Mortage company to originate seller financed loans

17 Replies

Is there demand for loan origination for seller financed transactions across the country? We defiantly have the demand here. The benefits out weigh the expense and headache for us to become licenced and compliant. Since we specialize in seller finance property management, we felt obligated to help our clients stay within the new law. Are there any other new companies springing up out there?

Originally posted by @Jason Dillard :
Is there demand for loan origination for seller financed transactions across the country? We defiantly have the demand here. The benefits out weigh the expense and headache for us to become licenced and compliant. Since we specialize in seller finance property management, we felt obligated to help our clients stay within the new law. Are there any other new companies springing up out there?

There's definitely a need for licensed originators to help with seller financing, and it's been made known here on BP several times in the last year with few responses.

Have you become licensed and compliant and done any such originations yet? I suspect after you know/understand the full scope of what is required and the liability issues involved, you may be less inclined to think the benefits outweigh the risk.

Please keep us posted. This is an important topic that many are interested in.

Originally posted by @Jason Dillard :
Is there demand for loan origination for seller financed transactions across the country? We defiantly have the demand here. The benefits out weigh the expense and headache for us to become licenced and compliant. Since we specialize in seller finance property management, we felt obligated to help our clients stay within the new law. Are there any other new companies springing up out there?

This is a subject I've been wanting to discuss, great for my 15,000th post :)

My mortgage company originated and serviced seller financed contracts and notes, we guaranteed the loans under a unique program much like private mortgage insurance by advancing payments to holders and collecting payments. 7 states and I have no idea of the number of originations, thousands over almost 15 years in this area.

You made a statement, the benefits out weigh the expense and headaches, that may have been a question.

There are two reasons that banks and mortgage companies are not jumping on this band wagon. First, seller financed notes are funded by equity which are different than cash funded loans and secondly, the risks involved in originations are different and they have no experience.

The underlying theory of underwriting these loans is also rather different than conventional loans. I can assure you that a 25 hour course to obtain a license is not close to being sufficient to underwrite these notes. The license is based on conventional mortgage originations, this only touches on prudent lending requirements it does not teach underwriting.

Saying that you would allow clients to be compliant really stops at the fact that a RMLO license seal and number would be affixed to the obligation, you carry the compliance of originations after closing and there are servicing requirements. A sub-servicer can be put in place easily for collections, that does not eliminate liability.

The reason I guaranteed the notes originated was two fold, obviously it was a profitable venture, but it also eliminated most, if not all, of the risks of origination.

Many investors seem to think you can eliminate risks with disclosures, not true, you can not perform professional services and declare that you are not responsible or that you lack expertise or simply warn your client of dangers, those providing professional services are liable for what they do.

Specializing in seller financed "property management" (not sure how you see that as if you are collecting rents) is a loan servicing function. If you are collecting payments on purchase contracts then you are servicing obligations which requires not just a RMLO license (to modify any terms at any time) but a mortgage servicing license as well. I don't know your state laws but this aspect is a federal issue. Not trying to rain on your parade, just saying, if your properties have been sold and you're collecting payments or managing collateral, you are in violation without a servicing license.

As to the market and your area. I suspect there is a need for services and it can be profitable. I understand that there is an originator charging $700+ for services, I would say that is getting to a rip off point, half that can be profitable on a larger scale.

I have been looking for originators here, the problem is the sponsor of the RMLO, who they must have or qualify as an independent lender, will not allow them to originate. These can become third party originations for a sponsoring institution and such can be in violation of the new laws.

So, it's going to take an independent broker who can originate wholesale mortgages to enter these waters, they will need to be compliant under state laws which vary widely, there are or can be net worth, bonding, insurance, educational and experience requirements. Kansas has no requirement! So the brain damage and expense will depend on where you are.

I had a meeting with a stock broker and his affiliate broker is in lending and he has a RMLO, we are researching the possibilities of him originating and frankly, I'm considering an educational role for the "backroom" operations. I'll also mention that my considerations are really, at this point, limited to experienced loan officers, primarily commercial lenders with institutional experience as they will have more of an underwriting background and to attorneys and stock brokers as they can relate to risk and underwriting matters.

