INTRODUCTION TO REGULATION OF PRIVATE TRANSACTIONS
For no noble or viable economic reason anyone can honestly identify, as Congress has gone about re-regulating the Big Bank lenders for the past 5 years, it has also been quietly slipping in some new and (probably) unconstitutional laws to inexplicably limit the property and contract rights of private citizens. This is no more convincingly reflected than in what Congress has done to the right of a private citizen-owner to sell his or her property on an owner-carried installment sale. In essence, Congress has tried to make the simple act of a seller loaning to a buyer as prohibitively new-rule-heavy as the Regulatory Labyrinth that is being laid out to “clean up” the Fortress Five banks—the actual ones who drove the marketplace into the ground with crooked loans and DOA derivatives. The effect of the new private-loan laws is an unnecessary complexity that amounts to a regulatory veto against private citizens who wish to AVOID business with the big banks and their bad financing terms by offering or accepting private seller-buyer finance as an alternative.
Owner-carries are an effective and economical (and totally traditional) counterbalance to do deals in a conventional banking environment which has become ever-more-hostile to real estate lending. Throughout real estate financing history, owner-carries have been a major part of the market and in some eras it has been almost the only financing mechanism to move real estate, such as during the last big financing crunch between 1982 to 1989. What the market needs now is Congressional assistance to open the way even more for this kind of alternative financing. But by these new Acts, Congress – under the rubric of “protecting the consumer (from himself?)” – attempted instead to “dead-end” seller finance. By requiring the intervention of the professional loan community even into one-on-one private, self-financed sales and by attempting to mandate that all private finance must be on terms more onerous to th e seller/lender than even conventional finance, the new Rules work instead to COMPEL private citizens to allow conventional lenders and mortgage brokers to become their financial partners (getting a dip into the consumer’s private cash and equity) even when merely selling their own property, using their own money.
This “nationalization” of private property and usurpation of private money was done in smoke-filled back rooms without publicity or fanfare. It was also passed without any showing that owner-carries have done any consumer harm that needed regulating. In fact, judging by the MLS statistics reported in each locale where owner finance is showing a resurgence, the only impact from owner-carries has been to uplift sales in speed, volume and price and in some locales to have single-handedly resuscitated the entire market by liberating properties otherwise trapped by the “no” of empty Banks and the “nix” of hostile conventional underwriting requirements. The owner carry process provides reasonable, flexible, privately-dickered deals in which sellers get better returns, buyers get finance customized to their resources and “almost any need is possible to meet.” No “one-size-has-to-fit-all-or-the-deal-dies” as the Banks offer. It is probably the only method by which many respectable middle class families without 20% down or with one small credit ding will ever be able to escape increasingly buck-burning rents and hope to buy another home.
Under the federal Acts, the states can opt for their own regulations by adopting in whole or part a uniform Mortgage Loan Originators Act within 1 year of the adoption of these federal Acts. California and Arizona (and over a dozen other states) have adopted their own regulations under that within the statutory period of time, for the most part, keeping the worst restrictions intact and thus joining the wrecking crew. Legislatures are owned by the Bad Boy Bank lobbies, too.
The only power group this anti-consumer private-carry law could have been passed to assist is, obviously, the Banks. The rationale: If a consumer has no option but to do business with the Bad Boy Banks, the consumer has to swallow whatever B.S. is dealt out and pay whatever the Banks want. It is transparently crafted by the bank lobbies to “cut the owner-carry option off at the financial pass” in a political strategy best described as “ . . . Up against the wall, Mutha . . .!”
Worse, the Bad Boy Banks and their legislative Coprophagic fellow-travelers have tried hard through a host of public dis-information (or more accurately, a lack of genuine information) campaigns to make it sound impossible to do anything else but give up on owner-carries and surrender their deals to the teeth-gnashing of the “no-deal-we-cannot-bust” Banking wolves.
