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.

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