Lease-to-Own; Dodd-Frank; SAFE ACT


#1

I’m curious how people have handled things upon learning about the SAFE ACT.Has anyone gone back and redone agreements that were originally non-safe-act compliant, either converting them to rent credit or re-doing the loan once you had become SAFE ACT licensed?Thanks in advance!


#2

Dear High Plains Drifter - that’s the perfect name for someone trying to navigate Dodd-Frank and SAFE Act requirements,Here’s my thoughts on the topic:1)  It is difficult to be fully compliant with all rules regarding home mortgage issuance.  In fact, I’ve heard banks that used to buy seller generated mortgages in the past say that today, they don’t buy them anymore unless they were originated by a bank because it’s highly unlikely the notes meet all legal requirements in form and in the way they were generated;2)  To date, there is little enforcement of Dodd-Frank and SAFE Act.  The most common industry method of dealing with those laws is to act is if they don’t exist and counting on not being caught - you can legally do 2 or 4 ??? a year without being compliant.  How much risk you can stand is a big part of your decision on whether to do owner carry notes;3)  Straight rentals are the the easiest way to go from a legal compliance perspective;4)  Lease to Own is the hybrid option many try to use to circumvent Dodd Frank etc.  I’ve heard speakers on the topic say that in order for it to not be deemed a loan/consumer finance agreement, you need to have a real buy-out at the end of the contract.  For example, the last payment can’t be $100 and then it is yours.  To get around a final payment of $5,000 or so, I’ve sen agreements which make that amount an unsecured note given to the lender that the lender may or may not ever expect to get paid on, and5)  There’s really no insurance you can buy reasonably to protect you from government fines and penalities, as well as consumer awards, should you issue a loan that’s non-compliant with Dodd-Frank.


#3

To add to this topic; can anyone share how they facilitate the purchase of a ‘book’ of homes in a Park that are being sold on contract to tenants under a lease type agreement?  I may be in this situation soon.  If there is a ‘legal’ process to follow that you’ve discovered please share. 


#4

Kurt, great informative answer!  Covers a lot.One thing I haven’t come across is anyone who actually decided to get certified as an originator OR who found a local originator to run their loans through.Anyone done this, and if so, did it change the structure of your loans or anything else in how you do business?Thanks.HPD


#5

I have asked a few park owners their thoughts of the Lease Purchase vs Rent Credit program.  Anyone want to share their thoughts?


#6

tmperrault - I am not an expert in Dodd-Frank, nor an attorney.  My best semi-educated guess would be that if it was not originated in compliance, then you could inherit liability if you “buy” the book of deals made by the seller.The number of deals that can be done without falling under the umbrella varies by state.  There may not be any cases YET where this has been taken to court, but I am willing to bet that there eventually will be and I hope like heck that it isn’t us that becomes the poster child case!The SAFE Act may have had good intentions, but they took them WAY too far!  As a result, would-be park owners and others that legitimately have good intentions and are trying to help buyers as well as earn a reasonable return are no longer able to do anything.  I recently attended a meeting with some industry experts and made the comment that as long as we don’t tell our buyers anything that they might find helpful with regards to securing financing, we should be ok, right?  It got a chuckle out of the room, but is basically what it boils down to, unless you are a licensed mortgage originator.  You can’t tell potential buyers that Lender “X” tends to approve lower score buyers, even if that is true.  All you can do is give them several names (you can’t give them just one!) and wish them luck.  If they pick the wrong ones first, apply and get denied, they have just made their score even lower because of the extra credit pull!With regards to the lease-option deals, I have studied that option at length.  It certainly is not perfect, but with the correct legal advisement and structure, it is probably as good as it can get.  Another option is to run your deals through an LMO to become compliant.  There are some out there that will do so, for a fee.  We have not yet used that option, but it is being strongly considered for future deals. 


#7

OK. Here is my add to the posts.

Our company has, and is, helping both community owners and retailers start captive finance companies. We have clients from California to Maine and all points in between, including over 50 in Kurt’s state of Texas. The short response is there are people doing it, and doing it legally.

The more detailed response is, it is not for everyone.

  • The state or states in which a community owner is located is important, because some states are more expensive to license in that others and often have more difficult compliance issues.
  • The number of loans originated each month necessary to “break even” will depend on the average dollar amount of the loans and the states licenses are held in.
  • Some people are not able or perhaps not willing to learn a whole new business.
  • Some people’s capital is too stretched to handle the start up costs. (The money to make loans with is easy once one learns how.)

Kurt is correct if his statement about enforcement revolves around the CFPB. I believe, based on my conversations with CFPB personnel, they are at least a year away from examining MH chattel lending - unless there is a consumer/competitor/whistleblower complaint. The states however are a different story. Remember the states have shared authority with the CFPB to enforce the Dodd-Frank Act and some states have utilized it.

Lease with an Option to Purchase (different from Lease-to-Own and Rent-to-Own) is legal in some states and not in others. Further, each state where it can be utilized has different laws, which necessitates different contracts. ***This is not an internet searchable project. *** Each state has different rules regarding the collection and payment of sales taxes. In addition to state laws, the federal government requires a comprehensive compliance management system in place and functioning. The CFPB, the FTC, DOJ, the IRS, and FinCEN, all have rules and regulations in play the operator is expected to follow.

Without the help of knowledgeable consultants and attorneys, it would be almost impossible to do everything correctly using either method.


#8

In Indiana I have a park under contract. That park has a bunch of rent-to-own contracts that began in 2016 and 2017. I’m going to reach out to an RE attorney to find this out, but do you know from experience if these RTO contracts are legal in Indiana?


#9

RTO and LTO are not legal in Indiana. An Indiana specific and highly structured Lease with an Option to Purchase is (for the time being), if everything is done correctly under Federal Leasing Laws and Indiana law.

You need a regulatory attorney, not a real estate attorney.


#10

To be clear the contracts with the park owner and the tenants are an option to purchase the mobile home in question within the said term. They can choose to excersise that right to purchase the home or not. So are these types of contracts legal in Indiana from your experience?


#11

To answer that, would require an examination of the contracts.


#12

Do you think the rent credit option is legal?


#13

That is a huge issue.

It is going to depend on which state you are asking about;
It is going to depend on how it is structured;
It is going to depend on your definition of legal - meaning will a regulator come after me today, or will a regulator ever come after me for using rent credit.

Bear in mind that Rishel Consulting Group is not a law firm and I am not an attorney so we do not offer legal advice. What we do offer to customers and clients is the benefit of what we learn from the regulatory attorneys we pay, and our many years of experience in both outside finance and seller finance.

Rent credit as it is commonly presented has been clearly declared illegal in Illinois and Pennsylvania. Many other states see it as a gray area, and act only selectively if at all on it at the present time. The CFPB does not like any unlicensed lending, and has repeatedly said so, especially in relation to the finance of residences, but the Trump administration has partially crippled them for the time being, so they are holding their plans for this in limbo, probably until after the next election.


#14

Does anybody have a state by state list or regs for SAFE Act?


#15

@RishelConsultingGroup, I sent you a PM, please contact me at your convenience.