Question about legality?

Question

Hello allI have been reading this forum and wow, lots of great discussion and tons of knowledgable people. I wasn't aware of all the regulation regarding lending, now I am wondering about a transaction I did in the past. If there is no lien recorded do you need to have an MLO involved? Can you write loans secured with property if the lender has physical possession of the deed? I had a family member approach me looking to invest. At the time, I had 50% equity 720+ FICO, high income. I was going to sell in three years anyway, so we worked out a loan agreement and had it notorized. I had a 30yr fixed with chase at the time, if that matters. I asked for a payoff statement and my family member wired the money. Property was reconveyed to me and the deed and loan agreement went into my family members safe. 2 years later I sold the home and escrow asked to see all the paperwork. I provided them the full paper trail. From payoff request, to canceled checks showing I paid the note. Incidentally during this time I bought a car and when I spoke to the finance guy he was tripping over himself to loan me money. Was he able to see that I had a free and clear house? On my car loan app I put a mortgage payment down, and you could see the monthly payment on my checking acct statement. The funny part was I sold the house and paid off the car loan 3 months later.To top this off the family member who loaned me the money was audited by the IRS ! As far as I know, they passed with flying colors and it had nothing to do with our agreement. Thanks for any insight.

Verna M. · Answer

That I am aware of. And yes, I had insurance. I was more concerned about getting my family member in trouble for lending without proper licensing as there seemed to be many threads here about that sort of thing. Warning people about new laws that have been passed in regards to consumer lending. This was awhile back. I plan to do more business with this family member and while they are a bit cavalier (and in this instance it was in my benefit) I want to make sure we are to the letter of the law if we move forward in a different direction or I borrow more funds from them in the future. and it's the kick in the ass I need to write up a will!

Chris Martin · Answer

Yup. Some times everything works out. Some times not. I hope you had/have hazard insurance too. The named insured won't cover your lender. Lot's of things missing that the rest of us take for granted. Next time, I'd recommend that you follow simple practices like recording documents that should be recorded. My 2 cents. Not legal advice.

Jeff Rabinowitz · Answer

I do not know California law but it is unlikely that it was illegal to take the loan from your family member; however, you left your family member in a very vulnerable position. You did not record a mortgage so, if for any reason, you could not pay your family member back they could not have foreclosed on the home to recover their funds. Since the title was clear you could have taken out another loan on the property and your family member would not have been notified. I suspect you had no intention of doing this but what if you were incapacitated or died and someone stepped into you place and did it? What if your family member died--would their heirs know this loan was outstanding and would they have known how to collect it? It sounds like everything went as planned but this could have resulted in an expensive lawsuit.

Verna M. · Answer

The part about me being incapacitaed it what I needed to hear. I didn't even think about that! Well, this is a vailid concern, and thanks for thinking of it. At the time of doing this, my only concerns were with legality with the IRS and NMLS. At the time, I had no heirs or will. The house would have gone to probate. (!!!!!!!!!) I don't know how I could have taken out another mortgage? Because I tried! The payment was clearly shown on my checking account, institutional lenders figured there was a note and would not give me a loan, only a HELOC. Im sure I could have found an alternative lender to write me a note on the house. As far as if my family member died, yes their heirs were aware of the deal.

Blair Poelman · Answer

the purpose of recording is to provide constructive notice to the world of the parties with interest in a property, as well as establish lien priority, secure an interest position, etc. Don't know about your state, but here it's not legally required to record a lien. However if a lien holder ever wants to do anything with their interest (foreclose), their position will be much more powerful if the position is recorded. The car salesman was probably just excited to sell you a car. He likely had no clue what your house situation was.