As with all legislation, there is the issue of interpretation. In this entry, we will drill down, quickly, what the Dodd Frank Act did, why it did it, and how to comply with it as an investor or private lender.
Dodd Frank’s 849 page lending overhaul, as we’ve all seen, made it mostly impossible for smaller lending entities to stay in business. This is because it transferred the responsibility of the buyer onto you, the lender. If the buyer defaults on a mortgage loan, and it can be determined that the lender didn’t make sure the buyer had the “ability to repay” at the time of loan origination, the lender could lose their right to foreclose. This was done to try and protect the consumer against a crooked mortgage loan officer. As a result, many private lenders and investors abandoned residential, seller-financing all-together, and have long awaited repeal or new legislation to reopen the door. Trump’s recent lift did quite a bit for smaller banks and credit unions, but still requires them to service those loans and ensure their borrowers still qualify.
So how do I get back in the seller-finance, or note-buying game and stay compliant? 2 answers.
1. SAFE Act – This is the law that says you need a Mortgage Loan Officer (MLO) to originate the loan between you and your buyer. Note that if you are doing no more than 3 per year, there is an exemption to this requirement. You can find an MLO in any state by simply accessing their registrar of loan officers, or by using an entity that originates in all 50 states.
2. Ability to Repay – Dodd Frank states the lender is responsible for making sure the buyer can repay their loan. While it doesn’t tell you what interest rate to charge, or how high of a debt ratio is too high, it does recommend a few things. In fact, the CFPB issued a 59 page guide to help summarize the ACT’s requirements and how to comply. We keep a free copy of that guide on our website here, and use it regularly during our Compliance reviews. Dodd’s biggest question, during an audit, is going to be, “What underwriting methods did you use to ensure the buyer had the ability to repay your loan?” That’s it. Short and sweet. If you can’t answer that, or don’t want to become a mortgage underwriter, then simply hire one familiar with Dodd Frank.
Lastly, don’t confuse using an MLO to underwrite the transaction or to ensure your buyer has the ‘ability to repay’. That’s the underwriter’s job. MLO’s originate for food, commission, clams, Benjamins, and greenbacks. They are not underwriters and aren’t typically familiar with guidelines. They are salespeople. MLO’s help you to comply with the SAFE Act, underwriters help you to comply with the Ability to Repay. You need both.