Must I use an originator for a private seller deal?

Question

I've done a lot of cut and pasting Edward Scissorhands-style of many posts on BP that address seller financing, but there are several differing opinions on the topic of whether or not it is necessary to use a mortgage broker who originates secondary market loans for a NOO transaction.

My question:  If I have an attorney prepare the note of Trust Indenture to be recorded at the county courthouse, use a title company for the rest of the transaction, and use a third party servicer for payments and escrow, would
that satisfy SAFE act requirements? The buy/sell would also be handled by two real estate agents.

I ask because I'm drawing up an offer where the seller has indicated interest in financing, and while I don't want to complicate things (it may scare them, they are older and tired of the property) I do want to have all of my ducks in a row.

Page Huyette · Answer

Thanks guys.  Hopefully this thread will shed some additional light on the subject for others in the future.  Regarding the quote above, and realizing that originators and agents are two completely different animals, I had a thought.

We are negotiating through our agents, not with each other, so this should also offer a bit of protection I assume.  I am not suggesting that the agent is responsible for any origination tasks or prequalification or anything of the sort.  But, by performing this transaction through agents, using an attorney for promissory note, Trust Indenture, escrow instructions and the reconveyance deed and using a 3rd party servicer to handle payments and escrow, those bases are covered.

I am performing due diligence from all angles to ensure this goes smoothly, if it goes that is :)

Bill Gulley · Answer

Thank you Dion, these waters are rather untested to date, the insight I provided is from experience, there are many "life events" that can come into play after a note is made, not just can, but do.

The best thing to do is to avoid issues popping up in the future.

Don't misunderstand, the lender and the borrower ultimately must agree to the terms. It si really rather unclear how this is accomplished as it is clearly part of the negotiation in setting loan terms, a matter specifically addressed as an underwriting and origination function. A buyer could set the basic terms in an offer, interest rate, amount, amortization and loan term, anything could be offered. That offer then goes to the seller, they could counter or agree. But then the seller becomes obligated to comply with applicable law. Now the deal needs to be presented to an originator. It becomes thier duty to ensure the terms are in compliance considering the qualifications of the buyer/borrower and prudent, if not, the originator will need to modify the terms to meet the requirements. After the originator has completed thier task the note should be presented to both parties for agreement, if agreeable, you move on to settlement. I believe the trick here is that once the deal gets to the originator, that both parties deal in the negotiation of loan terms with the originator, not between each other so much.

If I were doing it, as I have, I have had both sitting beofre me and we hammer out a deal, either party may object to any term, but some are set by law, such as any balloon payment being required, but if they are a good broker/originator they should be able to offer payments being purchased or other guarantees that may off set such limitations that still meet compliance. While the SAFE Act states who can originate and what origination includes I'm sure the intent is not to say that whatever an originator dictates must be agreed to or that neither party can't negotiate thier position within the required limitations. There is also an issue if an originator refuses to do the note under terms desired. (Probably not an issue unless there is some violation)

Don't put a NOO residential 1-4 rental in a commercial loan line of thought, the Act is clear about that, it is not a commercial loan.

You mentioned a Trust, in such a case I really suggest you pay attention to the marketablity issues as Trustees/Administrators don't like notes (I know, but I have one using par as the value, some don't) as a Trust is required to give an accounting of the assets in Trust at the market value annually. These notes and real estate are usually liqudated at the first opportunity to acquire marketable securities that are easier to value. You might mention that and see if they agree that the par value or balance owing will be the value, that can be added to the note.

Just get with the attorney, I'm sure they have done this before, as the borrower, you aren't on the hook, so much, but I'd try to get the longest term I could at a reasonable rate considering the circumstances made known here. Good luck. :)

Bill Gulley · Answer

I suggest you not go off a blog post for advice.

You can't charge points in an equity funded loan anyway.

An attorney can originate a seller financed loan. Originate takes more into consideration under the SAFE Act than preparing a note and deed of trust. Origination also includes the underwriting of the borrower, setting loan terms and now, certifying the note was originated under a license, mortgage or law.

