Dodd Frank, Safe Act Update


#1

I said I would report back after I researched the whole Dodd Frank and Safe Act issue. Here is what I have learned.

Dodd Frank:

DF is federal, so it applies everywhere. For owner financing it allows for borrower to sue lenders if they act against the law. Scary right? Not really when you look at what they can sue for – the interest paid, damages, and attorney fees. Big deal; I was not going to charge any interest anyway, but even if I did charge 5% on a $15k loan with monthly payments of $350, what would that be after a few years? Not much. It is not the kind of case an attorney would take on contingency and who would take it anyway if there is little to no interest to sue for? Plus as the attorney in the video I linked to before said, there are not many attorneys who practice DF law. And I guess those who do are not getting involved in working for clients who live in old trailers in trailer parks who have paid $172 in interest. Their clients are big financial institutions with bottomless pockets. I’ve talked to a bunch of attorneys and I now believe that is correct; not many are at all that knowledgeable about DF.

And there are exemptions to DF. First as a natural person you can do one owner financing deal every 12 months. Second, every legal entity can do 3 every 12 months. That includes natural persons, corporations, LLCs etc. How the first exemption and the second exemption jive in regards toward natural persons is beyond me; perhaps you can clarify but I am just going to go with #2. So my understanding is, I can do 3 owner carry deals, my wife can do 3, my LLC #1 can do 3, my LLC #2 can do 3, my LLC #3 can do 3 and my LLC #4 can do 3. I lost count but that is probably enough in 12 months.

The Safe Act

It is part of DF but it is about states regulating Mortgage Loan Originators. So it is up to the states to implement it in how they see fit. It is not about tenants suing you, it is about what you must do to become a MLO. And they typically have exemptions for owner carry deals.

So I called the South Dakota Department of Labor: Division of Banking this morning. They are the guys who take care of the Safe act in SD. I went through the whole spew about how I own a MHP, and the POHs and how I want to sell them and the tenants want to buy them but don’t have any capital, blaw, blaw, blaw. Guy 1 tells me he sees nothing wrong with it but maybe I should talk to Bob. Bob tells me, well, maybe you should check with the DMV to see if they have some kind of law about how much a person can charge for interest or some other law about that kind of thing.

Wow, my fear of the Safe act has been holding back my business for years, like if I did something wrong I would end up in the Yankton Federal Prison Camp.

OK, so I call up the Nebraska Department of of Banking and Finance.

Same thing. “Sure, sounds good to me.” They did add that I could not charge more than 18% interest and something about charging too much in fees which I did not write down because I am not charging fees.

I did learn that in CA and TX there are no exemptions to the Safe Act for owner finance deals, but I think it is easy to find a MLO there who will handle the deal for not much.

My take away – stop worrying so much about the Dodd Frank/Safe Act Bogey Man and sell off the POHs and start buying up homes, stick them on my vacant lots and sell those puppies. To hell with the rent credit program.


#2

You go man, tell us how it works,lol.


#3

Keep in mind that enforcement of Dodd-Frank is left to the states so it is entirely state-dependent. It is also entirely administration-dependent, and that can (and does, always) change in the future.

One of the current problems is that if you lend in a “bad” way they can “get you.” One of the “bad” ways is to incentivize the loan originator to agree to the loan by paying them on the basis of how much they can sign up the customer to lend. This leads to artificially inflated valuations both on the purchasing end and on the repo-bad outcome end. Who benefits? The lender gets the interest. The seller swallows the down-payment and any improvements made by the tenant-homeowner-customer-borrower. If you think the customer gets the raw end of the deal then you can go after the lender. It’s easy to paint a negative picture of the situation.

When it’s a good-outcome end, no-one pursues anything. So you only have to worry about the bad-outcome end.

Oh, and on the basis of a technicality, every sale you do is a “bad loan” because you are the same person incentivized in this manner because you are both the lender and the seller… and the repo-er in the bad cases. And also because 100% compliance with obscure bureaucratic regulations is unlikely for a small operator. And because you get “paid” a “lot” and the customer had a “bad” outcome you can be accused of “predatory” practices under the UDAAP statute (different for every state. Stands for “Unfair and Deceptive Acts and Practices”).


