Can I Loan Money to Father in Law under Dodd Frank Rules

Question

I had asked this before, but did not have the supporting links, so I am asking again with reference. My father in Law would like to burrow money so he can buy a new house. I would provide a bridge loan secured by the old house and he would pay me back once the old house is sold. Is this legal under Dodd Frank as I am definitely not a mortgage broker? See link below for the detailed explanation.

http://barneswalker.com/seller-financing-restrictions-under-the-dodd-frank-act/

Brian Gibbons · Answer

@Curtis Mears

Disclaimer

The information contained in this information is based on the  research through several sources and is not to be relied on for any  transactions occurring anywhere without consulting your attorney. No  representations can be made on how any court in any state or federal,  will interpret the regulations or apply them, and that said  interpretation or application will be different from this analysis of  the law.

Therefore, there is no guarantee that relying on this  analysis will prevent governmental or civil actions against the  lender/seller. Nothing in this analysis should be construed as legal  advice and relied upon, as each transaction must be separately analyzed.

Further,  I strongly recommend anyone seek independent legal advice on any  specific transaction contemplated after January 10, 2014 prior to any  consummation

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Dodd-Frank Summary The Dodd-Frank Act took effect January 10, 2014 and changes the rules for seller financing for those not qualifying as exempt.

The most relevant changes are:

� What information am I required to get from buyer to prove their capability to pay? Subtitle B, section 1411

A: At a minimum, creditors generally must consider eight underwriting factors: (1) current or reasonably expected income or assets (2) current employment status (3) the monthly payment on the covered transaction (4) the monthly payment on any simultaneous loan (5) the monthly payment for mortgage-related obligations (6) current debt obligations, alimony and child support (7) the monthly debt-to-income ratio or residual income and (8) credit history  *Creditors must generally use reasonably reliable third-party records  to verify the information they use to evaluate the factors. � What is a qualified loan?

A: A qualified loan: (1) cannot have a negative amortization (2) cannot have a balloon payment (3) must be for 30 years or less (4) cannot have prepayment penalties in excess of a schedule set out in the regs  (5) can be a variable rate, but the underwriting must be based on the  highest interest rate it can be during the first five years. (6) the creditor must verify income and assets and debts through 3rd party reports  (7) the creditor need not verify employment status per se, monthly  payment per se, or simultaneous loans except as they fit into the debt  to income ratio (8) the creditor need not verify credit history, but  as a practical matter will do so as part of determining the debt to  income ratio � What is the 120 day rule?

A: Loan servicing  regulations in Dodd-Frank require the loan be delinquent for 120 days  before you can begin a foreclosure. You must engage in lost mitigation,  loan modification, etc. and can’t do any kind of foreclosure action  while the loan modification is pending.

� What makes me a mortgage originator? How do I become an exception as home seller?

A:  The rules define a “loan originator” as a person who, for or in  expectation of direct or indirect compensation or other monetary gain,  performs any of the following activities:

(1) takes an  application, offers, arranges, assists a consumer in obtaining or  applying to obtain, negotiates, or otherwise obtains or makes an  extension of credit for another person” OR

(2) represents to the  public through advertising or other means that such a person can or will  perform any of these activities. A “loan originator” includes  individuals and organizations, as well as an employee, agent or  contractor of the creditor or loan originator organization.

A loan originator may include an independent mortgage broker or a bank loan officer.

Therefore, if you “make an extension of creditor for another person” you are a mortgage originator.

As  a selling homeowner who is going to do seller financing, you can be  considered a mortgage originator. The only exception that applies to a  home seller under the rules is someone who only “originates” 3 or fewer  loans a year.

Under TILA, any person who originates 2 or more mortgages referred to in subsection  (aa) of this section in any 12 month period or any person who  originates 1 or more such mortgages through a mortgage broker shall be  considered to be a creditor for the purposes of this subchapter.  However, this is different than mortgage originator.

� Balloons are not permitted, but are there any provisions allowing interest rate to rise each year?

Must it be fixed for five years before increase? How much can it increase?

A: Those restrictions apply if you are trying to fit under the exclusion to the originator rule as a seller financer.

Once you are doing more than 3 loans per year per person/entity, all the provisions of Dodd-Frank apply.

Therefore, once you want to be incompliance, you must comply with all the regulations.

The  qualifying exclusion restriction on adjustable rates is that they can  only adjust after five years, and must have the margin tied to an index  such as LIBOR. Additionally, they must have “Reasonable” annual and over  the life of the loan limits. It appears that number is a maximum 2%  annual and 6% lifetime of the loan increase.

� How do I become exempt from Dodd-Frank?

