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Dodd-Frank 2014


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#1 MichaelG

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Posted 28 October 2013 - 03:05 PM

Has anyone analyzed the ramifications of provisions of Dodd-Frank 2014 as it releates to options, lease options, seller financing, such as the debt-to-income ratios, interest rates allowed, etc.?

 

There seems to be quite a buzz about it.  Don't know if it's something serious that needs to be reviewed as far as how we do business...or if these are just 'seminar promoters' who are using the latest news to develop a new product/seminar/webinar.

 

Your thoughts?



#2 MichaelC

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Posted 28 October 2013 - 08:08 PM

Seems to me the law is about tightening rules for lenders, making sure that borrowers are legit and can actually pay back the loan.  I don't see it as a bad thing, and I don't see a big effect on what we do.  In fact, it might be a boon to our business because buyers who can't qualify today make for tenant/buyers, instead.

What have you been hearing?



#3 MichaelG

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Posted 29 October 2013 - 06:56 PM

Here's a partial post from another forum that caused my concern:

(The words in red are my emphasis.)

____________________________________________________

 

 

Real estate investors are in for a rude awakening January 10th, 2014.  The way you do business will change dramatically thanks for the US government and Dodd-Frank specifically.

There are 2400 pages of new rules and regulations in Dodd-Frank….enough to make your head spin.  “This makes the SAFE Act look like kindergarten,” attorney Bryan Dunklin said last week during out weekly Coaching Call.   Here are just a few examples of what it means to you:
 
Real estate investors are in for a rude awakening on January 10th, 2014.  The way you do business must change dramatically thanks for the US government and Dodd-Frank specifically.

There are 2400 pages of new rules and regulations in Dodd-Frank….enough to make your head spin.  “This makes the SAFE Act look like kindergarten,” said attorney Bryan Dunklin during last week's Coaching Call.

Here are just a few examples of what it means to you:

When you sell with seller financing, you will not be able to charge more than 5% over the going interest rate (currently 3.2%) and you cannot discuss any of the terms of seller financing with the buyer… only certain certified mortgage brokers can do that.  

There cannot be a balloon in the note and you must have a fixed interest rate for at least the first 5 years.   The debt to income ratio must be 43%... but there 840 pages of other qualification rules too.  

There are a lot of rules about what you can and cannot put in your advertisement on craigslist or your web site. Violate one… and you could be in big trouble.


My attorney says these rules apply to lease/options, contract for deed, and selling the beneficial interest of a trust too.  Basically, any time a person is going to occupy the property (house or mobile home) as more than just a renter, you will be required to follow these new rules starting January 10th, 2014

Even if you "assign" a contract, you will be liable for the Dodd-Frank rules.


And you are limited to 3 transactions per year… maybe less… depending on where you live.  Using different entities will not work because of the rules they put in to Dodd-Frank.

HERE’S THE REAL KICKER….

If, even after 3 years, your buyer claims that you did not properly vet their qualifications, they can sue you and get all the money back that they have paid you for 3 years, plus any money they have spent on improvements to the property AND their attorney fees.  

Of course, you might prove in court that you did properly vet them, but you will still lose because you will likely have $10,000 or more in attorney fees to defend yourself.

You can be sure that as soon as a foreclosure notice is posted the urban terrorist… the contingent fee attorney… will be sending letters to the home owner suggesting a law suit to prove that it is all your fault that they are losing their home because you did not vet their qualifications.  

If you invest in notes… think twice.…because these rules apply to you too.  Anyone who assigns or buys the note is equally to blame if the seller of the note did more than 3 transactions in a year or if the owner occupant claims that they were not properly vetted.  


#4 MichaelC

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Posted 30 October 2013 - 01:26 PM

Here's my take on this BS passing as consumer protection. . .I can contact any number of attorneys right now who will tell me the opposite of what your attorney advised.  The laws are so convoluted and contradictory, so full of loopholes, that they are impossible to enforce.  I hope many investors are scared away and decide to become part of corporate America.  Means more deals for me.


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#5 MikeT/NC

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Posted 11 November 2013 - 05:09 PM

Here's a video about the "DUD"- frankenstein act. From what this guys is saying, and who knows if he's correct, you better have a licensed loan originator on your team if you're going to do any type of seller financing, lease option, sub 2, contract for deed and on and on.

http://www.screencas.../t/SwPRbuHEwYOE



#6 MichaelC

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Posted 11 November 2013 - 07:31 PM

My opinion is that I disagree completely that doing a lease option is in any way affected by this bill.  I'm talking specifically talking about how we do them:  as a Cooperative Assignment, as an assignment of any kind for that matter, as a Pure Option, and as a sandwich lease.  I have yet to have anyone give me a specific quote from the bill that is proof I'll be out of business and working for the Post Office come January.  In the meantime, I hope many investors are scared away.  More deals for me.