#4

Of course you are right Brandon,

but,

one of the common warnings that experienced RE investors give to want-to-be investors is to be wary of paralysis of analysis. We, the doers, the men and women of action, pat ourselves on the back as the brave ones who took that leap into the uncertain and put our money and futures on the line and are now reaping the rewards due to us as successful landlords.

Yet we can, as I did, fall into the same paralysis of analysis when we bump up against scary Federal Regulation. We have to ground ourselves and take a hard look at reality. And here it is as I see it.

On the homes I am selling I require $2k down. That is to filter out most of the fly-by-nighter, the jackasses, and the nair-do-wells, which of course, are the source of most landlording headaches. I am also telling all of the buyers that if things are not working out, I will buy their home back. I tell them clearly that most likely I will not be able to pay as much as someone in the market since I will need to pay to have it cleaned and repaired and I will have the expenses of selling it again, but the option is there and they have no reason to just walk off if they find themselves in a tight spot. I guess that would eliminate the need for them to go running off to a lawyer unless they are really crazy and got past the $2k down gate. But I would make the offer to buy back the home without the whole legal - I might get sued - issue. Why wouldn’t I? Heck, I’ve done it before with non-POHs – I get the title back quickly, I send my crew in to clean it up, sell it again and make a few grand. Big frigging deal.

Sure, with 19 lots to fill and with 29 POHs to get rid of, there might be one or two that go sour. Again, big frigging deal. So what do I tell their attorney? What do you want, their money back – here you go, now get lost looser. Remember; only about half of their monthly payments is for the loan, you get to keep the lot rent and the big pictures remains; my little mobile home park empire makes me significantly more then the Supreme Court Justices make, and I spend my days doing pretty much what I want, including afternoon naps.


#5

Randy -

It is typical that the people you talk to at state regulatory agencies often don’t know what they are talking about when it comes to chattel secured loans on manufactured homes. Some of what you report here is absolutely incorrect.

For example: The interest rates quoted by the Nebraska regulators would be in violation of federal law. Also federal law requires a MLO to discuss and negotiate with customers even for seller finance. NMLS, the licensing authority for MLOs requires that license be placed with a licensed lender.

You really should hire a qualified regulatory attorney or law firm or a recognized consultancy if you seriously want to make legal purchase money loans. Even the average attorney does not understand what needs to be done, so I find it very hard to believe that a non attorney could Google what they need to know and get it right.

What you may find out, is the volume of loans you want to do would make it too expensive to do it legally. Then you can pursue one of several other solutions better suited to your potential loan volume.


#6

I’ve been hearing people say such things for years but they never include in their comments that there are exemptions to DF for owner finance deals and many if not most states also have similar exemptions for the Safe Act. Interesting.

I don’t think you are correct about a MLO having to negotiate with the customer in every case. Under the three exemption rule you, the seller, needs to qualify the buyer with the eight part test and make sure the back end ratio does not fall above 43%. This is just good business sense even without the law and eight parts can be met by pulling a credit report; having them fill out a Fannie Mae 1003 and going over it to make sure there is solid reason to believe they can make the strokes. Big deal. Who wouldn’t do that anyway?

I believe, but am not certain, that doing deals using the DF 3 exemption rule through multiple LLCs has not been tested and given the stamp of approval. But it seems unlikely it would not if it ever is tested. And if the regulators are not knowledgeable about the law, and all but rare law firms are not knowledgeable about the law and after calling EVERY mortgage broker in two states found EVERY one of them is not knowledgeable about the law in regards to what I want to accomplish and since I have in place a policy to help out any buyer who finds himself in a tight spot I see very little risk in going ahead. And, I should add, let’s not forget that these are rather short term loans 3 - 5 years. Which means in just 18 to 30 months the buyer is on the downside slope of the loan and not likely to be a disgruntled customer.

I could keep myself tied in knots worried about the very remote possibility of what would happen if a deal went sour, but after becoming more knowledgeable about the law and the risks, well, if I let that stop me from building my business, I would never have been in business in the first place.


