When you are creating a note you are rewarded if you do it correctly and can be punished if you don’t! In this episode, Kevin does a very informative interview with Max Bailey of Call the Underwriter. You will learn the ins and outs of how to create a note the right way.
At Call the Underwriter, LLC we specialize in helping you screen your borrowers to ensure they meet the mandatory Dodd-Frank Ability to Repay (ATR) requirements. This process saves you time, money, and potential liability. Our process is designed to ensure that your notes are compliant, that your borrowers are unlikely to default in the future, and that you end up with an underwriting retention file that will attest to your professional, consistent note creation process.
While there are many complicated aspects to ensuring Dodd-Frank compliance on your notes, Call the Underwriter, LLC (CTU) has a scientific, streamlined approach to doing this for you. We make the process easy, and we offer free coaching in the process.
For anyone new to note creation, you might wonder how Dodd-Frank affects you and why you should care about professional underwriting for all your notes. Simply put, Dodd-Frank legislation, first enacted in 2010 after the housing bubble burst, mandates that the lender for any Owner-Occupied property (1-4 family) ensure the borrower meets the Ability to Repay (ATR) requirements.
The Consumer Financial Protection Bureau (CFPB) acts as the enforcement arm for Dodd-Frank compliance. The CFPB can levy fines up to and including 25,000 per violation. Their penalties can result in rendering the note null and void and awarding the asset to the borrower.
In considering Dodd-Frank compliance it’s critical to understand the spirit and intent of the legislation. Dodd-Frank was born in an attempt to prevent the predatory, risky lending practices of pre-2008 that directly contributed to the housing bubble burst and subsequent “Great Recession”. In response to this crisis, in 2008 the Federal Reserve Board adopted a rule under the Truth in Lending Act (TILA) which prohibits creditors from making “higher-Priced Mortgage Loans” (HPML) without assessing the consumer’s ability to repay the loan. An HPML is defined as any home loan with an interest rate 1.5% higher than the Average Prime Offer Rate (APOR) or Fannie & Freddie street rate of the day. Virtually all seller-financed home loans are HPML. For example, if today’s APOR is 3.25 percent, then an HPML loan would be any rate of 4.75 percent or higher.
With that knowledge in mind, understand that Dodd-Frank and CFPB are both very borrower (victim) centric. As a note originator/lender, you are mandated by this legislation to adopt and maintain lending practices that demonstrate the utmost concern for your borrower’s welfare.
Throughout Dodd-Frank legislation several consistent themes are prevalent. The authors frequently state that lenders must “utilize underwriting practices that result in historically low default rates”. Additionally, the legislation is peppered with the standard of care expectation being that the lender “make a good faith effort to ensure the borrower has the ability to repay”.
“Good faith effort” is an implied contractual term and it is defined as “what a reasonable person would determine is a diligent and honest effort under the same set of facts or circumstances.” Troutt v. City of Lawrence, 2008 U.S. Dist. LEXIS 61641 (S.D. Ind. Aug. 8, 2008)
What does it look like to apply a Good Faith Effort to ensure your borrower has the Ability to Repay (ATR)? Ensuring ATR for your borrower consists of eight general categories that must be considered in your Good Faith Effort to evaluate your borrower’s eligibility for a loan. The legislation says that you must, at a minimum consider the following factors: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loans; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio with state-specific residual income; and (8) credit history. Creditors must generally use reasonably reliable third-party records to verify the information they use to evaluate the factors.
That’s a mouth full for sure. Not to worry though; this is the sole focus of Call the Underwriter, LLC. We take a very scientific approach to performing the necessary due diligence and compiling the proof into a retention file that will defend your actions for years to come. Remember this; as they say in court, “if you didn’t write it, you didn’t do it”. At the conclusion of our underwrite for you, we hand you a professional underwriting file that shows specifically each metric measured and you will retain the documents to prove it. The Consumer Financial Protection Bureau (CFPB), the enforcement arm of Dodd-Frank states that you must be capable of “reproducing all documents used in determining your borrower’s ATR” for the statutory three-year period after loan consummation. The package we produce for you will enable you to do this easily if ever needed. We essentially underwrite to the same standards that the Fannie & Freddie conventional lenders are writing to. This assures that your loan origination processes will be consistent, on par with other professional loan underwritings, and will demonstrate obvious respect for the Dodd-Frank intent.
Let’s break down the criteria that you are required to consider in determining your borrower’s Ability to Repay the loan. First, you must look at their current, or reasonably expected income or assets. Industry-standard for this is to review a two-year work/income history for each borrower. Historically, we use the most conservative income expected in the future based on what we see in their work/income history and present income position.
Next, you must review their current employment/income status. You cannot credit a borrower for the income they no longer have, or for income that is not reasonably expected to continue for the next 3 years. We expend great energy reviewing your borrower’s income expectation and make every effort to ensure it appears likely to remain solid into the future. Note: You are not responsible for a borrower’s failure to maintain Ability to Repay (ATR) if they lose or quit the job you used to qualify them with. If a borrower loses their employment subsequent to your loan and defaults, you will only be responsible to prove that they met ATR requirements at the time of loan consummation or loan approval.
You have to consider the monthly payments on the transaction you are doing with the borrower. This includes the entire PITI of the deal, as well as any possible HOA’s or flood insurances, etc. We will ask you for all the details of the transaction you are doing at the time we begin the process for you. To make it more consistent and streamlined, we have developed a “TERM” sheet that you will complete with each loan submission to us. That document will allow you to capture all the necessary data we’ll need related to the terms of your current deal.
CFPB requires you to evaluate all other debts your borrower or co-borrowers may have. To do this, we have them complete the loan declarations on the loan application and sign the bottom statement swearing that they have answered all questions honestly. Then we get a signed authorization from them allowing us to pull their credit reports. We enter all debt shown on their credit report into our calculations to reflect an accurate debt to income ratio (DTI).