Okay. Does it truly boil down to “heads they win, tails we lose?” Hell, no!
It’s not “all over but the shouting” for owner-carries! Outside of the fact that many real estate and consumer organizations in this country are howling for the repeal of all or part of these Acts and will likely get a lot of it over time as public outrage awakens to the cons and deceits played them, the fact is there are still ways to sell one’s own property and spend or loan one’s own money in socially responsible ways as one wishes, to realize one’s constitutional rights to do so and make deals work through owner-carried finance . . . and to avoid being forced by cigar-chomping Banking Weasels and their political hyenas into signing their pacts with the Devil. The deals can be done. It’s just not as simple as it used to be . . . but is anything? Now let’s get to the Acts and what t o do to save our marketplace.
THE BIRTH OF THE TWO LAWS:
There are two new federal laws that affect seller financing. On July 30, 2008, President Bush signed into law the Secure and Fair Enforcement for Mortgage Licensing Act (the SAFE Act). The SAFE Act requires licensing or registration of loan originators. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act or “DFA”). The Dodd Frank Act restructures the oversight of financial regulation and includes amendments to the Truth in Lending Act (TILA). Both of these laws will affect seller financing, except to the extent exempted.
A larger (but still summary) description of the laws follows. After it also follows a list of the transaction styles and sales it DOES NOT cover (and Congress and the banks using it as a scare tactic neglected to mention).
SUMMARY 1: THE SAFE ACT
This act negatively targets not just owner-carry consumers and their owner-carry loans, but also attacks real estate licensees by “a regulatory shot over the head” which suggests that they might be arrangers of credit requiring not just a real estate license but a mortgage license to go about their normal and historic business. Licensing of “loan originators” under State laws enacted pursuant to the SAFE Act and meeting minimum federal requirements is already required and was clear back to the times of the last attack by Congress and the Courts on private property and transaction rights in 1982, when the Garn Act – dealing with due-on-sale clauses – was passed. Anyone involved in loan originations should check out both their own state law and the federal requirements.
The HUD website (where SAFE is explained) has information about the SAFE Act. Informal HUD guidance noted there exempts anyone who provides financing for the sale of their own residence from licensing under the SAFE Act. HUD has proposed a rule to make its guidance official and until that is resolved (and HUD recommendations are usually followed) it is at least an official substantive policy statement on which the real estate community can usually rely. Some state laws provide more flexibility for seller financing than HUD permits, but how HUD will respond is not known. The National Association of Realtors’® (NAR) February 12, 2010, comments on HUD’s proposed rule urges a total exemption for seller financing and alternatives that would still provide much needed flexibility. As of January 2011, HUD had still not issued the final regulations. When the Consumer Financial Protection Bureau (CFPB) goes into effect on July 21, 2011, it will take over SAFE Act implementation from HUD. For real estate licensees, the law exempts those who only perform real estate brokerage activities unless compensated by a lender, mortgage broker, or other loan originator (or their agent) for loan origination activities.
SUMMARY 2: DODD-FRANK ACT
Title XIV of the Dodd-Frank Act (the “DFA”) imposes rules on mortgage originators to promote responsible, affordable mortgage lending (see exemption in next paragraph). “Qualified mortgages,” as defined in Title XIV, are subject to fewer requirements. Title XIV establishes extremely complex requirements, and the implementing regulations are needed to interpret the law and provide additional guidance. Title XIV will not take effect until final regulations to be issued by the CFPB go into effect. CFPB has until January 21, 2013, to issue the final regulations, and they must take effect no later than 12 months after their issuance. If CFPB misses the deadline, Title XIV takes effect anyway on January 21, 2013. What this means is that these rules are NOT in effect yet…and may never be in their current form or otherwise.
