How do you still owner finance with Dodd Frank?
Flipper/Rehabber · Lake Mary, FL · Member since 2011 · 28 posts · 6 votes
Who is buying and selling with owner/seller financing? How do you do it with the Dodd Frank act? I still don't quite understand that law.
Braden, for some reason my @tag isn't working you, but I hope you see that you are able to do as many owner financed deals to owner occupants as you please. There are a couple of thresholds to be aware of in doing so: 1) once you do 3 or more in a rolling 12 month period you must comply with RESPA, 2) once you do 5 or more in a rolling 12 month period you must comply with the SAFE act.
My recommendation is to work with a state local RMLO and RE attorney in order to make sure you're staying compliant. Dodd-Frank is really not that bad, and to anyone who actually READS the law, things are set out *fairly* black and white for what we need to do in order to comply. I have clients doing 5+ a month who are unlicensed, but I originate the loan and act as the licensed individual for them in order to keep them in compliance.
NO! Not to an owner occupant, the means your prey will live in the property. There are exemptions so if you really have a deal, see your attorney. :)
You can still owner finance. There are restrictions and guidelines if you do more then one seller finance deal a year. Just more hoops and disclosures. Contact a local real estate attorney and fire questions at him/her. If you are actually doing deals via seller finance it will be well worth the cost to speak with an attorney.
You can still do owner finance with DF act in place but get advice from a lawyer, and no one knows how the DF act will work until it is tested.
Joe Gore
@Braden Souder , did you listen to the current podcast episode (from last week)? This was discussed and the guest (Grant Kemp) says you can do as many as you want as long as you work with a residential mortgage loan originator who does the actual negotiation. Don't quote me on the details, check out the podcast, contact Grant and contact an attorney, but I got the definite impression from the discussion that DF isn't the death sentence to seller financing people have been led to believe.
When people start talking about the DF act and not knowing what they are talking about everyone get scared like Mr. Dodd and Mr. Frank are hiding behind every tree watching everyone who is doing owner finance deals. I have asked lawyers, bankers, politicians how the DF act will work and none of them have a clue so how can an investor know how it will work.
Lo and behold none of them would go on record on the DF act.
Joe Gore
Braden, for some reason my @tag isn't working you, but I hope you see that you are able to do as many owner financed deals to owner occupants as you please. There are a couple of thresholds to be aware of in doing so: 1) once you do 3 or more in a rolling 12 month period you must comply with RESPA, 2) once you do 5 or more in a rolling 12 month period you must comply with the SAFE act.
My recommendation is to work with a state local RMLO and RE attorney in order to make sure you're staying compliant. Dodd-Frank is really not that bad, and to anyone who actually READS the law, things are set out *fairly* black and white for what we need to do in order to comply. I have clients doing 5+ a month who are unlicensed, but I originate the loan and act as the licensed individual for them in order to keep them in compliance.
DF defines land contacts as mortgages, making them subject to all kinds of crazy mortgage rules. To do it legally, without an MLO involved, you have to meet 10 different exemptions that boils down to: you can maybe do 1 if it was your home you lived in a long time. The law has taken the power away from individuals to make private contracts. In my opinion its just a power grab by the mortgage industry.
If you are trying to sell investments without being in mortgages, look at lease-option contacts. They are not specifically named by the act but a lecturer I saw warned "if it quacks like a duck, it is a duck." So don't sign a land contact that just says "lease-option" on top.
@Grant Kemp this is a dangerous and slippery slope. Folks are taking some of your commentary as expert witness to these rules (based on your podcast) and some of what you are sharing is not entirely true.
#1 - In regards to your (1) above. RESPA ALWAYS APPLIES - there is no grace number of transactions before you must adhere to The Real Estate Settlement Procedures Act ("RESPA")
#2 - In regards to the expert testimony on SAFE Act. Grant you making claims that are NOT TRUE in every state and you are not making it clear what stae your claim on the regulation is for. Each STATE has it's own exemptions or lack there of. This is because each state has it's own version of SAFE Act, which is the regulation that deals with license requirements. This is a very straight forward. Folks need to stop bundling all the state rules togehter.
Texas allows 5 Seller financed properties in one 12 month period. (Texas de minimis letter)
California allows 8 Seller financed properties in one 12 month period (California DRE letter)
Georgia allows 5 [Natural Person] Seller financed properties in one 12 month period. A entity does not qualify for any exemptions. (Georgia exert of rule)
Michigan only allows exemption for a Primary Residence no minimal transaction number (Michigan Rule)
Many of the states do allow for a one time exemption related to a Seller who finances a property which previously (most recently) served as their primary residence.
The only bearing I get from your rule quotes is that you are reading interpretations from some of the national organizations or perhaps looking at the federal rule example. Those do not carry the details of each state.
Any reader needs to look in to the specific state they are operating in or where they plan to deploy the exemption to verify they qualify. If they are still unsure they can seek and attorney.