As mentioned above, you must include consideration for all monthly expenses related to the loan you are making. That is included in the PITI, plus HOA and flood insurance mentioned above. Additionally, you must consider any judgments, government loans (student loans), and court-ordered payments such as Alimony or Child support.
After determining all possible debt your borrowers may or may not have, you need to plug all that in against the most conservative income figure you have credited them with for joint gross monthly income. You then must determine their Debt-to-Income ratio and consider their state-specific residual income requirement also.
Lastly, you must review their multi-year credit history and consider their creditworthiness for a home loan. This is the most time-consuming process as it’s critical to review all open lines of credit, all collections, delinquencies, and charge-offs. Creditworthiness is generally considered having multiple open lines of credit in good standing for 24 consecutive months at the time of loan approval. In the absence of this, we get creative for you and help your borrower develop alternative credit (see alternative credit list on our website under investor tools. www.calltheunderwriter.com). We ensure that we are able to develop a 24-month positive credit history for your borrowers before issuing loan approval. We also address all negative credit (open collections, current delinquencies, etc.) and require the borrower to bring them current or pay them off before loan approval. This can take some time and when we encounter these challenges, we bring them to you and discuss what needs to be done in order to help your borrower be deemed creditworthy. (see “understanding loan conditions” on our website under the investor tools tab).
As complicated as this whole process sounds, and it is, we can generally perform an entire underwrite and get a decision back to you within about 2 business days from the time we receive a complete loan submission from you and the borrower. After the thorough review process described above, we will “decision” the file. We typically end up with one of three decisions which we share with you.
The most common decision in the seller finance demographic is “Approved with conditions”. This means we have determined that the borrower has adequate work/income history and has adequate gross income to support the new debt. However, there are some issues that must be addressed before it would be prudent to issue this loan to the borrowers. (see “understanding loan conditions). In this case, we list and explain all the conditions that the borrower must meet before loan approval. We share this with you and the borrower. Once this happens, the clock stops until the borrower can meet the conditions and return the necessary proof to our team to clear the conditions.
Occasionally, a borrower is very clean and we can issue loan approval as soon as we are finished with the underwriting. When this happens, we issue the approval and the Initial Loan Disclosures to you and your borrower. The Initial loan disclosures are the 25-30 pages of federal disclosures that you are required to provide to your borrower explaining the costs of credit and all other factors that the government requires you to disclose for every loan you originate.
The last possible decision we make is a loan suspension or denial. This happens when we determine that there is no way this borrower can meet the Dodd-Frank requirements for Ability to Repay (ATR). There can be a range of factors that render the borrower ineligible for the loan. It could be that they simply do not have adequate income to support the new debt. When this is the case, we will offer creative solutions if possible. For instance, we might tell you that the borrower is 200 per month short of making DTI or residual income and your options are as follows: Either have the borrower bring a well-qualified co-borrower to add additional income. Or, perhaps we recommend that you take a bit more in down payment, to drop the loan amount. Possible also, would be that you increase the loan term or reduce the interest rate.
When these situations happen, we will be able to tell you the exact dollar what your borrower is qualified for. This is very valuable information for you and them because now you can always go back to them and help them find another property or deal that will fit within the payment parameters that we give you.
Another possible scenario where we cannot approve a loan would be for a borrower that had conditions they could not, or would not remedy. Frequently, we condition a loan for credit problems such as open collections or current loan delinquencies. These conditions require the borrower to either make a payment plan with the creditor and return the proof or to pay the debt in full and provide proof. Occasionally we get a borrower that cannot or will not do what is required to resolve creditworthiness issues. When this happens, sometimes a loan cannot ultimately be approved for those borrowers.
On our website under “investor tools” (www.calltheunderwriter.com), we have a list of questions to ask every borrower. That resource is very important in your borrower pre-screening process. Asking those questions will typically weed out the borrowers that would not be able to meet Dodd-Frank requirements. We find that our investors who utilize our resources and implement them into their borrower screening processes typically have very low loan denial rates. Additionally, if you are screening borrowers and encounter scenarios you need to ask us about, we are open to phone calls and coaching sessions to help you make the best choice possible before sending a loan package for review.
While ensuring Dodd-Frank compliance for your notes is a serious responsibility; it is not something to scare you off of note creation. At Call the Underwriter, LLC, we specialize in walking you through this process and our comprehensive system makes the process very quick and easy for you and your borrower. Before you begin your next deal, go to our website (www.calltheunderwriter.com) and review all the information in the Investor Tools tab. Feel free to call me with questions after reviewing the materials, and together we can help you get your deals done professionally and quickly.
Is the next wave of foreclosures coming in 2022? Dan Deppen welcomes Franco Barile, a Primary Foreclosure Attorney and the Co-Founder of Sottile & Barile. Franco talks with Dan about how COVID has brought several moratoriums on evictions and foreclosures. Plus, the moratoriums expiring in January of next year could lead to the next wave of foreclosures. Join in the conversation as Franco shares amazing insights on how difficulty in hiring employees could lead institutions to sell more of their non-performing loans because they don’t have the resources to handle them. If you want to get an update on the current state of the market, you wouldn’t want to miss this episode. Tune in!
We are very honored to have a guest speaker from https://calltheunderwriter.com/ Max Bailey! Max is a licensed residential mortgage originator and verifies the ATR requirements on all of our seller finance deals. He will show you how to stay compliant with Dodd-Frank regulations as well as provide tips to get your buyer Dodd-Frank qualified to increase your success rate! Visit https://cassidyinvestments.com/ for more information on Notes and Seller Financing Or if you have questions please feel free to email us at firstname.lastname@example.org
Seller finance may seem like the bottom of the mortgage loan sieve, but it is also a sieve in its own right. To save yourself from a lot of headaches, you need to be clear upfront about whether your borrowers will qualify for a Dodd-Frank compliant loan or not. Pre-screening your borrowers can save you a lot of time in this process. Listen in as Dan Deppen brings in Max Bailey from Call the Underwriter to share some of his tips about this on the podcast. Max also talks a bit about loan origination.
