how does dodd-frank act affect note investing and seller carry back

[Jack Halley]

I've been considering getting into note investing but was told to avoid it because of the dodd-frank act could be a big problem. What is this act and why is it a problem for note investors?

[Dion DePaoli]

There is a plentiful amount of regulation both state and federal around mortgages and borrowers. Dobb-Frank provided borrowers with certain protections against predatory lending characteristics. I don't think it is too much of a burden or something to be fearful of anymore than RESPA.

One of the bi-products of DF, is the SAFE Act, there is both state and federal versions, where federal is the minimum standard that a state had to adopt but could have more in their state SAFE Act. For the most part, Seller carry-backs are addressed by the rule. The rule calls for any originator of a loan to have a license except where that loan may pertain to the primary residence of seller. So, a investment property offered with Seller financing is subject to license requirements.

There will likely be some future related legal events arise out of this and some unknowns are present until such time as concepts are challenged in court. For instance, some investors have ignored or have been slow to adhere the license requirements, so those notes in existence but because there has not been an extensive enforcement of rights and remedies, the body of law around non-compliant Seller origination is not filled out well. For instances, it is not well understood how proof or an originator will be provided in when mortgagee and mortgagor are in contest with each other. Will the security instrument be nullified or deemed unenforceable? Not too sure. We will have to see what the future brings on the issue.

That all said, prudent diligence in the purchase of the note or the origination of the note is necessary to protect your interests as an investor. Simply stated, use a fully licensed mortgage broker to originate any Seller mortgage. Get documentation of the same if you purchase one.

Outside of a couple new twists, like above, DF is not any barrier to entry into the note investing world. You do however, need to be aware of more rules and laws when you are a note investor opposed to real property. The first place to always start, is go read the rule for yourself and do not take interpretations of the rule from folks "off the street", which seems to be like the person who said DF is a problem.