Legal Issues Concerning Note Finding

[John Bagwell]

To all Note Finders,
After carefull research on whether note finders need to be mortgage brokers you must look at the legal definition of each state's legal definition of a mortgage broker. My states defination for a mortgage broker is the following:
21(a): "Mortgage broker" means an entity that obtains, attempts to obtain, or assists in obtaining a mortgage loan for a borrower from a mortgage lender in return for consideration or in anticipation of consideration.
Since note finding does not relate to obtaining a mortgage loan for a borrower from a mortgage lender...then I do not need to be a mortgage broker in my state.
But your entire blog discussion did not examine another very interesting law that relates to referral fees related to real estate related transactions. Referral fees can be paid to residents in only the following states:
Arizona, California, Florida, Georiga, Illinois, Indiana, Michigan, Minnesota, Montana, New Hampshire, Oklahoma, Oregon, and Virigina.
If you are doing any note business and earning a referal fee from an investor in any state not mentioned above, you are breaking a completely different set of state laws.

[Chris Martin]

John, no need for name calling. You have a legitimate point that I will comment on.

A real estate note is indeed a security. And as we all know, creating notes has always been quite different from buying existing notes. But the SAFE Act has really changed the whole industry. Virtually all states have implemented the SAFE Act (it is administered by states per the Act) and some states are more 'strict' than others. I will give you my perspective based on my state only.

Let me go on a slight tangent. {Tangent On.} Many people say you can't do various things under SAFE, like create notes through the sale of investment property. This is not true, per the NC Commissioner of Banks, "... a seller-financer may receive up to five residential mortgage loans in a calendar year without obtaining a license regardless of whether the property served as the seller’s residence" (Reference 1) and by state law (Reference 2). So I can create notes through seller financed transactions. But can I also service them? The answer also comes from (Reference 1) the NCCOB, "If the individual acting as Mortgage Servicer is the original seller-financer of the residential mortgage loan, no license is required." And if I so desire, can I sell this debt obligation? Well, why not? It turns out that if I originate or sell the debt obligation, and these actions are incidental to my business of rental real estate, I am not "in the business" of installment paper and the state law pertaining to Installment paper dealers (Reference 3) does not apply to my selling entity. In NC, if you are in the business of dealing in, buying, or discounting installment paper, notes, bonds, contracts, or evidences of debt... I would suggest you learn about and follow the state laws pertaining to the business per Chapter 105 on Taxation. Until 2010, I am exclusively a creator of notes, but with access to a SDIRA this may change in 2011, hence I am educating myself on this matter. {Tangent Off.}

The SEC? They may be concerned with the principal buyer if they are violating federal law. They don't care about a 'finder' assigning a contract. The REC? They don't have jurisdiction on existing notes, other than their forms allow for creating them (Reference 5). State securities commission? The "transaction" is an Exempt transaction (Reference 4) per item (5) in the list as long as the note is offered and sold as a unit.

1) http://www.nccob.org/NCCOB/Mortgage/FAQ/Company+Licenses.htm
2) http://www.ncga.state.nc.us/EnactedLegislation/Statutes/HTML/BySection/Chapter_53/GS_53-244.040.html
3) http://www.ncga.state.nc.us/EnactedLegislation/Statutes/HTML/BySection/Chapter_105/GS_105-83.html
4) http://www.ncga.state.nc.us/EnactedLegislation/Statutes/HTML/BySection/Chapter_78A/GS_78A-17.html
5) http://www.ncrealtors.org/uploads/2-T-sample.pdf "BY SELLER FINANCING" on 1.(d) and Standard Form 2A5-T

I also commented on your post here: http://www.biggerpockets.com/forums/70/topics/52242-are-note-finders-just-another-broker-

So my point is that you certainly should know your state law. Since John will not return a post (said so in his last post), let me just conclude that "note finding" and the "note business" has changed with the SAFE Act, but that doesn't mean you can't deal in debt. Just understand the parameters and know and follow the rules. This post is for entertainment purposes only and should not be considered legal advice.