In this episode, Russ O’Donnell, the CEO and founder of Call The Underwriter helps us understand the underwriting process. Correct and compliant underwriting can save you hundreds of thousands of dollars. Additionally, compliant underwriting can help ensure that your risk is protected. If you were to underwrite without meeting compliance, there’s a chance that you could lose your ability to foreclose on the borrower. This could cost you your entire investment!
That’s why it’s important to understand the underwriting process, and even more important to have someone like Russ O’Donnell on your team.
On this episode we interview Russ O’Donnell and talk about the Dodd-Frank Compliance and The Safe Act. Russ O’Donnell is a licensed RMLO and HUD Certified Underwriter. He is also the CEO and Founder of Call The Underwriter, a company that helps private lenders and investors remain Dodd-Frank compliant. We talk about what you need to do when selling on creative terms and go over
- Russ’s experience in lending.
- Defining origination and underwriting and some examples.
- The laws to consider when lending and borrowing money.
- How Dodd-Frank can protect lenders.
- What it means to screen someone’s ability to repay.
- Specific guidelines for balloon payments.
- Professional advice for those planning to become a lender or borrower.
Russ O’Donnell is a licensed RMLO and HUD Certified Underwriter. He is also the CEO and Founder of Call The Underwriter, a company that helps private lenders and investors remain Dodd-Frank compliant. They have helped over 200 note investors, accomplished more than $5 million in compliant new loans, and helped clients save more than 125 litigation hours. Russ has over 22 years of experience in mortgage lending and has helped thousands of investors through the advice he shares as a regular podcast guest.
In today’s episode, Mike Cowper talks with Russ about selling on creative terms. Russ shares his professional experience in the lending and compliance industry. He explains how Dodd-Frank is a lender’s best friend and how it can protect your assets. He describes regulations and laws that govern lending and borrowing. Russ also explains how lenders screen borrowers in terms of their ability to repay their loans.
“It’s on us as lenders to make sure the borrower doesn’t get in too deep.” – Russ O’Donnell
On Today’s Episode of Flip Talk:
- What you need to do when selling on creative terms.
- Russ’s experience in lending.
- How often is Dodd-Frank invoked?
- Defining origination and underwriting and some examples.
- The laws to consider when lending and borrowing money.
- How Dodd-Frank can protect lenders.
- What it means to screen someone’s ability to repay.
- Specific guidelines for balloon payments.
- Professional advice for those planning to become a lender or borrower.
Your business should be running in full compliance. If not, you’re putting everything potentially at risk because all it takes is one person making a complaint, turning it into an audit, and you’ll find yourself with a very big problem. Many investors think that if they hired an RMLO, they are covered. Russ O’ Donnell, the CEO and Founder of Call the Underwriter, talks about compliance and the role of underwriting in doing that. He outlines the services they provide to help investors comply with the Consumer Financial Protection Bureau, or CFPB, and avoid the possibility of having a problem in the future.
Hiring An RMLO Doesn’t Always Mean You Are Compliant with Russ O’ Donnell
We are going to get into something that is important. It’s on the topic to what I foresee is the future. What I see for the future for the note business is combining the best of note techniques with the best of real estate techniques. That means that you’re going to be creating your own notes. Everybody reading this, whether you’re focused more heavily on real estate or real estate notes, creating notes should be a part of what you’re doing. All the benefits that we talked about, getting the cashflow without the hassles of being a landlord and without the liabilities of being a property owner. All those advantages we have talked about over and over again mean that you need to start to look at creating notes with these properties. Also, there are many of you that are landlords.
One of the things I’ve been promoting is it may be time with property values where they are and everything else to start to move out of that position, become the bank and convert your tenants over to property owners. You will be creating notes and doing that. There are some of you who are going to want to buy real estate and you want to buy it on terms. That’s creating a note. You’re promoting somebody else to create a note. All of those scenarios are going to require that you create a note that is of good value and good value in the second component is compliant. Please don’t run your business under the notion of, “I know somebody and they created a note, they didn’t go through this compliance thing and they never had a problem.”
They never have yet. There are no seller finance police. Here’s the thing. If you’re audited, that audit can expand rapidly and you’re putting your entire business at risk and it doesn’t make sense to do that. This is a hot topic nowadays. You all should be running your businesses in full compliant, then you can sleep at night. If you’re not, if you’re cutting corners, you’re putting everything potentially at risk because all it can take is one person making a complaint, turning it into an audit and you’ve got a big problem in your inventory. You need to use loan officers who are compliant in every state. Many of you have brought that challenge to me of, “We don’t have somebody who’s in every state. We only know a few people in the industry that can do that. Where else can we find these people?” The good news is I have found our guest, Russ O’Donnell. He is the CEO and Founder of a company called Call the Underwriter. Russ, welcome to the show.
Thank you, Kevin. It’s a pleasure to be here. Thanks for having me.
Before we get into some of the nitty gritty, I know you come from a banking and lending background. Maybe we start there and give everybody an idea of where you came from and why you created this company to help investors because I know that’s a passion of yours as well.