A new RMLO may have a legal position to originate but without experience in underwriting matters they simply are not qualified, saying qualified as understanding the differences mentioned so they can at least operate safely. In context, a new RMLO is much like graduating the 6th grade applying for a position that requires a college degree. It would just be a matter of time for that 6th grader getting into trouble as to compliance matters.

If it is really a goal, there are many spin off business opportunities that can arise that can be very profitable, like the note business or assignments and management, then all of this can be learned. You need to approach this business with the understanding that getting a drivers license will not make you a race car driver ready for the next Indy.

My vision is that there could be a network of originators nationally with a centralized underwriting system. Loans would be sub-serviced.

So, my answer above as to yes, it is needed and the "can be profitable" leans to a larger scale than how I started out decades ago, you'll need a large market area to have enough seller financed transactions to have a business, you won't be making a living off 20 deals a year, which is the no side! But, you gotta start somewhere and then grow any business. :)

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

Yes, we are licenced. Compliance is another question. No two attorneys can agree on some of the specifics. This is probably because the DF has ambiguities. However, we build a file with what is definitely required. We then add documentation if there are exceptions. The goal is to have as much documentation as possible to mitigate the risk of the seller and educate the buyer. One of our methods to prove "the ability to repay" is to document 6 to 12 months of on time rents through our property management company for buyers that may not fit into the "box" in the beginning. Our goal is to build a file on every loan that would hold a strong defense if there was ever a lawsuit. This is very unique. Essentially the lender/underwriter/seller has already approved the loan when we receive it. We are really providing a lawsuit mitigation service to the seller. At the same time, we educate to the buyer on exactly what they are agreeing to.

The origination company carries some risk, so we are buying the appropriate liability insurance, we have the required bond, and must maintain the appropriate reporting to State and Federal authorities.

Here in SC, we can get owner occupied property tax rates with recorded Bond for Titles. This cuts the property tax rate by 50 to 65% which allows investors like myself save a lot. My average property tax bill is 700 per yr instead of 1500. Lower property tax is one of the biggest benefits to seller financing over straight renting. This concept saves about 800 per year per house. We own or manage about 200 houses and growing. That's over 150k per year still in our bigger pockets! (Couldn't help it)

Most originators cannot explain DF when you ask them and most banks cannot provide any help or answer any questions on the DF act but they call themselves originators. Jason I think you will be ok doing what you are doing.

Joe Gore

@Jason Dillard

Can you better address your profile with more details? Might mention too what you're looking for.

So, you're in servicing, that's great and a real PITA now, LOL

We could talk. Good luck :)

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

Originally posted by @Jason Dillard :
Yes, we are licenced. Compliance is another question. No two attorneys can agree on some of the specifics. This is probably because the DF has ambiguities. However, we build a file with what is definitely required. We then add documentation if there are exceptions. The goal is to have as much documentation as possible to mitigate the risk of the seller and educate the buyer. One of our methods to prove "the ability to repay" is to document 6 to 12 months of on time rents through our property management company for buyers that may not fit into the "box" in the beginning. Our goal is to build a file on every loan that would hold a strong defense if there was ever a lawsuit. This is very unique. Essentially the lender/underwriter/seller has already approved the loan when we receive it. We are really providing a lawsuit mitigation service to the seller. At the same time, we educate to the buyer on exactly what they are agreeing to.

The origination company carries some risk, so we are buying the appropriate liability insurance, we have the required bond, and must maintain the appropriate reporting to State and Federal authorities.

Here in SC, we can get owner occupied property tax rates with recorded Bond for Titles. This cuts the property tax rate by 50 to 65% which allows investors like myself save a lot. My average property tax bill is 700 per yr instead of 1500. Lower property tax is one of the biggest benefits to seller financing over straight renting. This concept saves about 800 per year per house. We own or manage about 200 houses and growing. That's over 150k per year still in our bigger pockets! (Couldn't help it)

Jason: when you say the seller has already approved the loan, what exactly does that mean? The new regs say that only licensed originators can offer and negotiate loan terms. Are the sellers coming to you with loan terms already negotiated directly with the buyer/borrower and wanting you to complete the file? If so, they are in violation of the Safe Act and DF before they get to you.