When and if they are ever in effect they provide as follows:
The DFA definition of mortgage originator exempts an individual (or an estate or trust) that provides mortgage financing for no more than 3 properties in any 12 month period from the requirements of Title XIV, but only if the financing meets certain rules:
1. The seller did not construct the home.
2. The loan is fully amortizing (no balloon mortgages allowed).
3. The seller determines in good faith and documents that the buyer has a reasonable ability to repay the loan.
4. The loan has a fixed rate or is adjustable after 5 or more years, subject to reasonable annual and lifetime caps.
5. The loan meets other criteria set by the Federal Reserve Board.
COMBINING BOTH SAFE AND DODD-FRANK: “THE NEW SAFE/DFA ‘EXIT RULES’ TO MAKE YOUR DEAL WORK”
Yes, it is true, the two Acts are actually trying to tell private citizens what they can do with their own property and what transactions they can do with their own money without having also to pay the Banks a percentage of the entire deal to handle it for them. It actually tries to prohibit all private transactions and make Bank intervention mandatory. But, as in all law, after the shock subsides of seeing the Feds with their noses so deeply in the private financing and loan affairs of the average citizen and after some good consumer lawyers look at this, there are places where the Acts miss the mark entirely – and apparently
unintentionally – and still permit private transactions.
One also ought not lose sight that many of these are not “hard” (in effect or in enforcement) yet under law and may never be (see above hurdles and chances for radical changes) and that they are under major legal and lobbying challenge from many, many consumer strongholds, including NAR®.
Nonetheless, assuming these SAFE and DFA rules might be or remain in effect, there are properties and deals they do not prohibit as written. Those are, collectively:
BY PROPERTY TYPE:
Single sale of a seller’s primary residence to another (HUD exclusion under SAFE and DFA)
A residential property to a family member (HUD exclusion under SAFE
A residential property to someone who will use it as a rental or vacation home (SAFE/HUD exclusion and appears to be a DFA exclusion, i.e. the “character” of the transaction is not just how the seller uses the property but also how the buyer uses it)
A non-residential property, meaning a residential property not lived in by the seller and/or sold for rental or investment, bare land, a commercial property of any kind, business, commercial rental, office, industrial, farm, etc. (excluded both under SAFE/HUD and DFA)
According to HR 4173, a seller is allowed to owner-finance up to 3 (qualifying) residential properties a year without worrying about licensing. Again, non-residential properties are exempt. (SAFE/HUD and DFA exclusions)
BY TRANSACTION TYPE, REGARDLESS OF PROPERTY TYPE:
The rules cover only transactions which qualify as “installment sales” and the act speaks only of trust deeds, mortgages and sale contracts, contracts for deeds and leases under $25,000, but does not list any the more modern alternate quasi-financing instruments such as real property leases or options of more than $25,000. (not covered in SAFE/HUD or DFA except for consumer leases under $25,000).
The rules do not apply when the transaction is not one with a “consumer buyer“ or is not otherwise a “consumer transaction.” Transactions between seller-buyer business entities as a business transaction (like commercial transactions, transactions between artificial business entities such as corporations, LLCs, etc., where the property at least in the hands of the buyer is “non-consumer”) do not qualify as a “consumer” or a “consumer transaction” under the TILA, Regulation Z and Regulation M and thus appear to be excluded under both Acts, which are recited according to their terms as being designed to protect buyers who qualify as “consumers” in transactions that qualify as a “consumer transactions.”
Covered transactions must be where the buyer or borrower is a natural person and the transaction is legally defined as “a purchase for the personal, family or household use of the (natural person) buyer or borrower” under the TILA and other federal protective regulations. For example, the sale of a single family detached home between an LLC seller-investor and an LLC buyer-investor is not a “consumer transaction” between“consumers”.
Assumptions of underlying conventional loans are not covered by either Act.
Sales and loans that pre-date the effective dates are not covered by the Acts, (though current refinances or resales of those might be)
Private use of licensed private mortgage broker: One safe harbor for those who want a general “safe pass” in the deal that meets both SAFE and DFA rules or for those who are bumping directly into the SAFE/DFA regulations or for those who have used up their “3 transactional freebies,” is associating a “licensed mortgage originator” (“LMO”) – this seems to bless the deal entirely.