I got into mortgage lending back in 1997. I was a loan officer for a few years right up until the crash of ’05, ’06, ’07, ’08, ’09, ’10, ’11 and ’12. There weren’t a whole lot of loans to do back then. I went to work for a big bank as an underwriter. I learned how to underwrite and got all my FHA/VA and all those certifications. I fell in love with underwriting. I love the compliance side of things, coupled with the origination side, the creativity and the entrepreneurialship of the origination side. I set out in 2014 to privatize underwriting somehow in some way. We saw a need with private investors and lenders who after Dodd-Frank had started running scared and not wanting to lend their own money. We saw a need and we created the company. The trouble was we couldn’t get anybody to pay for it. Everybody thought it was a great idea, but everybody was running a little scared of the CFPB and didn’t know Dodd-Frank well. The CFPB hadn’t identified how to be compliant. We need to be compliant. They didn’t know how to be compliant. Fortunately, we met some key people and they introduced us to some people. We started talking to some key people in this awesome investor network and here we are. We’re one loan at a time trying to help private investors and lenders stay Dodd-Frank compliant.
There is a huge need for it and I know we struggled with this. I’ve taught thousands of people the note business over the last few years. You might have somebody who’s licensed in a couple of states and a couple of states over here and then you have some people going, “I’m going to do this one and sell the note and not worry about it.” Part of it was with Dodd-Frank. To this day, as far as I know, not every rule, act or law from Dodd-Frank has even been enacted. The last number I saw was about only half of them and it’s been years now. It was tough to understand. I would bet that a lot of people who were involved in passing this and creating this didn’t know everything in there either.
It looks like we’re going to put this out there and let the attorneys figure it out, which means let it go through the court system. Let somebody get sued and that establishes legal precedent. It was those scary times back then about, “What do we do?” A lot of people avoided it. Now, that people have calmed down on this, it makes absolute sense for people to jump back in and I’m seeing them do that in a big way. The other thing that was holding people back was the cost, which is nonsense in my opinion. The cost of doing something to be compliant versus the cost of what it could be if you’re found not to be compliant. It’s ridiculous to think of that. I like your videos on your website, CallTheUnderwriter.com. He’s got some informative videos on there. He’s got some blogs on there. Tell us about the cost and tell us about why and how you can do this in all states.
Our flat fee is $329. It is a valid RESPA-approved fee. It’s an underwriting fee. We put it on the loan estimate and the final closing disclosure as an underwriting fee. The buyer is legally allowed to pay that fee. It’s a buyer cost. They can bring that fee to closing. As an investor, if you set this up right, you should never have to pay for a fee, whether it’s $329 or $3,029. We charge an extra $15 if we’re the ones pulling the credit. We do this in all 50 states because we elected to hang our NMLS license with an FDIC, which gives us a 50-state exemption. It wasn’t easy to find, but we found a way to do it. It gives us the ability to do it in all 50 states.
I love that because it’s one call. Who do you call? You Call The Underwriter. You can handle it from there in every state. It’s something that’s been missing in our industry for a while. You may have been around a lot longer than I had realized, but I’m glad that I found you. Going back to the cost, $329 is nothing to do this the right way, but I agree with you 1,000%. This is a cost that should be passed along. These people are essentially applying for a loan. Why shouldn’t they incur some cost to do that? What can happen is sometimes people might get approved for the loan, but then they’re looking somewhere else and they back out of the deal. You don’t want to keep fronting money for people. What do you do in circumstances like that?
In a typical real estate transaction, as a seller you would always require the borrower to put up some earnest money. If the buyer then tries to go through underwriting and doesn’t qualify, the borrower gets his money back. It’s the way that it works. We work in much a similar way. Our fee is paid based on not closing but based on approval. If we can’t approve a buyer, if the buyer doesn’t qualify, if we can’t verify income, we can’t verify the things we need to verify for Dodd-Frank, we’ll issue a denial. That buyer doesn’t owe anybody anything. The seller doesn’t owe us anything. Once we issue an approval on that buyer, we’ll then send our invoice. That invoice can be paid through closing. You never want to be in a situation as a lender where you’re working with a buyer, you have asked us to Dodd-Frank the guy, we do it, the buyer walks and you’re left holding our invoice. We recommend pulling together $400, $500 in earnest money, letting them know that when they’re approved that those monies would go towards cost.
For my readers, that should not be a difficult thing for you to do. If you’re selling a house with seller financing and you have people who tell you they would like to buy it, you explain it to them, “There is this qualification.” You let them know ahead of time, “Here’s how it works. We need to have you go through a pre-qualification.” We get them pre-qualified. We get them over to the underwriter and then they can go through their approval process to do the checks and balances and all that, pull the credit and everything else that they do. It’s this whole thing of setting this up. When you let them know ahead of time, “Here is the overall process and it’s required that you have a $500 escrow.” It’s no big deal. You build it right into your whole presentation to the potential buyers. If they push back on that, there may be a reason. My second thought is if they can’t put $500 in escrow, are they the right ones to be setting up as a buyer of your property? Don’t let this be a stumbling block. You build this right into your entire presentation to them and this is how we do it.
What you will also find in setting it up that way, you will find better potential buyers for your properties. This is not the days of way back when. People might have seller financed anybody. You can’t do that nowadays and it doesn’t make sense to do that. You want to do it to deserving buyers. This ability to pay issue is the big thing that all loans have to be in compliant with. My readers know from my blogs and everything else about qualified mortgages and non-qualified mortgages, but seller-financed mortgages would fall under non-qualified because that has more to do with Fannie and Freddie, but they still have to have this ability to pay. Tell us a little bit about that standard and how that works.
To summarize Dodd-Frank, you have two requirements as a lender. You have the loan officer licensing requirements. Anytime you do more than five, you’ve got to either use a licensed loan officer or be a licensed loan officer. What happens is there’s a misconception in thinking that if I hire an RMLO, I’m covered. I’m compliant with Dodd-Frank, but there’s the second part of Dodd-Frank and that’s the ability to repay. That is where underwriting comes in. MLOs are not underwriters. They’re salespeople. They’re commissioned loan officers. They work to architect the deal, but they’re not compliance underwriters. You’ve got to have both pieces. Ability to repay means that you have to prove under underwriting standards set forth by Dodd-Frank that this customer has the ability to repay the loan under the agreed upon terms. They have to go through an underwriting process.