A:  Don’t originate more than 3 seller financed deals per year in any  entity you control. Commercial deals are exempt, loans to non-owner  occupied buyers are exempt, and if buyer and seller are entities, it’s  exempt.

� If I become an exception, does any of the law apply?

A: Yes! You must still meet the following criteria:

(1) No balloon (2) Interest rate fixed for 5 years (3) You qualify your buyer

� What must I do or not do to buy and sell with owner financing?

A:  Buyers are the ones receiving the protection, and therefore none of  this applies. Sellers who sell with owner financing more than 3 times  per year will become mortgage originators and must comply with the  requirements of Dodd-Frank.

So, if your entity sells more than 3 per year, you must comply with all the rules.

� Can I do 3 deals each in different entities if I control all? Subtitle A, Section 1401

A:  The entity control question is more complex. If the same person  controls multiple entities, then the rules may apply; however, there is  no clear distinction in the Act as it does not address this issue.

We believe you may own several entities doing up to 3 deals and comply with the exemption.

� What is the penalty if I don’t comply with Dodd-Frank and I’m not exempt?

A:  Any borrower on a consumer loan secured by real property has 3 years to  bring suit against a lender for failing to consider the borrower’s  ability to repay the loan.

If they succeed, the borrower is  entitled to EVERYTHING THEY PAID THE LENDER FOR THE PREVIOUS 3 YEARS  plus attorney fees, costs, etc. At any time after the loan is made (3  years or not) the borrower may bring this as a defense in set off to any  foreclosure action and recover the previous 3 years of payments!!

�  We sometimes do 10 year lease options when homes are over-leveraged.  Will this be considered as owner financing? If so, how can we fix it?

A:  A 10 year lease option may fall under Dodd-Frank if it can be construed  as a seller financed transaction. Lease options are considered loans if  the renter/borrower” is attempting to build equity in their primary  residence. One has to be careful of how the lease options are structured  to make sure there’s no equity buildup or other terms that would make  it qualify as a sale. The IRS may consider a lease option with a 3 year  term as a sale, but this should not be confused with Dodd-Frank.

� Is a private money loan considered a security under SEC rules?

A:  Correct. In general, under the Securities Acts, promissory notes are  defined as securities, but notes with a maturity of 9 months or less are  not securities. Securities Act § 2(1), 3(a)(3); Exchange Act §  3(a)(10). Likewise, the US Supreme Court sets a rebuttable presumption  that a note with a maturity over 9 months is a security unless it  resembles a type of note that commonly is not considered a security.  Reves v. Ernst & Young, 110 S. Ct. 945 (1990).

The US Supreme  Court in Reves recognizes that most notes are, in fact, not securities.  The Court provides the following list of notes that are clearly not  securities, irrespective of their maturity. Notes that fit into any of  these categories are not securities.

o A note delivered in consumer financing. o A note secured by a mortgage on a home. o A note secured by a lien on a small business or some of its assets. o A note relating to a “character” loan to a bank customer. o A note which formalizes an open-account indebtedness incurred in the ordinary course of business. o Short-term notes secured by an assignment of accounts receivables. o Notes given in connection with loans by a commercial bank to a business for current operations.

Disclaimer:  It has not been proven, if in fact, a private money loan is or is not a  security as there is a lot of dissention on the subject. One  interpretation is that it is not considered a security based on the  statutes above. No representations can be made on how any state or  federal court will interpret the regulations or apply them. And that  said interpretation or application may be different from this analysis  of the law.

� What about when we assign a long term lease option with equity build-up for the tenant buyer?

A:  In this case, you are assigning. You aren’t the seller, and therefore,  even if the lease option were considered a sale, a homeowner may sell  their home with seller financing or lease option and be excluded from  Dodd-Frank.

Conclusions Dodd-Frank and the  Consumer Financial Protection Bureau are set-up to protect consumers  from predatory loan practices by institutions and other lenders. While  owner financing is mentioned, it is not a big focus of the Act. Your  focus should be on maintaining exemption by knowing and adhering to the  rules. If you’re concerned, you may wish to hire a loan originator to  process your deals in conjunction with your attorney.

**A Good  Idea: Use a disclaimer or notice on the documents noting that the loan  is NOT subject to Dodd-Frank regulations (and why) and provide a  specific closing document that outlines Dodd-Frank so the borrower can  make an informed decision to go forward with the deal.

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You buy it and resell it to your father in law?

First thing, see a RMLO, registered mortgage loan originator in NC.

Shari Bertsch · Answer

Brian - thank you for cutting to the core and outlining all of this so clearly.   Even those of us who "think" we've got a handle on this it sure is good to see you doll wait out an outline form. Thanks for sharing.