#7 <Steve>

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Posted 12 December 2013 - 10:22 PM

With this law coming in January, I'm hearing that Rent Credits maybe an issue as they are paying down the purchase price similar to paying down the priciple of a mortgage.  The investor/seller maybe seen a loan originator and the tenant/buyer as having an equitable interest in the property.  Any opinions?


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#8 MichaelC

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Posted 13 December 2013 - 05:56 AM

At this point it seems if you ask 6 attorneys you'll receive 6 different interpretations of the law.  My very un-legal like and mostly uninformed opinion is that this law is going to focus much more on seller financing rather than what we do.  Could be wishful thinking on my part and time will tell.  I'm also confident that there will be many unintended consequences as a result of the bill. . .Obamacare, anyone?



#9 Propertymagnets

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Posted 16 December 2013 - 09:20 PM

I have been following this topic at another website that Michael is familiar with. Bigger Pockets has some excellent commentary and examples of what and what not to do. If this thread gets approved, visit Bigger Pockets


Charles M. Hill, M.Ed, MA
Property Acquisition & Management Consultant
Property Magnet Real Estate Investors Inc.

#10 <Steve>

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Posted 17 December 2013 - 01:30 AM

Yes, there has been a lot of talk about Dodd-Frank.  My understanding is a lender or seller offering financing and doing 5 or more deals per year will need to "Qualify the Borrower's Ability to Pay" under Dodd-Frank.  Documentation of the loan is under the Safe Act.  There are about eight factors to consider when qualifying a borrower.

 

1. Income

2. Employment status

3. Any other current loans and loan payments

4. Any current mortgage obligations

5. Alimony or child support

6. Debt to income 43%

7. Residual income

8. Credit history

 

Lease Options

A true Lease Option does not convey title and does not fall under Dodd-Frank.  However, I have heard many argue that the tenant/buyer may have an equitable interest.  The IRS may see a L/O as an installment sale if the lease term is over three years with large rent credits being offered and if the t/b is required to make all repairs.

 

So How to Comply?

 

First, the Naked Investor contracts clearly state that financing is not part of the agreement.

Second, I already qualify my tenant/buyers and document most, if not all, of the eight items above.  The tenant/buyer will need to prove that I have not.  The Naked Investor "Application" confirms that I have received permission to pull a credit report and obtain personal information.

Third, my state regulates Lease Options and I abide and comply.  So, if it looks like a Duck it's a Lease Option.

 

An installment sale is an IRS thing.  Any tenant/buyer I have over three years is on a month-to-month lease as long as I continue to accept rent payments and by this point the original option has expired and dropped off (Naked Investor Lease Agreement).

 

Rent Credits seem to be the big hang up.  Equitable Interest.

FHA, the standard today for most loan underwriting, for the most part does not recognize 'rent credits' lowering the purchase price or as a down payment.

The IRS do see rent credits as part of the option consideration and those option payments do not need to be considered income until the option is excercised or not.  My rent credits only go for one year, even if the lease term is extended longer.

 

But if my argument does not stand up, I have qualified my tenant/buyers' ability to pay per Dodd-Frank, by pulling a credit report, confirming employment & income, and review existing debts for a lease purchase.  Because I am not a lender, it is disclosed to the tenant/buyer to contact a loan originator before or at the start of the lease term to know what they need to do to obtain financing.

 

So what I have heard so far, the key is to keep good documentation as proof of qualifying the tenant/buyer.  Have a check list for the application process as part of a system to prove compliance with Dodd-Frank.


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#11 MichaelC

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Posted 17 December 2013 - 11:05 AM

Steve, that's about as succinct and comprehensible overview of Dodd-Frank as I have read.  You'll never get a job working for the government.


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#12 MichaelC

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Posted 28 December 2013 - 01:26 PM

Heritage Foundation's take on Dodd-Frank. . .it will prove to be as effective and efficient as Obamacare:  http://www.heritage....tory-regulators


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#13 <Steve>

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Posted 29 December 2013 - 05:37 PM

Underwriting is currently pretty tough to get through and close today.  This coming year, probably next to impossible.