Readers need to be care on how they put any plan into action. Holding oneself out to the public, even under the guise of exemption to license, can easily cause that person to be required to hold a license. Further, in some states mobile home properties have separate set of rules. (one of the MH guys could comment more on that)
To make a blanket statement that "...you are able to do as many owner financed deals to owner occupants as you please." is a little irresponsible IMO but perhaps I am a prude that way. For the record, I have read the federal SAFE Act example and MANY (not all) state versions, which are the versions that matter. I have been dealing with mortgage regulation for well over 15 years and I sort of 'get it'. The fact that we have experts, which seems to only be a public idea election, that never seem actually point to the state level for that actual law, leaves me concerned that the experts do not understand as much as they say or imply that they do. Details matter here.
If you are trying to sell investments without being in mortgages, look at lease-option contacts. They are not specifically named by the act but a lecturer I saw warned "if it quacks like a duck, it is a duck." So don't sign a land contact that just says "lease-option" on top.
Land Contracts or Contract for Deeds are also dealt with at the state level.
Many rules come from Dobb Frank. When the idea of the rule conversation is related to license activity or lack there of by way of exemption, the portion of Dobb Frank that we are dealing with is SAFE Act.
Some of this is a little bit of a rant and the details are not completely in line with each state.
It looks like everyone has a different idea how the DF act will work. I wonder has anyone ever talk to an expert who does understand the DF act, and I am not talking about the Internet hype.
Joe Gore
I just checked this out Rick.
http://www.dosslaw.com/real-estate-law-and-finance-webcast/
Its AWESOME!
Joe Gore
Hi Joe,
I am in the world of Seller Financing as a RE Investor.
TX best RMLO is Mindy Henderson.
https://www.linkedin.com/in/mindykhenderson
TX best Dodd Frank Attorney is Bryan Dunklin JD
https://www.linkedin.com/pub/bryan-dunklin/9/a08/ba6
My library of Dodd Frank including CFPB links is
Hope that helps.
I just checked this out Rick.
http://www.dosslaw.com/real-estate-law-and-finance-webcast/
Its AWESOME!
Rick and Brian, here is my opinion:
EXCELLANT! ! ! ! :)
HOWEVER, KEEP IN MIND FOLKS HE IS TALKING TO RMLOs
He's talking to small lenders, not to Ivan Investor selling his # home to an owner occupant necessarily.
State Laws apply.
Another issue, while a lender who fails to originate a loan in compliance may be guilty of PREDATORY lending, PREDATORY lending can still exist while following these general guidelines. The APOR is rather the national usury rate applied to these loans, it does not address assessment of risks. It does not address properties sold and financed over 100% of the property's fair market value, such value not set by you the seller or lender but under definition as assessed by appraisal.
Speaking of appraisal, notice that the requirement may now exist as well.
I'm 100% for using VA standards as well, the SAFE Act and Dodd-Frank discuss FANNIE MAE requirements being used. Using the VA residual income is an excellent way to stay compliant which should keep you from having that underwriting dilemma.
Another point, the ability to pay as presented concerning balloon notes is to registered lenders, brokers, banks, with the presumption that the borrower can meet the obligation without some great fear of being sued. However, that does NOT pertain to an individual who sets a borrower up to fail, doing the fund, rinse and repeat type deal, this is still predatory lending and a different issue all together.
Besides the webcast stuff put out by the CFPB, this is the best one I have seen to date! I really get the sense that this attorney is a finance compliance guy and not a guru attorney, I don't know if he sells stuff, but he wasn't suggesting ways to "get around" the law but face it head on and comply! :)) :)) :)) That get's three smiley faces from me!
omg smiley faces from the "irascible regulator"
The sky is falling!
Lol :)
I like that "irascible regulator," and you said the sky is falling, and I ran inside.
Lol :)
Joe Gore
@Dion DePaoli great response.
@Grant Kemp I do applaud your work.
But ANYONE that wants to do seller financing for a Owner Occupant needs a team.
1. a RMLO.
2. an attorney well versed in the Safe Act, RESPA, TILA, Dodd Frank, etc in the state of where the property exists.
PERIOD.
3. A Tax advisor is always prudent too.
While we are on the subject, for western REIs,
See
for California RMLO http://sellerfinancepros.com/
for Dodd Frank Attorney in AZ, CA, OR, and WA http://www.eckleylaw.com/contact.asp
im totally new to all this, but, how i look at it is this: if you are going to do a lot of owner financing, you should use a mortgage originator. the problem, and the REASON dodd frank was put into place is to keep you from being able to finance people with poor credit. i initially didnt like the idea, but the more i think about it, its a good idea because it shifts the liability more onto the mlo if the buyer defaults down the road. if the mlo qualifies your buyer, how can you be held liable if the buyer defaults? thats why the mlo is BONDED..
There are a couple billion dollar mortgage settlements that would lead us to believe that the law may not pass all liability onto the MLO and absolve the Mortgagee based on MLO actions. The basis there, it has not been explicitly stated, therefore there is not explicit additional actions required to accommodate those types of liabilities on a state level within the SAFE Act.