Iknow that in Cali the broker has leeway in originating a loan, beyond that, I suggest you get a mortgage broker/originator or ensure the attorney understands and can/will certify the note and you as a Realtor (or investor) not get involved in the processing or setting terms. Your seller can state what they will accept and then turn that over to the originator.

What happens if your seller/note holder dies and that note goes to an estate situation, it ends up in bankruptcy years later or the holder needs to sell the note and the note is found to be in violation of law?

First check with your state law to see if the transaction is covered under the SAFE Act, there are exemptions, if it is I suggest you follow the requirements. There are exceptions to owner occupied notes originated.

There are issues of charging any loan fees in connection with a loan, cash or equity, you need a license. But not charging any fee doesn't open the door to act as an originator, broker or lender, especially for others.

Again, there are instances where such a note may be required to be sold by an individual holder. The note should then be marketable. To have a marketable note any open market buyers, dealers and brokers, will want to know that note was properly originated. If a note is or was exempt from regulations, how do you prove that? You may need to go back years to show the holder lived in the property when it was sold and show that it was exempt. The best way to ensure the client receives a marketable note is to have it originated professionally. Such will also add value to the note with most buyers, at least in thier confidence as to the quality.

Liability arising out of any note origination survives the term of the note to statutory periods, 3 or 5 years usually.

Don't be afraid to use seller financing, it's still a good option! :)

Dion DePaoli · Answer

Page, the state act calls for a license to originate any residential loan unless exempt.  You can look up the full exemption list if you google the statue code below.  Moral of the story, Seller's are not exempt.  Your attorney can help you in accordance with the exemption statement below.

MO Safe Act:  
Unless licensed, no person may act as a mortgage broker,  mortgage lender, or mortgage loan originator with respect to a residential mortgage loan secured by a mortgage, deed of trust, or  their equivalent consensual security interest on a dwelling or on residential real estate located in Montana, unless the person is exempted from licensing requirements by Mont. Code Ann. 32-9-104. Mont. Code Ann. 32-9-102, 32-9-103.

32-9-104. Exemptions -- proof of exemption.     (l) a Montana-licensed attorney who negotiates the terms of a residential mortgage loan on behalf of a client as an ancillary matter to the attorney's representation of the client unless the attorney is compensated by a mortgage lender, mortgage broker, or mortgage loan originator or any agent of the mortgage lender, mortgage broker, or mortgage loan originator;

Bill is offering you insight to the origination process which from time to time and amongst different situations can be a problem.  If a Buyer somehow creates and delivers all the loan terms.  He is telling you that sometimes that event can cause problems related to the enforceability of the instruments.

If you use your attorney, it would seem this will add some layer of protection against that concept.  Certainly in order for a borrower to borrower and a lender to lend, terms must be mutually agreed to.  If it was looked at where the Seller provided terms only beneficial to the Buyer, that could have negative consequences.  For instance, if someone took advantage of Grandma Betty, getting favorable financing on her property, etc.

A title company is a title company.  A mortgage servicer is a servicer.  While agents of a real property transaction and mortgage, they are not SAFE Act parties.  SAFE Act is "Secure and Fair Enforcement for Mortgage Licensing Act of 2008".  The act applies to originators and loan negotiators (forbearance/modification) dealing with the origination event or any event where the public negotiates with a mortgagee such as modifications.

Page Huyette · Answer

Thanks Bill Gulley, great info as always.

If the seller agrees to the terms, I have an attorney ready to draw up the Trust Indenture in coordination with the title company.  It sounds as though are suggesting the seller needs to propose terms and not me (buyer).

This is a NOO property being purchased as an investment, with neither party having originated loans in this manner before.

Your point about the party dying is a good one--I'll check with my attorney to be sure that is handled in the paperwork he draws up.

Not seeing anything in my state's SAFE Act that makes this improper, but will check through the info again.

Page Huyette · Answer

Just found this blog post on the topic.  Doesn't completely answer my questions, but I'm getting there.

If the seller is carrying and not charging points (ie:  directly profiting from the loan transaction itself) then it works.  Since their profit comes from the sale of real estate and not the transaction, that excludes it?

Must I use an originator for a private seller deal?

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