 

Also, interesting that there is NO regulation of the government in this law.  The Gov'ment being the one major player that gave the green light that caused the housing market collapse.  I can still hear Mr. Frank saying that everyone should have the American dream of home ownership.  And Dodd agreeing that even those who could not necessarily qualify for a mortgage, the banks had to have a percentage of loans made to them.  Fannie & Freddie are still in business and now years later quietly receiving huge bails outs.


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#14 MichaelC

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Posted 30 December 2013 - 07:07 AM

Classic government move.  The very people the law is aimed at protecting are the same ones who end up being hurt by it. <_<



#15 EQUITY NOTES

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Posted 02 January 2014 - 12:01 PM

Steve,

Info I received from a master broker on seller finance

 

 

 

 

2014 Seller Financing Regulations Explained

Reprinted with permission by Jeffrey R. Armstrong – President/Owner of Armstrong Capital

Your favorite Master Note Buyer – Straightforward, Honest, Fair…

            Ric Thom is one of the leading authorities in seller carryback real estate contracts.  He owns Security Escrow in Albuquerque, New Mexico. He has served as a director and the president of Valencia County Board of Realtors. He also served as a director of the Albuquerque Board of Realtors as well as a director of the Realtors Association of New Mexico. Ric was recently named Affiliate Of The Year to the Albuquerque Board of Realtors.  He is a certified instructor for the New Mexico Real Estate Commission’s continuing education program. He teaches the course “Practical Application of Real Estate Contracts,” which he created.

SETTING THE STAGE
            First, none of what follows affects anyone today.  It all applies to transactions on or after January 1, 2014.  Further, none of it applies to any seller-carryback transactions where the buyer will not use the property as their personal residence.

            When Dodd-Frank (“The Dodd–Frank Wall Street Reform and Consumer Protection Act”) was enacted into law on July 21, 2010, it said that you could only do three seller carryback transactions a year, and those transactions had to meet certain requirements: 

(1) The note could not have a balloon.

(2) It had to have a fixed interest rate for five years, then it could adjust. 

(3) You had to prove and document the buyer’s "ability to repay" in accordance with the Qualified Mortgage Rule (QM), which is quite restrictive.  That’s the same rule that banks have to use if they want a safe harbor and not get sued for making a loan that didn’t fit the QM. 

            The Consumer Financial Protection Bureau (CFPB), which was writing the regulations to implement Dodd-Frank, asked for public comments.  I told Bill Mencarow about this, and he immediately (and repeatedly) alerted PAPER SOURCE JOURNAL subscribers and everyone else he could think of, urging them to submit their comments.

            I also alerted members of Congress and got the National Association of Realtors on board and helped them write their comments to the CFPB. 

            Because so many people wrote comments to the CFPB —- and THE PAPER SOURCE took the lead — the bureau relaxed the seller financing restrictions.  They came out with something that was a lot more relaxed than the Dodd-Frank law was originally.

            The CFPB subsequently issued the following regulations. They apply to seller carryback notes created on or after January 1, 2014.

THE ONE PER YEAR CATEGORY 
           
The CFPB broke seller financing into two different categories.  One category is for those individuals, trusts or estates who do just one seller carryback transaction a year on a property that has a dwelling that the buyer will use as their primary residence. 

            Let me repeat that, because there has been so much misinformation circulated about it:  this category is for those individuals, trusts or estates who do just one seller carryback transaction a year on a property that has a dwelling that the buyer will use as their primary residence.  For them:

*  You can have a balloon in your note with the buyer.

*  You do not have to prove or document their ability to repay.

*  The note must have a fixed interest rate for five years, and at the end of five years the interest rate can increase no more than two points per year with a cap of six points above whatever you started at.  You have to tie it to an index like a T-bill or the prime rate in the beginning. 

            That’s probably going to affect all but three to five percent of individuals who carry back notes. 

            Remember that these restrictions only apply to seller-carryback transactions on properties that have a dwelling that the buyer will use as their primary residence.  A transaction on a lot or vacant land is exempt, even if the buyers plan to build a primary residence.

            If the property has a dwelling, but the buyer is not going to use it as their primary residence  — say they’re going to rent it or use it as a second home —  then none of this applies, and you can offer seller financing with no restrictions.

            Commercial  property and multifamily that is five units or larger is also exempt from the restrictions. 

            Again, the one seller carryback transaction per year category applies to individuals, trusts and estates.  It does NOT apply to corporations, LLCs, partnerships or other legal entities.  In that case the second category applies (below). 

            Again, these rules only apply to what the CFPB refers to as a residential mortgage loan where the note is secured by a dwelling or residential real property that includes a dwelling.