There's so much hype about how using an originator will keep those of us offering seller financing in compliance. But it's not hard to read the regs and see that the seller financing business model has to change substantially to stay compliant. You can't advertise or negotiate loan terms as a non licensed originator. You can't legally discuss the loan options and hammer out terms directly with the borrower. You can advertise that financing might be available and then send the interested buyer directly to a broker. Is that what your seller/lenders are doing?

Originally posted by Kristine Marie Poe

There's so much hype about how using an originator will keep those of us offering seller financing in compliance. But it's not hard to read the regs and see that the seller financing business model has to change substantially to stay compliant. You can't advertise or negotiate loan terms as a non licensed originator. You can't legally discuss the loan options and hammer out terms directly with the borrower. You can advertise that financing might be available and then send the interested buyer directly to a broker. Is that what your seller/lenders are doing?

I'm not an expert on this stuff, so I apologize if this is a dumb question, but are you saying that as the owner/seller, you are not allowed to even discuss price and terms with a prospective buyer? Seems a little overboard to me...

@Bryce Y.,

You need to overlook all the hype people posting and not knowing what they are talking about. Check with a lawyer on the right approach.

Joe Gore

Originally posted by @Bryce Y. :
Originally posted by Kristine Marie Poe There's so much hype about how using an originator will keep those of us offering seller financing in compliance. But it's not hard to read the regs and see that the seller financing business model has to change substantially to stay compliant. You can't advertise or negotiate loan terms as a non licensed originator. You can't legally discuss the loan options and hammer out terms directly with the borrower. You can advertise that financing might be available and then send the interested buyer directly to a broker. Is that what your seller/lenders are doing?

I'm not an expert on this stuff, so I apologize if this is a dumb question, but are you saying that as the owner/seller, you are not allowed to even discuss price and terms with a prospective buyer? Seems a little overboard to me...

If the buyer is owner occupied, that's right! They may not technically do any origination or processing function. They can tell the originator what they want, in reality they can contract terms to agree to, but that won't mean those terms can be allowed or approved.

K. Marie, I was hoping to get more info from the OP before I explored other areas, but you are correct. I find it very odd that the federal servicing license can be held without the RMLO, I don't think that's possible.

I can certainly see where a Realtor type doing PM can get into collections of SF deals, it's a logical step, but logic doesn't always apply in RE finance and compliance matters.

6 to 12 months, in mortgage history is very short, that doesn't "prove" much at all toward ability to pay, it depends on prior histories as well, credit standing, DTI ratios, current employment and expected employment continuing as well as compensating factors.

I've never heard of a loan underwriter coming out of the PM business, after a few years in finance and mortgage banking I'm sure one could have a background as a property manager, it would be helpful.

I'm not going to pass judgment, I'd say due diligence would be in order but not saying it wouldn't be met........ The OP is new here, let's give him the benefit of the doubt and with more background a determination can be made. There is a heck of a demand for the services, so even having the interest is a good thing, exactly how it's done, that's the concern. I'd hope everything is smooth sailing, but just hearing everything is good to go won't really cut it here, so you'd need details I suppose, :)

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

Originally posted by @Bryce Y. :
Originally posted by @K. Marie Poe There's so much hype about how using an originator will keep those of us offering seller financing in compliance. But it's not hard to read the regs and see that the seller financing business model has to change substantially to stay compliant. You can't advertise or negotiate loan terms as a non licensed originator. You can't legally discuss the loan options and hammer out terms directly with the borrower. You can advertise that financing might be available and then send the interested buyer directly to a broker. Is that what your seller/lenders are doing?

I'm not an expert on this stuff, so I apologize if this is a dumb question, but are you saying that as the owner/seller, you are not allowed to even discuss price and terms with a prospective buyer? Seems a little overboard to me...

The federal and CA regs both define the meaning of loan origination. It says that offering a loan and negotiating the terms of a loan is part of origination. You have to be a licensed originator to do those activities. Hence a seller negotiating seller financing (and where the deal doesn't qualify for the exemptions outlined by the CFPB) is not in compliance.

