Dodd-Frank Report on Seller Financing

Transcription

1 Ddd-Frank Reprt n Seller Financing December 10, 2013 Published by Glbal Publishing Inc Old St. Augustine Rd. Jacksnville, FL p f [email protected]

2 Table f Cntents I. Legal Disclaimer..2 II. Ddd Frank Summary.2 III. Questins & Answers. 3 IV. Cnclusins..6

3 I. Legal Disclaimer The infrmatin cntained in this presentatin is based n the research f Glbal Publishing, Inc. thrugh several surces and is nt t be relied n fr any transactins ccurring anywhere withut cnsulting yur attrney. As the regulatins discussed herein have yet t be put int effect. N representatins can be made n hw any curt in any state r federal, will interpret the regulatins r apply them, and that said interpretatin r applicatin will be different frm this analysis f the law. Therefre, there is n guarantee that relying n this analysis will prevent gvernmental r civil actins against the lender/seller. Nthing in this analysis shuld be cnstrued as legal advice and relied upn, as each transactin must be separately analyzed. Further, we strngly recmmend anyne seek independent legal advice n any specific transactin cntemplated after January 10, 2014 prir t any cnsummatin II. Ddd-Frank Summary The Ddd-Frank Act takes effect January 10, 2014 and changes the rules fr seller financing fr thse nt qualifying as exempt. The mst relevant changes are: Requires every lender t cnsider the brrwer s ability t repay the lan Requires that lenders cnsider at least 8 factrs applied against reasnable underwriting guidelines The Lender must write a qualified lan Requires lenders t wait at least 120 days f delinquency befre freclsing Ddd-Frank cmbined with the SAFE Act in the varius states, will require all wner finance transactins (except the exceptins) t be riginated by a Residential Mrtgage Lan Originatr Prhibits builders frm selling with wner financing Eliminates ballns and negative amrtizing lans and requires fixed rates fr 5 years with n prepayment penalties Sellers wh sell with wner financing mre than 3 times a year will becme mrtgage riginatrs and must cmply with Ddd-Frank N frced arbitratin clause is allwed in the buyer s nte DODD-FRANK REPORT ON SELLER FINANCING - DECEMBER 10,

4 III. Questins & Answers What infrmatin am I required t get frm buyer t prve their capability t pay? Subtitle B, sectin 1411 A: At a minimum, creditrs generally must cnsider eight underwriting factrs: (1) current r reasnably expected incme r assets (2) current emplyment status (3) the mnthly payment n the cvered transactin (4) the mnthly payment n any simultaneus lan (5) the mnthly payment fr mrtgage-related bligatins (6) current debt bligatins, alimny and child supprt (7) the mnthly debt-t-incme rati r residual incme and (8) credit histry *Creditrs must generally use reasnably reliable third-party recrds t verify the infrmatin they use t evaluate the factrs. What is a qualified lan? A: A qualified lan: (1) cannt have a negative amrtizatin (2) cannt have a balln payment (3) must be fr 30 years r less (4) cannt have prepayment penalties in excess f a schedule set ut in the regs (5) can be a variable rate, but the underwriting must be based n the highest interest rate it can be during the first five years. (6) the creditr must verify incme and assets and debts thrugh 3 rd party reprts (7) the creditr need nt verify emplyment status per se, mnthly payment per se, r simultaneus lans except as they fit int the debt t incme rati (8) the creditr need nt verify credit histry, but as a practical matter will d s as part f determining the debt t incme rati What is the 120 day rule? A: Lan servicing regulatins in Ddd-Frank require the lan be delinquent fr 120 days befre yu can begin a freclsure. Yu must engage in lst mitigatin, lan mdificatin, etc. and can t d any kind f freclsure actin while the lan mdificatin is pending. DODD-FRANK REPORT ON SELLER FINANCING - DECEMBER 10,

5 What makes me a mrtgage riginatr? Hw d I becme an exceptin as hme seller? A: The rules define a lan riginatr as a persn wh, fr r in expectatin f direct r indirect cmpensatin r ther mnetary gain, perfrms any f the fllwing activities: (1) takes an applicatin, ffers, arranges, assists a cnsumer in btaining r applying t btain, negtiates, r therwise btains r makes an extensin f credit fr anther persn OR (2) represents t the public thrugh advertising r ther means that such a persn can r will perfrm any f these activities. A lan riginatr includes individuals and rganizatins, as well as an emplyee, agent r cntractr f the creditr r lanriginatr rganizatin. A lan riginatr may include an independent mrtgage brker r a bank lan fficer. Therefre, if yu make an extensin f creditr fr anther persn yu are a mrtgage riginatr. As a selling hmewner wh is ging t d seller financing, yu can be cnsidered a mrtgage riginatr. The nly exceptin that applies t a hme seller under the rules is smene wh nly riginates 3 r fewer lans a year. Under TILA, any persn wh riginates 2 r mre mrtgages referred t in subsectin (aa) f this sectin in any 12 mnth perid r any persn wh riginates 1 r mre such mrtgages thrugh a mrtgage brker shall be cnsidered t be a creditr fr the purpses f this subchapter. Hwever, this is different than mrtgage riginatr. Ballns are nt permitted, but are there any prvisins allwing interest rate t rise each year? Must it be fixed fr five years befre increase? Hw much can it increase? A: Thse restrictins apply if yu are trying t fit under the exclusin t the riginatr rule as a seller financer. Once yu are ding mre than 3 lans per year per persn/entity, all the prvisins f Ddd-Frank apply. Therefre, nce yu want t be incmpliance, yu must cmply with all the regulatins. The qualifying exclusin restrictin n adjustable rates is that they can nly adjust after five years, and must have the margin tied t an index such as LIBOR. Additinally, they must have Reasnable annual and ver the life f the lan limits. It appears that number is a maximum 2% annual and 6% lifetime f the lan increase. Hw d I becme exempt frm Ddd-Frank? A: Dn t riginate mre than 3 seller financed deals per year in any entity yu cntrl. Cmmercial deals are exempt, lans t nn-wner ccupied buyers are exempt, and if buyer and seller are entities, it s exempt. DODD-FRANK REPORT ON SELLER FINANCING - DECEMBER 10,

