Is your Seller Financed Note in RESPA Compliance?

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The two biggest gripes I hear from note investors is lack of proper documentation and lack of compliance. We previously discussed the importance of all your documents being in order. This ensures that your note has value to prospective buyers, yet, there is another component we cannot overlook- Seller Financing Compliance!

You’re probably thinking this post is going to be about the SAFE Act.  It’s the most debated piece of legislation we’ve seen in real estate in some time.  However, there is law from 1974 that all note originators need to be aware of.  This post focuses on the Real Estate Settlement Practices Act or RESPA. RESPA was enacted in 1974 as a means of proper disclosure to the consumer.  It also eliminates kickbacks in real estate financing transactions.  RESPA compliance alone, can determine the enforceability of your note. Here are a few key items you must always put in place:

HUD Information Booklet: HUD put together a small booklet for consumers in an effort to provide education and disclosure about all things related to purchasing with financing. If you are originating seller financed notes I suggest ordering these booklets for your buyers. www.hud.com/booklet.pdf

HUD Settlement Statement: All real estate transactions require a HUD-1 Settlement Statement.  It’s an easy to follow overview document identifying all the costs associated with the transaction.  It also details how much money is required from the borrower and their starting balance. A HUD-1 template can be downloaded at: www.hud.gov/offices/adm/hudclips/forms/files/1.pdf

Mortgage Servicing Disclosure Statement: This document notifies the borrower of your intention to service the loan or transfer the servicing to another party. In addition, it points out if there is a likelihood the note servicer could change over the life of their loan.

Good Faith Estimate: Along the lines of the HUD-1, but specific to the fees associated with the settlement statement, this estimate gives the borrower an understanding of how their fees break down.

Escrow Account Disclosures: If you are collecting escrow for taxes and insurance and potential association fees, you will have to provide a yearly escrow account analysis to the borrower. There are several servicing software packages out there that can assist you. This form must be sent to the borrower to ensure their funds are distributed as required.

These five items will put you, your note, and your borrower in RESPA compliance. I have interviewed attorneys who have horror stories from investors who are not in RESPA compliance and then find out their note is no longer enforceable if they have to go to court and the borrower uses the RESPA argument.

Compliance is not always the most fun for investors, but when you are in compliance and have solid documentation to back your note.  Compliance also strengthens the value of your notes portfolio.

Have a RESPA story to share? Have you seen this law enforced on a note you or someone you know owns? I appreciate your feedback and comments.

Photo: Ctd 2005

About Author

Kevin Kaczmarek is President of Capital Blueprints, LLC. Serving a national and international client base, Kevin helps clients achieve their personal goals for long-term stability and solid financial growth through Self Directed IRA Investments and individualized Passive Income Strategies.

3 Comments

  1. Kevin –

    Great article, as usual…

    Quick question: Is it beneficial for a seller who is owner financing a deal to work with (or have the buyer work with) a mortgage broker and closing attorney, and actually perform a real closing to ensure that all the loan docs are correct (and in compliance) and that the deed is transferred and recorded correctly?

    I realize this would add some cost to the deal, but I also see some benefit, especially for those who are inexperienced at creating notes, transferring/recording deed, etc.

    Thanks!

  2. Chris Martin on

    I do close seller financing with an attorney who drafts all the documents. I am a principal in the transaction (my own property) not a broker, agent, loan officer, etc. and I am not licensed in such activities. I am currently selling rental property using seller financing and do not plan on ‘playing’ the role of a loan broker by following RESPA.

    In general it could be noted that RESPA does not apply to credit transactions involving extensions of credit– (1) primarily for business, commercial, or agricultural purposes
    http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/res/resp2606
    So selling a rented investment property, for instance, is exempt.

    See also http://portal.hud.gov/hudportal/documents/huddoc?id=faqsjuly16.pdf a FAQ, specifically #2 (seller financing ‘take back’ not covered by RESPA) and #12 (sale of note is a secondary market transaction not covered by RESPA).

  3. Thanks J Scott!

    I originally did a bunch of transactions with a closing agent and we made sure everything was put together. Eventually we started closing without an attorney or closing agent after about 100 transactions. At this point, I suggest going through an attorney, or mortgage broker in case compliance with the SAFE ACT comes into play. Each state is different on the SAFE ACT so if it doesn’t apply to you, you are lucky!

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