The short version, 'Lenders' are treated differently in some states. There is a requirement for financial safe gaurds in the form of insurance, bonds and net worth requirements. Based on that idea, I think there is a limited liability to the MLO and still the majority will be the burden of the Mortgagee. An MLO could come and go in the industry over the course of 5 years but the loan made will still exist and your loan would still be present (with you as a Mortgagee). We do not understand how that will work outside of how it has worked in the past. Pre Dobb Frank and all of it's new rules.
I don't have enough time to dig in to that idea more for readers today. Might be able to loop back unless another BP member adds some commentary around the same. My short version, I would say do not bet that any Mortgagee is absolved from liability in full. I really do not see how that would be possible or make a ton of sense.
DF states that anyone who makes, originates, processes or negotiates a financing obligation....
Question: Who is that "Maker" of a loan?
Answer: The borrower
Anyone includes you, the other guy, the lender, the real estate agent, the seller, the buyer, the closing agent, the attorney, the plumber, or any entity.
The judge is going to nail the person responsible for the problem.
If you, as the super duper whizbang RE investor operator devises, constructs, establishes terms and/or conditions, offers and conveys the idea of some RE transaction to an unknowing, less clever, uneducated, naïve property owner and then introduces the documents to facilitate that transaction and you then make that financing agreement......it's going to be on your azz.
How do you get caught? Your seller has some life issue where his finances become known, divorce, bankruptcy, he becomes incapacitated, he dies, he goes to an attorney to buy another home and he mentions it, his taxes are audited, he tries to refinance his mortgage and it surfaces as an asset, he attempts to qualify for any government entitlement or benefit, he talks to a Realtor, he hears about selling notes for cash and attempts to do so.....I could go on, point is, you can not hide what you did, it will surface someday.
Statutes of limitations vary, but fraud is universal in that the limitation begins upon the discovery of the fraud.
Welcome, "you can check out but you can never leave"......without paying
:)
There are a couple billion dollar mortgage settlements that would lead us to believe that the law may not pass all liability onto the MLO and absolve the Mortgagee based on MLO actions. The basis there, it has not been explicitly stated, therefore there is not explicit additional actions required to accommodate those types of liabilities on a state level within the SAFE Act.
The short version, 'Lenders' are treated differently in some states. There is a requirement for financial safe gaurds in the form of insurance, bonds and net worth requirements. Based on that idea, I think there is a limited liability to the MLO and still the majority will be the burden of the Mortgagee. An MLO could come and go in the industry over the course of 5 years but the loan made will still exist and your loan would still be present (with you as a Mortgagee). We do not understand how that will work outside of how it has worked in the past. Pre Dobb Frank and all of it's new rules.
I don't have enough time to dig in to that idea more for readers today. Might be able to loop back unless another BP member adds some commentary around the same. My short version, I would say do not bet that any Mortgagee is absolved from liability in full. I really do not see how that would be possible or make a ton of sense.
lets take a investor out of the picture. lets say a homeowner sells their house, to a buyer, that is using a financial institution, thru a mortgage loan originator. the buyer later defaults. under the reasoning above, the buyer COULD in theory, go after the seller of the house, for liability, but instead, have been sueing the banks. thats what im reading here. im with you, just this is my take on what you posted.
And exactly why you most likely won't find a bank that will originate a loan for an owner or individual.
FDIC put the brakes on banks "assisting" customers like this back in the 80s as the bank was performing a service in a loan they had no interest in exposing them to liability. Since FDIC insures banks and has an interest in the business conducted and exposures to risks, such banks got spanked.
There are risks to lending that go far beyond the loss of money lent.
While, in reality, if the originator/underwriter really know what they are doing, risks are very minimal. Now, since this is a new source of business that could be paid for, RMLOs may engage in this activity, if they screw up they could lose a license or get fined or both. If a sponsoring bank (sponsor of that RMLO) allows him to originate they will want to be paid, probably handsomely for accepting that perceived risk. :)
Before you hire a mortgage originator to make sure they are licensed and have insurance because you are trusting them to protect you on all fronts and yes and make sure you get the mortgage originator to get the buyer to sign under penalty of perjury that all facts are true on the application and you the seller needs to get all copies from the mortgage originator for your records.
Joe Gore
i always wondered why mortgage brokers originated loans and not banks. this brings me back to my original post. if a mlo isnt liable, then WHY even have to go thru the middleman? if the fdic required banks to stop being the originator, and use a mlo, then the sole purpose of a mlo is to originate loans on behalf of their clients. thats why they are bonded. so, just like with any insurance, you would think any claims go against the insurance. if thats not true, ( i dont know how its been in practice in the past), thats like buying car insurance, you hit somebody, but your insurance company isnt liable and does not have to pay, you do.......
That is why an MLO has insurance and E & O insurance, just in case they do something wrong you go after their insurance, and the MLO must check all paperwork to make sure it will pass the DF act. And at this time take everything someone say about the DF act with a grain of salt because it has not been tried and tested.
Joe Gore