Dodd-frank or SAFE act, and balloon payments?

47 Replies

I'm a realtor in Oregon. My principle broker last week dropped a bomb on us, saying that balloon payments are going (have gone?) bye bye, and that most people who are going to carry notes on their own properties, will now have to be licensed.

First of all: What? -- In doing my searches of the two acts, I can't find a single thing about balloon payments. Is he confusing these for something else?

Second, Has this impacted your business? If so, how? And what workarounds have you found?

Hi, you might contact @Bill West, as he always seems to have knowledge and input on this subject. However, a few of the attorneys I have contacted and asked about this say they do not yet understand this law completely, as well as the wonderful guys who created it. Best of luck!!

I appologize, I meant Bill Gulley....

LOL, Under the Act a balloon can't be required until one third of the amortized principal has been paid.

You'll find it contained in the seller financing issues which are about 2/3s of the way through the Act. It's not a large section but puts the brakes on quickly to old ways of doing things.

Homeowners are usually exempt from the act. States may exempt sales to a 2/3 a year, then a license will be required.

If you're doing seller financed deals, better become familiar with the Act. :)

Thanks, @Bill Gulley . I'll look into it... There's something about the Safe act as well, but I'm not sure when which applies.

Does any of this apply to NOO? It is my understanding the Safe Act only applies when a homeowner is involved.

The SAFE Act applies to any financing method, by cash or equity, which is secured by properties that are 1-4 single family dwellings, including mobile homes and vacant land zonned for sfd residential use. It does not apply to commercial financing.

There are exemptions for homeowner's selling thier primary residence and some limitations as to the number of loans made in one year by states. If you are in the business of financing RE deals with cash or equity you'll need to address the new requirements and comply, the intent is really aimed at RE operators.

Such financing is more difficult but not impossible as you can go throgh a mortgage broker/originator or an attorney.

Bill Gulley your replies are much appreciated and expertise in this business evident. Are you for hire regarding creative financing options to help others to continue to run business as normal? i.e. How can one obtain your advice regarding compliance with these and other issues in their (my) real estate business. There are very few attorneys with knowledge of this stuff in my area...(Virginia)

Thanks Sam, but I'm retired, but don't tempt me, lol

Best way to get my opinion is to post the question here on BP! That's free! :)

Come on Bill, there is so much conflicting "STUFF" on BP re D/F that confusion runs rampant. At least tell us what you read to stay current. You are much appreciated!

Thank you!

I read through the SAFE Act, studied the verbage pertaing to areas of interest, skipping the banking issues since they don't pertain to me anymore.

I also looked at a few state statutes and an update, I have not seen the final assuming the intent did not change, I'm sure it did not. Just undersatnding that each state will have its own version, but from the beginning HUD was charged with enforcement of the original intent, so sticking to that you can safely assume the states have complied.

It also provided that in the event HUD determined that the state law did not sufficiently address the intent, that HUD would then apply the federal interpretations.

There is no way I can keep up with all the states and what they have done, I suggest that those engaged in such business to look up thier own state's regulation. If there is an issue that is not clear anyone can certainly bring thier question here, specifically and we can address the matter.

On another related topic, the newly formed Federal Consumer Protection Board may have more far reaching actions that may pertain to RE. While congress is holding up all they can with the new agency they have already acted in several areas. They will be able to act in individual transactions and enforce any federal law appropriately.

F Foster, I appreciate the feed back, thanks, I realize that I'm the unusual one here on BP with a different mindset and that it is not always welcome, telling people why they can't do something or what might be wrong. I received a recent PM where someone told me that it finally dawned on them why I was so negative and thanked me for my regulator style of thinking. I have seen several on here change thier original thinking in some aspects over time as well, :). I'm not always correct on a detail but I'm confident I will be in general aspects, at least to the intent of how something should probably be accomplished in good faith. Thanks again!

@Bill Gulley You are my crystal ball that tells me were to be cautious. I am too old to go to prison or loose what little I have. If memory serves me, the Federal Consumer Protection Board is lead by a friend of Senator Elizabeth Warren, one smart lady who knows how the cow ate the cabbage. I don’t think she will be taken in by Dodd-Frank or Safe Act. Do you know of any case law that has occurred re: Dodd Frank or Safe Act?
Regards Foster

F Foster I too am interested in an CA case law in regards to Safe Act/Dodd Frank. I'm not too concerned about selling with seller financing to investor buyers and have done so since the acts passed. My understanding is that those are "commercial" enough to keep me out of trouble. But never say never when it comes to a defaulting borrower and what strategies they or their attorneys will use. To be honest, at this point I doubt I'd be wiling to offer selling financing to someone I didn't already have a business relationship with.

