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.