            Most people only carry back a  note once in their lifetime, when they sell the big house, retire and move somewhere else.  Some might do it a few more times.  Even many real estate investors only do it once a year.  These regulations are not a huge change for most people.

THE MORE THAN ONE PER YEAR CATEGORY
           
The second category applies to individuals, trusts and estates that do more than one seller carryback transaction per year when the buyers will use the dwelling as their primary residence. 

            It also applies to any seller-carryback transaction — even one — where the seller is a corporation, LLC, partnership or other legal entity and when the buyers will use the dwelling as their primary residence. 

*  The note cannot have a balloon.

*  The note must have a fixed interest rate for five years, and at the end of five years the interest rate can increase no more than two points per year after the fifth year with a cap of six points above whatever you started at.  You have to tie it to an index like a T-bill or the prime rate in the beginning. This is the same restriction as the first category.

*  You must determine the buyer's ability to repay.

*  If you do no more than three seller-financed transactions per year you do not have to become a Mortgage Loan Originator (MLO).  

*  If you do more than three you must become an MLO -- or find an MLO who is willing to be the go-between.

            Just as in the “one per year” category, these restrictions only apply to seller-carryback transactions on properties that have a dwelling that the buyer will use as their primary residence.

            If you have a rental house and the renters want to buy the house to use as their primary residence, and you want to carry back a note with a balloon (and you don't do more than one seller carryback transaction per year), and that rental property is in a corporation, LLC, partnership or other legal entity, you’re going to have to move the property into a trust or into your personal name.  Otherwise, you’re going to fall into the second category which says you cannot have a balloon unless you are an individual, trust or estate. 

            If you think about it, not having a balloon but being able to do an adjustable rate almost serves the same purpose.  Let's say you start out with an interest rate of 6% on the note and then after five years it goes to 8%, then it goes to 10% and then it goes to 12%.  That’s a huge incentive for the buyer to refinance out of the property and pay you off.  If they don’t, then you’re rewarded for your risk in carrying that paper; you’re now getting 12% for holding that paper, and there is no balloon. 

ABILITY TO REPAY
           
The second category requires you to determine the buyer’s ability to repay, but the rules and the regs don't specify any standards for doing it (such as the qualified mortgage standard, a 43% debt to income ratio, etc.).  You don’t have to do any of that; you can just ask them if they have a job, can you see a paystub, can you see their tax return (which they may or may not give to you).  All you are required to do is to make some good-faith determination that they’re able to afford that payment, and you do not have to document it. 

            It would be prudent to have some documentation in case there’s a default and the buyer's attorney says "where’s the documentation?" and tries to create a legal defense against paying you.  But there is no requirement that you have to document.  All it says is that you should determine the buyer’s ability to repay. 

            I asked an attorney at the CFPB about how one should determine the buyer’s ability to repay.  He said that if you fall under category two you have to determine the ability to repay, but he admitted that there are no set guidelines.  You just have to show that you used good faith in determining, for example, that the buyer has a job, his rent was $1,000 per month, but the payment on the note is $900 a month and you think in good faith he can afford this property because he could afford the rental house he was in before. 

WHEN YOU’RE BUYING A NOTE CREATED ON OR AFTER JAN. 1, 2014
           
You're going to be able to tell from the note if the mortgagee is a private individual or an entity.  If it is a private individual, trust, or estate, then ask them to sign an affidavit saying that they have not done more than three of these in a 12-month period and how many of them had balloons.  If it’s an entity, an LLC, or a corporation, etc., ask for an affidavit saying how many it has done and how many of them had balloons. 

            If there is a balloon in that note that you’re buying from an LLC, corporation or partnership, etc., you know there’s not supposed to be one (again, if that note was created on or after January 1, 2014).  You’ll have to have the note modified to remove the balloon before you buy it.  Otherwise at some point the mortgagor could use the fact that the note was not in compliance when it was written as a defense against paying the debt or foreclosure.

            One more thing -- I want to thank Bill Mencarow and PAPER SOURCE JOURNAL subscribers for getting the word out there, because, honest to God, without those comments we would be stuck with the original statute -- which would have killed seller carrybacks.

            In the Federal Register the CFPB wrote that they relaxed the rules on seller financing because of the numerous comments they received.

Written by Ric Thom

Visit his Website at www.securityescrownews.com


This article was originally published in THE PAPER SOURCE JOURNAL.  Visit their websites:  www.PaperSourceOnline.com  www.PaperSourceUniversity.com and www.PaperSourceSeminars.com or call 1-800-542-2270 for information.





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