Starting in about 2006 or so, it was my long-term plan to buy, rehab and to sell to owner occupants. That's off the table now until we know more the legal definitions and we see some case law. CA's version of the Safe Act is silent on seller financing. The ideas thrown around out there about a seller using a licensed broker to originate to be compliance don't seem well thought out to me. "Offering" and "negotiating" according to the law are supposed to done my LMOs only. If that's the case, I don't understand how I can even suggest to a buyer or advertise in my listing that I'll carry back a loan with 25% down (or whatever). Is that not "offering" a loan and "negotiating" terms?

Anyone with seller financing/Safe Act case law examples, please chime in!

You are correct about Warren, a very sharp and hard nosed looker I might add (lol). She is not against these Acts, they are right down her way of thinking and she will be supporting them 100% I'm sure.

The only case that I have heard of was one in RE where they used the Postal Inspector General to nail a mortgage investor/broker scamming investors and nailed him for mail fraud. That's what I meant, that by intergrating various agencies and using the laws on the books the FCPB will have far reaching effects.

You have several compliments here, but I'll throw you another one. You are great for detailed replies and staying in bounds, or out of the grey areas. It is a blessing to BP that you are retired and have the time to assist other here. Thanks!

Thanks Ted, I was typing and missed your post. Seems i get into alot of grey sometimes, lol...

@Account Closed I think you are taking a wise approach, especially in CA with its recent MB statute that seems to be in the mill.

If any state does not adopt specific aspects of the SAFE Act, the federal Act prevails, if CA is silent they must simply be assuming the federal version alone.

The term "offering" is confusing, there is a split there, offering specific terms and conditions is for the MO or attorney after due diligence wich is the intent as mentioned, it specifically allows a seller to say they will consider financing or make an offer to finance but not as to specific terms as the seller is not qualified to originate terms necessary for any borrower. Might think of it as an initial offering and the final "offering of terms and conditions".

And, it may be years before you get to read case studies on any seller financed matter. I suspect you'll see it in CA before many other areas if it's left up to the states to enforce matters on the front lines.

It's just my guess that HUD has other things to do and it would have to be a serious infraction before they would go after a seller/originator of a single home (especially since so many exemptions have been adopted) Most likely it will be some dealer, selling several units as thier business before HUD would be turning up. And, most likely it will only surface if deals start blowing up and complaints are filed.

The recent FCPB issue was on the local news here and it was a MB in Mo. Ar., the guy got 3 years and was ordered to repay the losses. Sounded like he just got in over his head to me, he may not have had the intent to defraud investors originally, but couldn't cover losses...JIMO.

Here is another issue too as to case studies, HUD prefers to slap hands out of court quickly and efficiently, many issues don't go to court, they plead out to a closed hearing or agreement, pay fines and go on the HUD naughty list and the public may never hear of the issue. At least that seems to be the SOP for the midwest region out of KC, Mo. I've had several meetings and casual opportunities with the past Regional HUD Dir. and he spoke softly and carried a big stick but was keen on PR and the political nature of the office as well.

So relying on past convictions to form any views on the matter could take years to get a clear picture.

Seems like we had a discussion here on BP about CA Real Estate Broker/agents being exempt from the offering issues when act in the presentation of and representing clients of a transaction. I'm clearly understanding that they are not MOs authorized to originate loans off the street, but as to the transaction they are related to.

Hey @Bill Gulley , You seem extremely well learned in the area of real estate law, and just wanted to say thank you for giving us a (considerable) chunk of your time answering questions!

I also hear you when you say that if we (I) are to get into seller financing, it's important to become familiar with the acts in question. That said, it seems to me that it is a big couple of documents, and reading through it line by line would take a while. Do you know of any site or publication that breaks down the two acts into digestible formats?

Cody, I have been searching for you and really have not found an appropriate information site other than HUD-SAFE Act Requirements. But that's no short cut.

I also went to a note investor site, but it is rather slanted IMO.

I have also found many updates and some info that HUD appears to have changed or is taking different views on but not sure if they have been adopted or are current.

I see it's a real mess!

Seems like conflicting info as to exemptions, owner selling thier own OO home or is it a NOO home, 1 deal in 12 months, 5 deals in a year and then in 3 years, then contractors being exempt, then not, and

A scary three year right of recession for the buyer to resind the deal if the lender failed in due diligence in ascertaining if the note was affordable, hitting on the ability to pay, if the originator failed to prudently originate the note the borrower get all thier money back! I wouldn't have a problem with this but new investors aren't me, don't mean to brag but they are saying the deal has to be underwritten prudently, that's an impossibility for a first time seller unless they get help.