The "just get an originator" to do your seller financing loan file will not necessarily make it a compliant loan. This isn't far out stuff. The regs are easy to read. Good luck finding an attorney who knows or cares about Dodd Frank for private seller financing. And for those who do, I doubt they would advise anyone to contact a licensed originator to do the file after the loan was offered and negotiated. The loan file is only one part of the regs. The regs address, among other things: offering, origination, the application, servicing, collection and default.

Originally posted by @Bill Gulley :

K. Marie, I was hoping to get more info from the OP before I explored other areas, but you are correct. I find it very odd that the federal servicing license can be held without the RMLO, I don't think that's possible.

My understanding has consistently been different than yours on the servicing requirements posted by the CFBP. If you're doing less than 5000 loans a year and/or servicing your own portfolios there is requirement to use a licensed servicer. A seller financed loan is still subject to all the servicing requirements in the regs, but it doesn't require using a servicer.

So while I'm not sure if the OP is holding a servicing license, I really doubt it.

K. Marie, DF and the SAFE Act specifically mention that a seller and buyer are free to contract, however after that initial meeting of the minds and a contract is accepted is when actual loan negotiations commence as to compliance. At that point the originator can process and then underwrite the loan, they may attempt to meet the contract agreement and qualify as to the ability to pay issues, but if those terms can not be met the originator may not approve them, they may make other suggestions. Ultimately, the seller must agree or reject the findings by the originator, the seller is not obligated to accept anything an originator puts out there. The loan will either comply or it won't. Don't confuse the right of the parties to contract in a preliminary agreement to the end loan compliance required. You'll find this in the intent of the Acts. Good catch up there. :)

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

Originally posted by Kristine Marie Poe:
Originally posted by @Bill Gulley:

K. Marie, I was hoping to get more info from the OP before I explored other areas, but you are correct. I find it very odd that the federal servicing license can be held without the RMLO, I don't think that's possible.

My understanding has consistently been different than yours on the servicing requirements posted by the CFBP. If you're doing less than 5000 loans a year and/or servicing your own portfolios there is requirement to use a licensed servicer. A seller financed loan is still subject to all the servicing requirements in the regs, but it doesn't require using a servicer.

So while I'm not sure if the OP is holding a servicing license, I really doubt it.

I can guarantee you, no individual, not even a small company will come close to servicing requirements. Here are just some examples:

Loan collection reports

All telephone collections must be recorded and kept on file, a monitoring program and training must be in place.

Toll free numbers, payment books or EFT arrangements made, notices of changes of payment or address at 90 days, active accounts with contact information are confidential requiring security measures, accounting software must be verified compliant, there must be a loan resolution program in place dictating how and when complaints are transmitted, issues addressed within the required time frame, offers of any modification noted such as allowing a few more days to pay without penalty is a modification, must be recorded and portfolio servicing records must be on file in good form for examination, I could go on.....

There is the law and there are matters absent of requirements or exemptions and there is then reality, you're right, third party servicers are not required for small lenders, compliance with servicing requirements are. So the issue then becomes, how can a small loan servicer comply with all the requirements? My answer is that they can not, an impossibility to perform by one who is not formally trained in servicing and collection.

It would serve the public good if some would stop interpreting finance law as if to imply that just anyone off the street who did a seller financed deal can act in compliance, reading statutes does not explain all the details involved in processing, underwriting, originations or servicing of seller financed transactions, the statutes refer to other regulations and guidelines. No one on BP knows them all and many regulators don't know them all, regulators do have references and check lists and cross references and methods of examinations to help them to do what they do, as well as legal departments. No one BP has those resources.

I also think that keeping with DF and the SAFE Act in the forefront on a national or international forum as to discussions is probably the goal. I could give two hoots about state law, there are 50 states, none are exactly alike, so throwing out state requirements is like shooting a water pistol over a waterfall. Me telling someone in AR or TX or AL or ID what the state law is in MO is totally irrelevant to them. The only matters that are relevant are federal requirements, folks should be looking up their own state requirements if they are involved in applicable dealings, IMO.

I totally agree, I didn't want to blast Jason right out of the gate, but no, I really doubt that such operation is actually compliant, especially with 200 deals as that is below a decent break even point for an operation in full compliance.