If you don’t do that and the borrower later on defaults, you try to foreclose, he gets a smart attorney and they stand up in court and say, “We’re going to come under a term called rebuttable presumption. We’re going to rebut the presumption that this person had the ability because the lender didn’t prove it.” That opens a door for the court to invalidate the lender’s lien. That process is what we handle for each and every lender on each and every buyer, making sure that that borrower meets the standards set forth by Dodd-Frank. You know that when we’re done, that buyer has the ability to repay and they cannot come back and challenge your position.
What are some of those qualifications on the ability to pay? What do you look at above and beyond credit? They may have low credit but still show the ability to pay.
What’s the minimum FICO score? What’s the maximum debt-income ratio? Dodd-Frank has not set a threshold on a minimum credit score. It’s not set a threshold and a maximum debt-income ratio. The CFPB issued a guide on how to comply with Dodd-Frank’s ability to repay requirement. We keep a copy on our websites under our Resources tab. We keep a copy of the SAFE Act. We even keep a qualified mortgage loan flow chart for investors to follow to see where they stand. When we’re underwriting a file, we know that we have to trot next to guidelines like FHA/VA, Fannie and Freddie.
The CFPB says in black and white that you have to adopt underwriting guidelines that historically have low default rates. The best guidelines for that are Fannie, Freddie, FHA and VA. While we don’t use just one, we may use a blend of all four. We even pull in some nonconforming guidelines when we have a self-employed borrower who doesn’t report all the income to the tax return or there are many write-offs there’s nothing left to qualify it with. That person, we can elect them to use a plan B set of documents in twelve monthly business bank statements to show the deposits. We will use a blend of those known guidelines that have historical low default rates and then we will talk about it. We dig into credit a little bit. We will do a verification of mortgage to help strengthen that file. In each and every case, in each and every loan that borrower must pass what’s called a residual income test. They not only have enough gross income to qualify for those guidelines, but we use the VA’s residual income test to make sure they have enough net income. That key is how you protect yourself against rebuttable presumption later.
The rebuttable means if somebody does end up going into default they get approved a few months down the road. They go into default and they come back with the statement of, “You shouldn’t have given me the loan anyway because I couldn’t afford it.” That’s essentially the rebuttable part. They challenge that in court and if they lawyer up, all of a sudden, they’re going to look at your paperwork. They’re right, you didn’t. You assumed they could make it or you didn’t assume, you ran their credit and said, “That’s all I have to do.” That is not the world that we live in now. This is another thing that hasn’t happened a long time now. Going back a couple of years, we used to get at our training events where people would, “There’s Dodd-Frank, you can’t do this and you can’t do that.”
I would have people say they want me to go through paperwork and make sure these people can pay and everything else. I’m like, “You mean you weren’t doing that before? You weren’t on your own logically going, ‘I should probably see if these people could afford to pay me.’” How is it different? What it’s done in my opinion because I’ve been doing this years and years ago before Dodd-Frank was even a thing. In the late ‘90s, early 2000s, we always looked at the ability to pay. We didn’t have a more precise formula to follow and little checks and balances in which to do that for. I like it because one of the other things that we talk about in the training and such that I do is when we do seller financing, we do want to create a good quality note. That note owner may want to sell all or part of that note in the future.
One of the big issues is, “What’s the track record?” Number one, how much seasoning? How many payments have they made? Even before you get to that, you’re looking at were these people qualified to do it. What you’re doing is helping investors like my readers and me to go, “This makes so much sense because we have a copy of all of this paperwork. All the approval process that you go to, we have copies of that.” If we’re showing a potential note investor after this deal is closed. Let’s say they have made three, four payments and they’re looking to sell some of those payments, I can then take all that paperwork and say, “These folks have been qualified through this process.” That adds strength to that note because if I don’t have that, the only balance I have to it is to season that note out more. I might have to hold on to that note for twelve to eighteen months before I can sell anything because investors are a little leery. Have you run into scenarios like that?
We’ve run across them where investors will call us and say, “I made a note a couple of years ago and it’s not Dodd-Frank compliant. Is there a way to get them Dodd-Frank compliant now?” The answer is twofold. What you can do is if you read the CFPB’s Guide, the CFPB did a phenomenal job of taking 2,000 pages of Dodd-Frank and trying to get into 60 pages of usable content. The CFPB not just shows us how to make sure they qualify before you do the loan. They also look at the first twelve months of payment history. Did that buyer make the payments on time for twelve months after you made the loan? That’s a good indicator of how the underwriting was done. Even if it wasn’t done, you could still take that to the bank. If the borrower lawyers up and they go the distance on it, it’s not the only thing you will need to win that battle, but it’s a step in the right direction.
Let’s say somebody made their own seller finance note and didn’t take this advice. They’re reading this and they’re going, “I’ve got a couple of these things and I’m starting to worry.” Russ said that we couldn’t make them Dodd-Frank compliant after the fact on this loan. Could we modify the loan and then go through a Dodd-Frank if we change some of the terms or is that not going to work?
You can do a modification and then collect the borrower documents that are needed to make sure that they are compliant. In essence, you refinance or you modify the existing note and then qualify the borrower at that time. If you’ve got the new note and you put them back through the process, you can right the wrong for sure.
That’s what we do. I’m assuming some changes would have to be made to technically call it a loan mod. That could be stretching a term or changing an interest rate a little bit, something like that to do it. There’s a good answer for you. If you do have loans that are out of compliant and you’re getting scared as we’re going through this. He also has it at his website, all the multibillion-dollar lawsuits that CFPB has fined, over $5 billion in such. These are to big lenders. Why get yourself in a situation where you’re putting your business at risk? I know a lot of you also, you utilize your IRAs for these investments and think about that.