I mentioned no balloon until a third of the principal had been paid, ooops, looks like no balloon, then no balloon in the first 5 years, so I guess that's up in the air from the original version.

I also see note investors are pulling thier hair out, as I mentioned here in the "What do you want Mr. Note Buyer" thread here on BP.
The future note holder can be at a loss if the note was improperly originated!

Guess I'll start studying the SAFE Act again and get with HUD.

Marie Poe-Thank you for your comment re: "commercial." You make me consider that any buyer who will not be an occupant, may be "commercial" and the more active as an investor, there more "commercial" he may be. Thank you. I had not considered that.

Bill Gully-I tend to disagree with you that Senator Warren would support these Acts 100%. I refer to her book, "The Two Income Trap". She will oppose any part of the Acts that she feels are unjust. Safe Act and D/F lookout!

@Bill Gulley , Once again, thanks for your detailed response. In my area, most of the realtors are just plain scared of the whole 'mess' regarding the two acts, and nobody (including any principal brokers I've talked to) REALLY knows how these affect the retail real estate business. It's good to know that if you go by the federal rules, state rules can't overrule.

Bill, thank you so very much for your valuable input. This is why I directed Cody Croslow to you in the first place because I have seen many of your very helpful responses. To me, if this is so hard for the professionals to understand this mess, it makes it that much harder, especially for us newbies that are just starting off. Looking forward to what you find out about any updates. Thanks again friend!!

Welcome... :) Thanks too!

Here is a note from an Oregon mortgage broker:

Hello Everyone- since the new year I have had numerous borrowers, lenders, realtors, and other real estate associates ask me what effect the Dodd-Frank bill will be for private mortgages. I have done quite a bit of research since the new year and jotted down some of the more major points that relate to private mortgages below. Even further down I’ve given the best links that I think will help to educate the majority of interested parties (this would be the “more than you ever wanted to know” part).

First and foremost everything beyond this point of the email (with the exception of the links) is as I understand the current Federal & State mortgage laws.

It is important to realize these points only apply to owner occupied mortgage loans only. The main reasons I found that will discourage private lenders and brokers from making mortgage loans to owner occupants are as follows:

1- Interest rate charged can only be a certain amount as the APR can be no more than 6.5 percentage points above the prime rate (currently around 3.5), meaning the APR cap is 10%. In order to have an APR cap of 10% on a private loan of $100k with fees totaling $5000, the lender would have to agree to a rate of 9% over 12 years. This rule itself has not changed from the previous rule, but the new rule adds that this APR cap must be met with no balloon payment, which brings up point #2.

2- No balloon payments. The way I read the law it indicates that no balloon payment is allowed that is more than twice the dollar amount of the normal monthly payment, so balloon payments on owner occupied loans are pretty much out. Most private lenders are willing to carry a loan for 3 to 5 years, but not 10+ years as I indicated above.

3- No prepayment penalties. Although Expert Mortgage Group does not use prepayment penalties this rule is important to note, as some investors like to be assured of a certain amount of return on their investment before payoff.

While these rules do not prevent private mortgage lenders from offering owner-occupied loans, they certainly don’t offer any advantage over funding a similar sized non-owner/business loan which can have a higher rate (increases yield to investor), can have a balloon payment, and can have a prepay penalty (or guaranteed interest).

When you couple these changes with ever increasing difficulty of actually foreclosing on a default owner occupant (if you can do it in less than a year you’re pretty lucky), it really makes little sense to fund a private mortgage on an owner occupied home, and with that in mind I really don’t see Secure Deeds or myself offering them to investors any longer.

In anticipation of these laws, Expert Mortgage Group stopped originating and funding private mortgages to owner occupants about a year ago. I will continue to offer the standard owner occupied full term bank loans for borrowers that qualify for them (Conventional, FHA, VA, USDA, Rural Housing).

Here are some helpful links about these laws that I found on the CFPB website (Consumer Financial Protection Bureau):

And here is a link that shows all “Final Rules” issued by the CFPB:

I hope that you all find at least one thing in this email (or the links) that was helpful to you or that you learned…there is definitely more out there than any of us want to read through entirely, so my job as a mortgage broker is to inform and educate as much as I can.

Thanks for reading and please respond if you have any questions.

The information transmitted is intended solely for the individual or entity to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of or taking action in reliance upon this information by persons or entities other than the intended recipient is prohibited. If you have received this email in error please contact the sender and delete the material from any computer.

Very helpful @Jeff S. , thanks, but did you read the guy's disclaimer?

Why don't you get permission so it can stay up on BP!

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