#7

Thanks to Randy for starting this thread and sharing his research, and for those who disagree with sharing their thoughts.

Is anyone on this forum aware of any instance of a park owner ever being prosecuted or litigated under Dodd Frank or The Safe Act?


#8

I don’t want to provoke anyone by sharing knowledge, but I worry about people getting in trouble because of inaccurate advice.

What follows is straight out of Wikipedia:

In the United States, when credits are applied to a purchase price the agreement becomes a financing contract and these contracts have been identified as predatory lending arrangements under the Dodd-Frank Act. Under this federal law any financing arrangement requires the purchaser of an owner occupied dwelling (one to four living units) is to qualify for any financing contract with a registered Mortgage Loan Originator. There are exemptions under this federal law for homeowners financing their primary residence, those in the business of real estate such as landlords are considered dealers. In all states, rent to own arrangements are no longer compliant with federal financing requirements.


#9

@DanS check this post out and tell me what you think


#10

Well, of course what you posted address rent-to-own schemes and not a straight forward owner carry financing that I started this thread about – good because I have some thoughts on it.

The article says such arrangements have been identified as predatory lending. I tend to agree. While I am sure there are some out there that are fair to the buyers, I have seen plenty discussions on RE investing boards who’s posters boast about taking advantage of buyers and recommend others doing the same. The term predatory lending seems a mild description of such practices, and some practices I have seen enthusiastically discussed should be criminalized in my opinion.

There is little I hold in more contempt in the business world then well healed sophisticated people taking advantage of unsophisticated people with few resources.

Please understand I am not accusing anybody on this board of doing anything unethical in this regard; I have never seen any posts here about requiring a large rent-to-own down payment and then kicking out the tenants a few months down the road for some cockamamie reason so the process can be started over again.

All the discussions I have seen here are about the Rent Credit Program. I have two thoughts about it I would like to discuss.

First is that it is very close to the basic rent to own scheme. So close that if it were ever tested in court, I guess it would be an even bet if would be found to be a scheme to disguise a mortgage or not, which in fact is what it is, if we are honest with ourselves, and is in fact why we do it. Yes, yes, I know the arguments of why it is not a mortgage by another name, like the Green Stamps theory and the fact it does not specify a certain home. But a smart judge would see the wink behind those arguments and might very well declare its “a mortgage by another name.” Or not. Who knows, the rent credit program does not move you out from under the Dodd Frank sword of Damocles.

In my experience, the big problem with the rent credit program is not that it could be found to be a violation of the dreaded Dodd Frank law, or that it is unfair to tenants, but that it is unfair to landlords. Well not unfair but not very good for landlords. Here is a question for you; If you are making enough profit from renting you POHs to pay back your capital you have invested in them, why after a good run of profits, would you ever just sign the home’s title over to your renters in exchange for worthless rent credit Green Stamps? Why not just keep on renting them and keep even more profits? To keep tenants from moving? When I had apartments, I had lots of tenants who had lived there forever. I recently went by an apartment building I sold in 2005 and was surprised to see how many of my old tenants were still living there.

Here is my main complaint about the rent credit program, which is the same for just straight out renting mobile homes: Since the tenant must pay lot and home rent, the home rent ends up being low, something like $300 or so. Hard to make money renting any kind of housing for $300 per month. And because it is low income housing rental, you typically are not going to squeeze much of a security deposit out of them, $500, maybe $1,000. But rent credit program or not, a lot of people are going to move out and leave the home in a mess, which after consuming the security deposit, will eat up many months of profits – and maybe the profits from their neighbors houses too.

OK, enough of that – here is my bottom line logic on the whole rent vs sell issue:

A lot of people in the rental market live lives of chaos and leave trails of destruction behind them. The only way to be sure to keep them out of your homes is to require something like $2,000 before they move in. The only way anyone will pay $2,000 to move in is if that $2,000 is a down payment on the home with a no hanky panky mortgage. You have two options for selling; (A) using a MLO if they are available and not price prohibitive, (B) taking advantage of the three exceptions per entity of Dodd Frank for owner financing, though it might run you afoul of the state’s implementation of the Safe Act.