If you’re not doing something in compliant and there’s an audit and that would envelop something in your IRA, who knows? It doesn’t make sense when you can do this. If you get to pay the $329, pay the $329. If you’re doing it the smart way and have them do it as a part of the package, I cannot see a reason why somebody wouldn’t do this to make sure that their business is being done right. If you have done some wrongs, you can correct it. Maybe do a little loan modification for that. You are talking about new borrowers. Somebody’s reading. They’re in a situation. They have a home. They have renovated it and they’re looking to sell this with seller financing and they have somebody open house or they’re getting a mail piece. They have got somebody who’s interested. I like what you put on your website there for your simulator. Tell us about your simulator and how somebody might use that in that scenario.
The simulator, we created that. We were approached in 2018 by an investor who is a note buyer. A lot of the notes they buy are not Dodd-Frank compliant and they’re mostly partial performing. They said, “Is there a way that we can because in these note buys, we don’t get all of the buyer documentation. There may or may not be buyer documentation in the file when we get it, we may know little to nothing.” I asked the investor, I said, “Can you get a pay stub? Can you get a list of the borrower’s debts? Are you able to ask those questions? Are you able to get that information?” “Yeah, most likely.”
What we did is my web engineer took the residual income calculator that the VA uses for all their veterans and which is part of the CFPB’s outline on how to comply. We created an online version of it so that an investor holding a pay stub and a schedule of debts or a credit report on a potential buyer could verify whether or not that buyer had enough residual income to meet Dodd-Frank’s ability to repay requirement. That’s a great way for an investor to put somebody through a ten to fifteen-minute pre-qual on their own to see if I’m going to go the distance with this person and have it fall out at the end or if this person’s got a shot at qualifying.
If they can pass that residual income test, you’re down to the one-yard line. We collect the rest of the documents on a borrower that’s starting. If we’re talking about a borrower that’s starting fresh, you can use that calculator to see if the residual income’s there. If you have a loan that you need to mod and you’re trying to figure out where the payment needs to come in at. You can use our calculator when you’re working with that customer, doing that workout to see where you need to land to meet the ability to repay before you start gathering all the documents.
That’s a great little tool because investors don’t want to waste their time. If you can get somebody who you go, “Let me run you through this real quick to see,” because most people don’t know. Let’s face it, especially in the for sale by owner world, if they see a house for sale but the owner or the seller will finance, they’re going to take a look at it. They haven’t gotten prequalified. They haven’t even thought about doing that and they don’t have all the paperwork. They probably don’t have exact numbers of gross income, net income and all that stuff. This is a nice little way to go, “Fill out this simple form. This will let us know to a high degree if you’re going to qualify or not.” That’s something anybody can fill out, not just investors. It’s free on your site. If we had to send somebody there to go, they could do that.
Anybody can do it. You can use the calculator as much as you want. It will tell you whether they pass or fail for free. Let’s say that you’re buying a note or you’re doing a mod for somebody that you bought a note and you can’t get all this information. You can get a pay stub. You can get some payment instrument, pay ledger, you can get that and scheduled with that. We offer a certificate with that calculator. It’s a Dodd-Frank light. What it will do is it would give you a certificate to show that based on their income now, they do have enough residual income to meet the ability to repay requirements for the terms that you’re proposing.
The more I hear from you, the more I love what you put together for investors. That’s who you put this together for, was investors in mind. I don’t know anybody’s who’s done that. I’m excited about this. I do want to go through your overall process because I know you have submission sheets and things like that. Any stories that you know of or you were involved in where somebody did do a rebuttal and how it came out one way or another?
It doesn’t happen often and nobody comes back and have the guts to come back and tell us, “We did use your service and we lost our assets.” We don’t hear that a lot, but what we do hear is from investors that know other investors, which is what prompted them to call, where investors have gone to court over this. It’s not just investors that don’t do anything. It’s investors that thought if they hired an RMLO, a licensed loan officer, they thought that they were covered. They have got one or two sheets of paper with the loan officer’s NMLS license number on it. They think they’re good, but the loan was never put under underwriting standards. It was never seen by an underwriter. It was never signed off. It doesn’t meet the ability to repay standards because you have to show that. If you’re originating more than five, you’ve got to use that license. Even say you’re doing one or two, you don’t need the license, but you still have to follow Dodd-Frank’s underwriting guidelines. You still have to make sure and you have to follow it as an underwriter would. A lot of times we see investors that think they’re compliant because they hired the RMLO and they lost anyway because they didn’t do the underwriting.
I bet there is a high percentage of investors that feel that way. “I don’t have to worry about the license. They’re licensed.” I could see a high probability of that, but I also do have the experience myself but also heard through other investors. You do get some borrowers out there that they know the system. They work the system. They will hire up attorneys that work the system. These attorneys are great, dragging out of foreclosures for a couple of years because they know every little avenue and everything else. I could see somebody lawyering up on some of these deals too. Your business might be fine but all of a sudden, a few years down the road this comes out of the woodwork. You never know. I know attorneys were pushing the statute of limitations there for a while through foreclosures and tried to take that angle. It makes sense to do it right. It looks like you have built this around these investors. Tell us how to work best with you from the beginning then.
We have a short video on our website that talks about where to begin, how to start, how do I pre-vet my buyer. What are some questions I can ask to pre-vet my buyer before I start collecting documents? Hopefully, figure out if I’ve got somebody real and tangible. We recommend that you ask a few questions up front and see if the answers to those questions make you feel comfortable. If somebody doesn’t want to put up $500 in earnest money, you’ve got the wrong person. In a typical loan, that person’s got 2% to 2.5% in closing costs including an appraisal and everything else. If they can’t pony up $500 for earnest money or they’re asking you lots of questions and why they don’t want to do it, walk away from that deal.