See more on the NAR® Webiste:
THE WINDUP—THE ANSWER FOR AVOIDANCE OF THIS OBSTACLE IS IN IDENTIFYING PROPERLY WHAT IS BEING BOUGHT AND HOW ONE CRAFTS THE SALE!
In sum, licensees and parties should craft the transaction to fit the property types or transaction types that are excluded, use the financing methods that are other than specifically identified as the targeted “installment sales”, and use the transaction party-types (artificial parties) that are not qualified as “consumers” engaged in “consumer loans or transactions” – any one of which escapes the worst of SAFE/DFA. If the present status does not fit in one of those categories, then consider changing the pre-closing status to fit one or all of the exclusions. For example: The home may be a regulated personal residence to the seller but sold as a non-regulated investment property to the buyer; the transaction might currently call for a regulated AIDT, but it can be converted into a non-regulated lease-option bearing all of the same economics and tax affects with artful drafting. With these ruby slippers, then, Dorothy can still get back to Kansas. Just not on a bicycle or a balloon.
It is self-apparent that the use of lease-options for private consumer transactional finance has now become the medium of the moment. It just might be the ONLY relatively safe-harbor left for residential finance (though it has always been great for all forms, including commercial)!
Last, the simplest solution if one of the parties wishes a “safe passage ticket” and does not wish to avail of any of the exclusions or transactional alternatives, is to obtain the services of a licensed mortgage originator (“LMO”) to bless it, and currently the websites are overflowing with LMOs offering to do just that at a flat fee. What this means in practice is that one still does precisely the owner-carry deal wanted on any land desired and by any instrument, but for a percentage (though less than the banks) the LMO (currently running on the net for single family detached residential at about $500 a pop) can and does blesses the deal the way a Bank does under SAFE/DFA. The LMO becomes a consumer’s one-time “rent-a-bank” and nips off only a toe instead of the leg wanted by the Bank. For bigger players who anticipate lots of deals, one can permanently hire an LMO for one’s office (they are cheap as there has been no business for them recently) or become licensed one’s self or license one of one’s entities as a LMO (and make money at that, too).
The point is: As in all things, where there is a will, there is a way.
To the extent the Acts interfere with private property, effect a “taking” of it by clouding free transfer of it or derogates private contract or dictates how one spends personal money in real estate, the law is blatantly unconstitutional. This opinion is widely shared among legal and economic scholars and for that reason all of the responsible real estate and other consumer advocates are pouring fire out of the biggest guns they have to repeal it in whole or part, to cut back the Acts’ more onerous terms or, better and more likely attainable, to exclude private consumer-to-consumer transactions, entirely. Stay tuned. A Rule might be out as early as July, 2011. But in the meantime, keep on trucking, using the available methods to by-pass this detour.
Since America’s independence, it has been the traditional and private province of citizens to handle their property and money for lawful productive purposes as they see fit without unconstitutional dictates or gratuitous meddling from the Big Interests or the Feds. It is in major part the capitalistic creative liberty that built this country into the strongest nation in the world.
Corrupt Banks and their black-bag legislators should not be permitted to toss sand into the well-oiled constitutional machinery of our private financial transactions and property rights for their back-alley gains – no matter how great their self-induced “emergency”. In fact, they might do better by learning to emulate the self-reliant dynamics of the private market where money is still made the old-fashioned way: By earning it!
In the meantime, until the crooks, morons and fellow-travelers are evicted from the palace, by using our wisdom and the loopholes in the Acts, we must and can cope with this latest installment in a long litany of political stupidity. We will, as shown above, professionally pirouette and craft a transactional by-pass to the Economic Hell-Holes these people are creating for our country, our industry, our clients and our next generation.