Blog Archive

Wednesday, June 24, 2015

THE CFPB AND SELLER OR PRIVATE FINANCING: PROCEED WITH CAUTION


If you have not progressed sufficiently through your summer reading assignment of the regulations of the CFPB, permit me to share this nugget. We all have clients that do favors for friends and business associates and lend them mortgage money to allow their friends and associates to get past a speed bump in their lives. You probably already know that drafting loan documents with an interest rate greater than the state usury rate of 20% you can be charged with participating in a crime; but there are also civil and criminal penalties if you participate in the preparation of loan documents that do not comply with the voluminous and very complicated rules of the CFPB. By way of illustration, unless your client is a properly registered loan originator, your client cannot provide seller financing unless he/she is exempt in accordance with the rules.

Section 1026.36 (a) (4), which pertains to seller financing of up to three properties per year, states:

“(4) Seller financers; three properties. A person (as defined in §1026.2(a)(22)) that meets all of the following criteria is not a loan originator under paragraph (a)(1) of this section:

(i) The person provides seller financing for the sale of three or fewer properties in any 12-month period to purchasers of such properties, each of which is owned by the person and serves as security for the financing.

(ii) The person has not constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of the person.

(iii) The person provides seller financing that meets the following requirements:

(A) The financing is fully amortizing.

(B) The financing is one that the person determines in good faith the consumer has a reasonable ability to repay.

(C) The financing has a fixed rate or an adjustable rate that is adjustable after five or more years, subject to reasonable annual and lifetime limitations on interest rate increases. If the financing agreement has an adjustable rate, the rate is determined by the addition of a margin to an index rate and is subject to reasonable rate adjustment limitations. The index the adjustable rate is based on is a widely available index such as indices for U.S. Treasury securities or LIBOR.”

Ok, if your client was a contractor he/she cannot take back a note. And, if your client has not properly documented that the borrower has the reasonable ability to repay the mortgage, he/she cannot take back a note.

Section 1026.36 (a) (5), which applies to one seller financing of one property per year, states:

“(5) Seller financers; one property. A natural person, estate, or trust that meets all of the following criteria is not a loan originator under paragraph (a)(1) of this section:

(i) The natural person, estate, or trust provides seller financing for the sale of only one property in any 12-month period to purchasers of such property, which is owned by the natural person, estate, or trust and serves as security for the financing.

(ii) The natural person, estate, or trust has not constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of the person.

(iii) The natural person, estate, or trust provides seller financing that meets the following requirements:

(A) The financing has a repayment schedule that does not result in negative amortization.

(B) The financing has a fixed rate or an adjustable rate that is adjustable after five or more years, subject to reasonable annual and lifetime limitations on interest rate increases. If the financing agreement has an adjustable rate, the rate is determined by the addition of a margin to an index rate and is subject to reasonable rate adjustment limitations. The index the adjustable rate is based on is a widely available index such as indices for U.S. Treasury securities or LIBOR.”

Again, the Seller/Lender cannot be the contractor, but the requirement that the lender determine that the borrower can repay has been deleted.

Proceed with caution unless you have the ability to track how many loans your clients are granting in any 12 month period and you have compared the loan terms to the regulations.

But there is more, even if a lender is not a seller, a person or entity is considered to be a “Creditor” under the rules and subject to numerous requirements if they extend credit secured by a dwelling more than five times in a calendar year. Section 1026.2 (a) (17) reads, in part:

“(v) A person regularly extends consumer credit only if it extended credit (other than credit subject to the requirements of §1026.32) more than 25 times (or more than 5 times for transactions secured by a dwelling) in the preceding calendar year. If a person did not meet these numerical standards in the preceding calendar year, the numerical standards shall be applied to the current calendar year. A person regularly extends consumer credit if, in any 12-month period, the person originates more than one credit extension that is subject to the requirements of §1026.32 or one or more such credit extensions through a mortgage broker.”

Holy mackerel!

PAUL F. ALPHEN, ESQUIRE
Alphen & Santos, P.C.

Friday, June 19, 2015

YOUR SUMMER READING LIST INCLUDES THE REGULATIONS OF THE CFPB


Have you started to wade through the regulations of the Consumer Finance Protection Bureau? Did you know there was an Interstate Land Sale Registration Program which generally requires that “a developer may not sell or lease lots in a subdivision, making use of any means or instruments of transportation or communication in interstate commerce, or of the mails, unless a Statement of Record is in effect in accordance with the provisions of this Part…” §1010.3 ?