We first recommend you ask them how the most recent twelve-month rental history has been for you. How much are you paying in rent? If your new mortgage is going to be $700 to $800 and somebody is paying $1.50 in rent, that’s a lot of payment shock. You want to find out what’s going on there and will your landlord verify it in writing. Are you renting for mom or are you renting from a third party and will they verify it? That’s big. A verification of mortgage is big and it’s going to tell you a lot of how they’re going to pay you. Second, how is your income documented? A lot of people don’t document income. You get a handyman. You get people that are running cash-to-cash, week-to-week in some of these markets.
You know the markets I’m talking about, hard to document income. If they can’t document income, you’re not going to pass Dodd-Frank. Dodd-Frank did one thing big. It got rid of stated income. You’ve got to be able to document your income and enough of it. We’re aggressive. Remember, we’re not just compliance underwriters, we’re originators too. We’re entrepreneurs. We’re going to use everything at our disposal within the lending guidelines. Ask them, how’s it documented? Can you document employment history for a couple of years? Can you document self-employment? How are we doing it? If they can make you feel good about those answers, you probably got somebody who 80%-ish is going to be able to move forward.
It’s okay to ask them what their credit score is to see. I don’t have a minimum credit score threshold, but do you know what your score is? Do you log on to Credit Karma? If it’s below $500, you want to find out why. Other than that, if they feel good about that stuff, I would take our submission sheet and start collecting those documents. You want a complete application, which is on the submission sheet. You want to sign borrower’s authorization that allows us to pull credit. It also explains based on how they earn their money, if they’re self-employed, employed or retired. What income documents to ask for? It’s super simple, it’s five items. If they give you a hard time or take forever to get it to you, it’s a bad buyer. What you want is somebody who’s confident in answering your questions, able to put up some earnest money and quickly gets you the income documents that are needed. If you will get those to us, if you’d get us a complete package and you submit that to us, we will give you an underwriting response back within 24 hours.
This is from my mentality in doing this on the marketing side. You turn this into a positive for them. You’re interested. You go through all that rigmarole and they say, “We want to do loans that are compliant. You want a loan that’s compliant, don’t you?” Those are the phraseologies that you might say, “Sure, we want loans that are compliant.” In doing this on a compliant loan, we can also go towards their credit score.
If you as investors and lenders led to report the mortgage to the credit reporting agencies, it is a huge ticket to rebuilding their credit. It’s big.
That’s a good hook because when I’m explaining to somebody, if they’re looking to buy my houses, great. You’re going to have the ability to pay. I’m sure you’ve got that. You want to have a compliant loan. The other thing is that if we do this the right way, we can also improve your credit score. “Do you know what your credit score around what number it is?” It’s an easy tie-in to do things like that. As an investor, that could be a potentially another big benefit for me because these loans that we do on seller financing are not written at bank terms. We’re not writing 3% loans. You’re taking on more risk than a bank. They can’t get a bank loan. Why are you doing bank term? We’re riding in these higher interest rates here and a lot of times people down the road will want to refinance out of that property. That could be a nice payday for an investor. What percentage of people stays in their home and pay off their loan in 30 years? There is nobody. In World War II generation, it is a high percentage. Now? Nobody. There’s a chance they’re going to sell that house or modify the loan down the road. You’re offering them a compliant loan that you can help them build their credit score.
A few years down the road, the average tenure was a few years that people would sell the house or they will either refinance at that point in time, which both can be good for an investor. You get the compliant loan and get that potential refi down the road for you as well. Whether you’re keeping the note long-term or selling off all of it or part of it, that’s a win-win and you will have a better quality note. Your submission sheet, five to seven steps are all they need and they can download that ahead of time, have copies of that and hand to people if there’s a verbally established interest. Run them through the simulator perhaps and then say, “The next step is here’s all the documentation that we’ll need.” Once they get all that documentation, you want that all at one time. Don’t send this and then send the other, get it altogether.
We work with some great investors and I’ll give you an example. We’ve got an investor who submits clean files almost every time. When we get those files, we know that’s a clean file. I know that when I get it between our setup team, our underwriter, getting the buyers disclosures out and rendering a decision on that loan, we can do it in one hour because the file is clean. The biggest cause for a borrower, for your deal to fall apart before it ever gets to the closing table is not because the borrower has bad credit. It’s not because there are issues with the borrower. It’s because the submission is not complete. When the submission is not complete, we have to get back to you then and say, “In order for us to set this up, we still need items four, five and six.” A few days go by. You’ve got to go back to the borrower and every time you go back to the borrower, you’re lessening the chance that this deal is going to close. You look more and more like you don’t know what you’re doing. We’re waiting for you. We can’t do anything.
A week to several days later, when we finally underwrite the file, the buyer thinks they’re done, “Thank God, I’ve got all my documents to this investor. Finally, we’re going to get somewhere,” and then I have to reach out to the borrower and say, “It looks like there is a child support payment on your pay stub. I’m going to need the full divorce decree and the full child support order,” which you probably can’t find or don’t have anymore. “I need all of that before I can render a decision.” Many times the buyers are like, “I’ve had enough mess in my life. I thought this deal was going to go through. I thought it’d be easy for me to qualify and now there’s one more thing. Forget it.” It happens a lot. Even if you don’t think it’s pretty or you’re doing it right, there’s a bit more. Trust me, if we don’t like it, we will throw it out if we don’t need it but submit it anyway.
I’ve seen it before. You’re going to drive these people crazy sending stuff in and your odds, it’s a mess. You play a role in this as an investor and your job is to get all of that paperwork from your potential client, which is the potential buyer-borrower. You get them to get all the stuff. I would tell them too, “Wait until you have everything together before you send it to me so you’re not sitting there with a bunch of paperwork.” Put that burden upon them but stay on top of them. You know how this works. It was like when we were talking about Hardest Hit Funds and things like that, there’s a procedure through here and your job becomes you’ve got to motivate them to get this going.
