit on the loans themselves to make sure they have sufficient value and then to decide what needs to be done to make them legal and enforceable.

Second, if it is worth it to you, you need to form a captive finance company. That will take, with very good outside help, anywhere from 45 days to 6 months depending on how quickly you can do what is required. That finance company will need to employ a MLO or you or one of your employees will need to get licensed as an MLO.

I would do nothing about the existing loans until you had the proper licensure and had the company set up properly which would include a Compliance Management System as required by law.

My final though is you should not buy these loans without a very deep discount, and if you are not planning on generating 12 or more additional loans a year through the park purchase and/or more land home loans, you should pass altogether on the land/home portfolio.

Chattel lending and land home lending are two different animals with different legal protocols and documents and interest rates. Only a small percentage of the RCG client base does both, and they are primarily high volume retailers who are seller financing 30-100 loans every year.

If you are just doing chattel loans in a community you own, there are other easier and less costly solutions regarding financing homes in a community. Feel free to email me and view our Linkedin materials and our website.

First, any CFD originated prior to January 10, 2014 should not be an issue. Dodd Frank only applies to notes originated AFTER that date. @Curt Smith  , you are right to be concerned about the transfer of risk.  The THEORY is that the risks and obligations of Dodd Frank will transfer to the assignee or holder of the note.  (I say theory as I've not seen this yet adjudicated in court.)  The entity control question is a bit more complex because the Act simply DOES NOT address the issue.  Most attorneys who I have consulted hold (and my own research supports) that each entity stands alone and you can do up to 3 deals per entity before having to use (or become) a mortgage loan originator.  That could very well change if the CFPB chooses to close this loophole.

@Ken Rishel  

  My looking at the properties and the notes finds that there's near zero equity in the note and this company.   I'm new to this but I suspect there's an accepted discount for such notes, but don't know that percent.

Thanks @Bill Walston  

As I conjectured, the operator wrote notes for an over valued price and at the current paid down balance it's about at what the property and home is worth.  

So how do you value a land-home business comprised of at value CFDs?  I don;t know.

Curt Smith, Sweetgum Properties | [email protected] | 678‑948‑7151 | http://GaREIA.com

I am loath to be critical of what others offer, but, unfortunately I often find myself doing so. The statement: First, any CFD originated prior to January 10, 2014 should not be an issue. Dodd Frank only applies to notes originated AFTER that date is inaccurate because it fails to take into account there were numerous laws regulating finance behavior prior to that date including the SAFE Act and a raft of others that have discussed in great detail in this forum.

Further, while the servicing law extensions referred to did not go into effect until January, that does not allow a new acquisition (which is what is being proposed) by a servicer of pre January contracts any kind of grandfathered immunity from the legalities that existed at the time of origination. 

There are no easy answers - but there are intelligent solutions.

@Ken Rishel , I beg to differ.  No where did I say that provisions inacted PRIOR to Dodd Frank wouldn't apply.  However, @Curt Smith was questioning specfically the ATR provision of Dodd Frank. ATR was addressed specifically by Dodd Frank (not the SAFE ACT or any other) and can only apply after the effective date.  There was no grandfathering clause making ATR retroactive.  So, while other acts and provisions may apply to the acquisition of pre-2014 notes, DF does not.

Anyone offer opinion on how to price such a business comprised of say 50 CFDs, the deeds to the under lying properties, but the balance do on the CFDs being equal to what the properties are worth?

I have no experience or even a guess at how to value cash flow without any equity for protection?

Curt Smith, Sweetgum Properties | [email protected] | 678‑948‑7151 | http://GaREIA.com

I agree with Ken and I was going to mention him when I saw I had been mentioned.

Curtis, first understand you're dealing with a shister in the first place. You buy CFDs the same way you buy a note and deed of trust but the settlement is different as you need to buy the property to convey good title.

As to Bill's comments, the Dodd Frank Act also takes in loan servicing, which a contract for deed as an installment contract will be included just as a mortgage. Because you have a pot full of them and not one by an owner occupant type deal, you are a vendor and you'll need to comply with the servicing requirements. There is no grandfathering of loans as to servicing. So, the Dodd-Frank Act does hit you after all.

The SAFE  Act is incorporated into the Dodd Frank Act, so it's provisions are a part of the compliance requirement under Dodd-Frank.

Next, the SAFE Act states (paraphrased) is that the Act is to cover ANY method, system, plan or other ploy implemented with the purpose of evading the intent of the Act.

There is another issue in law that sees any closely held corporate structure, parent, subsidiaries, affiliates or other independent entities as being held by the same or similar beneficiaries of interests as being an affiliate relationship, they look behind the door to see who benefits. You can have 4,869 (whatever) separate entities held by the same principals and the dealings between those entities and the relationships of the principals will be seen as if they were all one entity in violations of law. In other words, forming a separate entity to fall into an some exemption to facilitate your activities to avoid compliance is pure horsefeathers (BS for those who don't know what a horsefeather is).

So, there are two different aspects that play on the comical suggestions of forming a bunch of separate entities and stand there saying nah, nah, denah nah, I out smarted the system and you can't get me...... Bet ME!

Let's not forget too, the your bunches of entities are also under capitalized, that held three properties and sold them off is all that was ever in the capital accounts, besides a few bucks for transactional expenses most likely. You had equity in a property then you hold a note, there is no cash there.  You're under capitalized and the regulators and prosecution will run straight through your sham entities quicker than Grant went through Richmond (which was a day I believe).

All the attorneys advocating multiple entities to circumvent the law are trying to sell you something!  DAH! It's an initial argument, a losing argument in the end and the attorney who suggested you do it has a backdoor and he won't be in court representing you....unless you pay more, in which case, he won't be paying any fine or going to jail, he'll just be double dipping in your pocket saying "sorry!"

Curtis, I'll bet you dollars to doughnuts the seller is trying to do to you what he did to all the other buyers, just on a grander scale, screwing you. His CFD's are pennies on the dollar, in fact, they are a liability to you unless you take title and you'll still have liabilities to each buyer, maybe legal fees if he screwed anyone as you accept the origination, regardless of the Dodd-Frank issues.

You need to see an attorney on this and not rely on self proclaimed experts in a forum, most don't know who the "Maker" of a note is and they are giving advice on Dodd-Frank. Ken is absolutely correct and his specialty is in compliance with chattel liens.

If I were you and dead set on trying this, I'd have the seller transfer all the notes to a servicer first, I'd get a bid on the paper and might pay more than the bid as you would be in a better management position, but not much more. Then buy with a servicer already in place.

If an investor is in a "Dealer" status with notes, and are still exempt by your portfolio size, you better understand serving requirements, notices, answering inquiries, collections, recording issues, tax reporting and accounting per the agreement or to acceptable practice if the contract fails to stipulate applications of funds.....knowing these aspects very well. I doubt Ken would service loans, I sure wouldn't, but a fool might on loans they didn't originate.   

         

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com