Question about legality?

[Verna M.]

Hello all

I 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. 

[Jeff Rabinowitz]

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.