I’m not taking my property off the market until somebody is fully approved perhaps. I want to keep the motivation and the pressure on them. Get all your paperwork together. Don’t send me anything until you have it all. Once you receive it, your role as the investor is to go through it. Take ten minutes, 30 minutes or whatever it takes. Go through the paperwork, check, make sure everything is there, then send it up to Russ. That way you could hear back in as little as an hour. You’ve got to make it easy because they have a process as well. If you want a quick response, if you want it done the right way, take it on as your responsibility to wait to send all the paperwork until it’s there. Pass that burden upon to your potential borrowers. It’s a smart way to run the business. When someone’s approved, they get back the approval, you do that by phone call, by email, submit the paperwork. How does that work?
When the borrower is approved, there’s one of three responses, yes, no or maybe. When it’s a yes, we’re going to issue an email letting everybody know, buyer and investor included, that the loan has been approved. It’s either been approved with conditions. Maybe we want to do a verification of rent on this one, it’s a little sketchy. We want to do a verification of rent. That will be one of our conditions. We will ask the borrower to give us the landlord information. We’re communicating what we need, but everybody’s communicated on that email. We will copy the borrower with their initial disclosures. There are two sets of disclosures that need to happen to be Dodd-Frank compliant in any mortgage loan, real estate loan. It’s initial disclosures then a final closing.
We handle those and we let the borrower know how to get those back to us, etc. When the borrower has given us those conditions, we can sign off on that. We’ll send another email out letting everybody know that the loan has received final approval. You can close anytime on or after this date. Dodd-Frank has a seven-business-day waiting period from the time you originate. We keep you on track in that timeline so you don’t close too early. If we get back to you on initial feedback and the answer is a maybe and say, “Kevin, we’re close on this, but I don’t have enough residual income to make this happen. Can we stretch this fifteen-year into a twenty? We will be fine.” If the answer is yes, we will get an addendum from you. We will change it in our system and we will reflect that on the final closing disclosure. The borrower can close with no hiccups.
If the answer is a no, this is usually when we simply can’t verify what’s been stated. We can’t verify the borrower’s employment. We don’t have a two-year employment history which you have to have. We can’t verify the borrower’s income. We can’t connect the dots. This person’s trying to fly under the radar. They’re off the grid. That’s usually when somebody doesn’t qualify. If you’ve got a low FICO score and there’s been some trouble, maybe a life event, something like that, we will go to work. We will dig in. We will have them go get a twelve-month auto insurance letter or a twelve-month Verizon bill history pay ledger. We’ll help build some credit as FHA does on a low credit a buyer. We will help you do those things. It takes a little longer to get that person to the closing table and issue final approval. That’s how the process works.
The note in the security agreement, you write that up. Is that the responsibility of the investor or a third-party?
That’s the responsibility of the investor, their attorney, the title company or whoever is doing that. What we do is when we issue final approval, our last step is to send out that final closing disclosure. We will let you know you can close three business days from now and that file is back in the investor’s court to pick up the ball with the buyer and close that deal.
Whether you’re using a title company, escrow company, real estate attorney or whatever you’re using to close your transactions. Do you have preferred sources that you refer to people on that or anything?
You probably have a number of investors. We refer people over to the bag network for different services in different states.
You’re an investor and that’s your responsibility. You’ve got the paperwork over. Russ is doing his work with his team. While you’re doing that, you’re working with your attorney or closing agent, whoever that may be. Once you get the approval, you fill in the blank or your attorney fills in the blanks on these cookie cutter contracts. Let’s face it, it is what they are. It’s a matter of getting the mailings off and getting the signatures on the documentation. You’re creating a good compliance solid note that you can keep for long-term passive cashflow or sell all or part of it. If you want to have this go to their credit report, you can do that. Do we need borrower’s permission to do that?
When a buyer applies, we have investors that pull their own credit. Investors that are savvy, that have rentals, they subscribed to a service and they will pull their own credit report or we will do it. Part of our package there is a borrower’s authorization, the buyer wet signs. That gives us authorization to full credit.
I didn’t frame my question there properly. I was thinking after the fact. If we’re going to record their payment history on this newly created note moving into the future and put that on their credit report, we don’t need the borrower’s permission for that or do we?
I push that question. I have to take the 5th on that one. I would say that’s more of a Fair Credit Reporting Act. I would push that over to your local attorney for that one.
Some of the borrowers may want that, some don’t, but they’re changing some credit rules on that too. This has been great. I enjoy the information. I learned this. It’s got a good website. It’s CallTheUnderwriter.com. He’s got some free information on there. He’s got the Simulator. You can play around with that as needed. He’s got a little blog on there as well and explains their whole system, which is not that difficult. This whole process is about five to seven steps there. It’s clear to everybody having these done with an RMLO is not the same thing as compliant. You’re RMLO might be making it compliant, but don’t assume your RMLO is making it compliant.
With this, you’ve got the underwriting, you’ve got the licensing, and you’ve got the ability to do this in all states. Pass the cost onto the consumer. That’s a smart way to run it. I don’t think you’d get any pushback because consumers expect if they’re applying for a loan, there’s going to be a fee. There’s a processing fee on all loans. You’ve got to put that burden back on them. Russ, thank you so much for being on the show. Any final thoughts or things I didn’t get into with you?
You covered all of it. I want to say thanks, Kevin. It was great seeing you at the summit as well over in California. You got such a great thing going and congratulations on the award you received as well. I love being here. I appreciate you having us.
I appreciate it. Thank you very much. It’s Russ O’Donnell over at CallTheUnderwriter.com. Thanks for reading this episode. I gave you all the news at the beginning of this one. I don’t need to go over that with you. I’ll look forward to talking to you shortly on another show.