‘Liberty’ is defined by Black’s Law Dictionary as “Freedom from arbitrary or undue external restraint, especially by a government”.
The ‘Dodd-Frank Wall Street Reform and Consumer Protection Act’ was enacted on January 10th, 2014. This piece of federal legislation contains onerous penalties for real estate investors who violate any of its oppressive lending law provisions.
The ‘Safe Act’ as it is commonly referred to, affects the ability for individuals and investors to engage in seller financing activities. Whereas congress failed to address a plethora of illegal activities within the banking system and federal reserve which lead to the real estate bubble and mortgage crisis, the response of the house and senate was to put the squeeze on the little guy by mandating people become ‘licensed mortgage originators’ to prevent fraud.
Really? A ‘License’ is defined by Black’s Law Dictionary as “A permission (usually revocable) to commit an act that would otherwise be unlawful”. For the uninitiated, governments throughout history first legislate, regulate and then confiscate. The Dodd-Frank Act which put forth to ‘legislate’ seller financing, may now ‘regulate’ these activities and may eventually ‘confiscate’ such ‘revocable permissions’ enacted in H.R. 4173.
You could take time to read through this 848-page bill, but it won’t serve you as the Consumer Financial Protection Bureau (CFPB) has been given carte-blanche authority to define the interpretation of, and draft regulations for, the implementation of this hideous bill.
The act establishes ‘mortgage originators’ as someone who ‘has an expectation of compensation’ or ‘receives compensation’ for arranging financing activities on the purchase of real property used as a personal residence (i.e. ‘seller financing’). So now, even though you may not have considered yourself as having been in the ‘mortgage business’ because you never received a commission for your activities as a mortgage broker, this bill puts you in that position just by the mere fact you receive compensation, or expect compensation, for the sale of real property which is reasonably expected to be used as a personal residence.
The ‘Safe Act’ includes a provision which ‘allows you’ to engage in up to three seller-financing transactions per year without obtaining the ‘mortgage originators license’ or paying fees for such previously non-necessitated services. But how, prior to originating the loan, does the unlicensed seller (you) qualify a buyer has the ‘reasonable and good faith ability’ repay a loan? You have to document their ability to repay with W-2 statements or tax returns.
But, what if I want to offer a balloon payment? Nope. You cannot be trusted with that anymore. No more balloon payments; period.
But, what if I want to offer just a 10 or 15 year note? Nope. The government knows best. It has been decided for you that 30-year amortized loans (with no negative amortization), where loan origination costs do not exceed 5%, interest rates begin at no more than 6.5% over prime, which can be reset after five-years so long as the adjustable rate does not increase by more than 2% in a year with a ‘reasonable cap’ of a 6% in the overall loan rate, shall be acceptable in the all-knowing eye of the United States government.
So, if the seller originates a loan at 5% and in the coming years interest rates spike up to historic levels of 12% or 14%, then who assumes that liability? Why you, of course. And it is a serious problem as selling-off those notes on the open market like the big boys on wall street do is not permitted - for your safety.
You cannot ‘serve as a contractor’ in the construction of a home for seller financing either. But how is that defined, by State law? Who knows, maybe one day we’ll find out these and other answers from the CFPB who apparently can make-it-up as they go along.
Would structuring deals as land contracts or lease options get around ‘selling’ the property? Nope. Dodd-Frank Act picks that up. What if I keep selling properties in my IRA, would that get around the ‘Safe Act’. Nope. Such IRA transactions are included too.
And if a borrower sues a seller-financed lender, (you) are now liable for their attorneys fees and the 5% loan origination fees in the event of a loss. If you try to foreclose on a property, after a new mandatory 120-day delinquency period has expired, then the borrower can turn around a force you to demonstrate to the court that you were in compliance with every aspect of this ‘Safe’ Act.
Guilty until proven innocent.
Originally published by Jay Butler at Assetprotectionservices.com.
Jay is the Managing Director of Asset Protection Services International, Ltd and has been an Asset Protection Planner for over 10 years. He holds a Bachelor's Degree of Fine Arts (BFA) from Boston University and is studying to obtain his Master in Laws (LLM) with a specialization in International Business Law through the University of London.