There is absolutely no sane reason any investor should even attempt to service their own loans, oh, I know, they think they know all about it, all you do is collect a check and make a deposit. They don't have a clue, penny wise and pound foolish, just takes one bad borrower, just one! :)

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

Originally posted by Kristine Marie Poe:

The "just get an originator" to do your seller financing loan file will not necessarily make it a compliant loan.

While I understand that it won't necessarily make the loan compliant, doesn't it relieve liability from the seller? I would think that having everything go through a licensed RMLO would mitigate a lot of seller's liability/risk, since the RMLO now takes the position as the expert.

Originally posted by @Joe Gore:
@Bryce Y.,

You need to overlook all the hype people posting and not knowing what they are talking about. Check with a lawyer on the right approach.

Joe Gore

Thanks Joe. Do you have any recommendations for a good attorney in our area?

Originally posted by @Bryce Y. :
Originally posted by @K. Marie Poe: The "just get an originator" to do your seller financing loan file will not necessarily make it a compliant loan.

While I understand that it won't necessarily make the loan compliant, doesn't it relieve liability from the seller? I would think that having everything go through a licensed RMLO would mitigate a lot of seller's liability/risk, since the RMLO now takes the position as the expert.

The lender will ALWAYS be on the hook for the loans they originate. The servicer is a vendor of the lender.

Originally posted by @Bill Gulley :
Originally posted by @K. Marie Poe:
Originally posted by Bill Gulley:

K. Marie, I was hoping to get more info from the OP before I explored other areas, but you are correct. I find it very odd that the federal servicing license can be held without the RMLO, I don't think that's possible.

My understanding has consistently been different than yours on the servicing requirements posted by the CFBP. If you're doing less than 5000 loans a year and/or servicing your own portfolios there is requirement to use a licensed servicer. A seller financed loan is still subject to all the servicing requirements in the regs, but it doesn't require using a servicer.

So while I'm not sure if the OP is holding a servicing license, I really doubt it.

I can guarantee you, no individual, not even a small company will come close to servicing requirements. Here are just some examples:

Loan collection reports

All telephone collections must be recorded and kept on file, a monitoring program and training must be in place.

Toll free numbers, payment books or EFT arrangements made, notices of changes of payment or address at 90 days, active accounts with contact information are confidential requiring security measures, accounting software must be verified compliant, there must be a loan resolution program in place dictating how and when complaints are transmitted, issues addressed within the required time frame, offers of any modification noted such as allowing a few more days to pay without penalty is a modification, must be recorded and portfolio servicing records must be on file in good form for examination, I could go on.....

There is the law and there are matters absent of requirements or exemptions and there is then reality, you're right, third party servicers are not required for small lenders, compliance with servicing requirements are. So the issue then becomes, how can a small loan servicer comply with all the requirements? My answer is that they can not, an impossibility to perform by one who is not formally trained in servicing and collection.

It would serve the public good if some would stop interpreting finance law as if to imply that just anyone off the street who did a seller financed deal can act in compliance, reading statutes does not explain all the details involved in processing, underwriting, originations or servicing of seller financed transactions, the statutes refer to other regulations and guidelines. No one on BP knows them all and many regulators don't know them all, regulators do have references and check lists and cross references and methods of examinations to help them to do what they do, as well as legal departments. No one BP has those resources.

I also think that keeping with DF and the SAFE Act in the forefront on a national or international forum as to discussions is probably the goal. I could give two hoots about state law, there are 50 states, none are exactly alike, so throwing out state requirements is like shooting a water pistol over a waterfall. Me telling someone in AR or TX or AL or ID what the state law is in MO is totally irrelevant to them. The only matters that are relevant are federal requirements, folks should be looking up their own state requirements if they are involved in applicable dealings, IMO.

I totally agree, I didn't want to blast Jason right out of the gate, but no, I really doubt that such operation is actually compliant, especially with 200 deals as that is below a decent break even point for an operation in full compliance.

There is absolutely no sane reason any investor should even attempt to service their own loans, oh, I know, they think they know all about it, all you do is collect a check and make a deposit. They don't have a clue, penny wise and pound foolish, just takes one bad borrower, just one! :)

Nobody's suggested that state law supersedes federal law. Nobody's suggesting or advising that one do their own loan servicing. Can't really tell what you are going on about.