6 If I becme an exceptin, des any f the law apply? A: Yes! Yu must still meet the fllwing criteria: (1) N balln (2) Interest rate fixed fr 5 years (3) Yu qualify yur buyer What must I d r nt d t buy and sell with wner financing? A: Buyers are the nes receiving the prtectin, and therefre nne f this applies. Sellers wh sell with wner financing mre than 3 times per year will becme mrtgage riginatrs and must cmply with the requirements f Ddd-Frank. S, if yur entity sells mre than 3 per year, yu must cmply with all the rules. Can I d 3 deals each in different entities if I cntrl all? Subtitle A, Sectin 1401 A: The entity cntrl questin is mre cmplex. If the same persn cntrls multiple entities, then the rules may apply; hwever, there is n clear distinctin in the Act as it des nt address this issue. We believe yu may wn several entities ding up t 3 deals and cmply with the exemptin. What is the penalty if I dn t cmply with Ddd-Frank and I m nt exempt? A: Any brrwer n a cnsumer lan secured by real prperty has 3 years t bring suit against a lender fr failing t cnsider the brrwer s ability t repay the lan. If they succeed, the brrwer is entitled t EVERYTHING THEY PAID THE LENDER FOR THE PREVIOUS 3 YEARS plus attrney fees, csts, etc. At any time after the lan is made (3 years r nt) the brrwer may bring this as a defense in set ff t any freclsure actin and recver the previus 3 years f payments!! We smetimes d 10 year lease ptins when hmes are ver-leveraged. Will this be cnsidered as wner financing? If s, hw can we fix it? A: A 10 year lease ptin may fall under Ddd-Frank if it can be cnstrued as a seller financed transactin. Lease ptins are cnsidered lans if the renter/brrwer is attempting t build equity in their primary residence. One has t be careful f hw the lease ptins are structured t make sure there s n equity buildup r ther terms that wuld make it qualify as a sale. The IRS may cnsider a lease ptin with a 3 year term as a sale, but this shuld nt be cnfused with Ddd-Frank. Is a private mney lan cnsidered a security under SEC rules? DODD-FRANK REPORT ON SELLER FINANCING - DECEMBER 10,

7 A: Crrect. In general, under the Securities Acts, prmissry ntes are defined as securities, but ntes with a maturity f 9 mnths r less are nt securities. Securities Act 2(1), 3(a)(3); Exchange Act 3(a)(10). Likewise, the US Supreme Curt sets a rebuttable presumptin that a nte with a maturity ver 9 mnths is a security unless it resembles a type f nte that cmmnly is nt cnsidered a security. Reves v. Ernst & Yung, 110 S. Ct. 945 (1990). The US Supreme Curt in Reves recgnizes that mst ntes are, in fact, nt securities. The Curt prvides the fllwing list f ntes that are clearly nt securities, irrespective f their maturity. Ntes that fit int any f these categries are nt securities. A nte delivered in cnsumer financing. A nte secured by a mrtgage n a hme. A nte secured by a lien n a small business r sme f its assets. A nte relating t a character lan t a bank custmer. A nte which frmalizes an pen-accunt indebtedness incurred in the rdinary curse f business. Shrt-term ntes secured by an assignment f accunts receivables. Ntes given in cnnectin with lans by a cmmercial bank t a business fr current peratins. Disclaimer: It has nt been prven, if in fact, a private mney lan is r is nt a security as there is a lt f dissentin n the subject. Our interpretatin is that it is nt cnsidered a security based n the statutes abve. N representatins can be made n hw any state r federal curt will interpret the regulatins r apply them. And that said interpretatin r applicatin may be different frm this analysis f the law. What abut when we assign a lng term lease ptin with equity build-up fr the tenant buyer? A: In this case, yu are assigning. Yu aren t the seller, and therefre, even if the lease ptin were cnsidered a sale, a hmewner may sell their hme with seller financing r lease ptin and be excluded frm Ddd-Frank. IV. Cnclusins Ddd-Frank and the Cnsumer Financial Prtectin Bureau are set-up t prtect cnsumers frm predatry lan practices by institutins and ther lenders. While wner financing is mentined, it is nt a big fcus f the Act. Yur fcus shuld be n maintaining exemptin by knwing and adhering t the rules. If yu re cncerned, yu may wish t hire a lan riginatr t prcess yur deals in cnjunctin with yur attrney. **A Gd Idea: Use a disclaimer r ntice n the dcuments nting that the lan is NOT subject t Ddd- Frank regulatins (and why) and prvide a specific clsing dcument that utlines Ddd-Frank s the brrwer can make an infrmed decisin t g frward with the deal. DODD-FRANK REPORT ON SELLER FINANCING - DECEMBER 10,