Furthermore, “In non-exempt transactions, the developer must give each purchaser a printed Property Report, meeting the requirements of this part, in advance of the purchaser's signing of any contract or agreement for sale or lease. Information collection requirements contained in this part have been approved by the Office of Management and Budget under the provisions of 44 U.S.C. 3501 et seq. and have been assigned OMB Control No. 3170-0012.”  §1010.3   


Also, Section 1011.2 allows purchasers to revoke a contract or a lease within seven days, unless the lot is “exempt” from the regulations. We all have to become familiar with the voluminous Regulations and what qualifies a transaction as “exempt”. Fortunately, there is a Single Family Residence Exemption. Unfortunately, it is a page and a half long:

“§1010.10   Single-family residence exemption.


(a) General. The sale of a lot which meets the requirements specified under paragraphs (b) and (c) of this section is exempt from the registration requirements of the Act.

(b) Subdivision requirements. (1) The subdivision must meet all local codes and standards.

(2) In the promotion of the subdivision there must be no offers, by direct mail or telephone solicitation, of gifts, trips, dinners or use of similar promotional techniques to induce prospective purchasers to visit the subdivision or to purchase a lot.

(c) Lot requirements. (1) The lot must be located within a municipality or county where a unit of local government or the state specifies minimum standards in the following areas for the development of subdivision lots taking place within its boundaries:

(i) Lot dimensions.

(ii) Plat approval and recordation.

(iii) Roads and access.

(iv) Drainage.

(v) Flooding.

(vi) Water supply.

(vii) Sewage disposal.

(2) Each lot sold under the exemption must be either zoned for single-family residences or, in the absence of a zoning ordinance, limited exclusively by enforceable covenants or restrictions to single-family residences. Manufactured homes, townhouses, and residences for one-to-four family use are considered single-family residences for purposes of this exemption provision.

(3) The lot must be situated on a paved street or highway which has been built to standards established by the state or the unit of local government in which the subdivision is located. If the roads are to be public roads they must be acceptable to the unit of local government that will be responsible for maintenance. If the street or highway is not complete, the developer must post a bond or other surety acceptable to the municipality or county in the full amount of the cost of completing the street or highway to assure completion to local standards. For purposes of this exemption, paved means concrete or pavement with a bituminous surface that is impervious to water, protects the base and is durable under the traffic load and maintenance contemplated.

(4) The unit of local government or a homeowners association must have accepted or be obligated to accept the responsibility for maintaining the street or highway upon which the lot is situated. In any case in which a homeowners association has accepted or is obligated to accept maintenance responsibility, the developer must, prior to signing of a contract or agreement to purchase, provide the purchaser with a good faith written estimate of the cost of carrying out the responsibility over the first ten years of ownership.

(5) At the time of closing, potable water, sanitary sewage disposal, and electricity must be extended to the lot or the unit of local government must be obligated to install the facilities within 180 days following closing. For subdivisions which will not have a central water or sewage disposal system, there must be assurances that an adequate potable water supply is available year-round and that the lot is approved for the installation of a septic tank.

(6) The contract of sale must require delivery within 180 days after the signing of the sales contract of a warranty deed, which at the time of delivery is free from monetary liens and encumbrances. If a warranty deed is not commonly used in the jurisdiction where the lot is located, a deed or grant which warrants that the seller has not conveyed the lot to another person may be delivered in lieu of a warranty deed. The deed or grant used must warrant that the lot is free from encumbrances made by the seller or any other person claiming by, through, or under the seller.

(7) At the time of closing, a title insurance binder or title opinion reflecting the condition of title must be in existence and issued or presented to the purchaser showing that, subject only to exceptions which are approved in writing by the purchaser at the time of closing, marketable title to the lot is vested in the seller.

(8) The purchaser or purchaser's spouse must make a personal, on-the-lot inspection of the lot purchased prior to signing a contract or agreement to purchase.

(d) The sale must also comply with the anti-fraud provisions of §1010.4(b) and (c) of this part.”

Said anti-fraud provisions as contained in Section 1010.4 require, among other things, that “if a developer or agent represents that roads, sewers, water, gas or electric service or recreational amenities will be provided or completed by the developer, the contract must stipulate that the services or amenities will be provided or completed.”

Good Grief, Charlie Brown!

PAUL F. ALPHEN, ESQUIRE

Alphen & Santos, P.C.