A prior newsletter discussed the new Alabama and Federal requirement that seller financing of any dwelling, except the seller’s personal residence, will be considered a mortgage loan origination, and all mortgage loan originators must have a license.
That was bad enough. It gets worse. Under the Truth in Lending Act (TILA), “creditors” must provide certain disclosures to borrowers. A creditor is defined as someone who “regularly extends credit.” What the heck does THAT mean?
Buried in the footnotes, the Federal Reserve Board provided guidance for us. Lest you dismiss “mere footnotes” as not binding on anyone, TILA says that footnotes have the same binding effect as statutes and regulations!
Footnote 3 says that when it comes to mortgages on dwellings, a person regularly extends credit if they extend credit more than five times in the prior year, and then extend credit even once in the current year. That’s bad enough, but here’s the real kicker now that we apparently all need to be licensed mortgage loan originators: you must also meet TILA requirements if you use the services of a mortgage broker! I’m guessing that if you ARE the mortgage broker on your OWN transaction, the feds will say you are using the services of a mortgage broker, even if “both” of you have only one social security number! My prediction–all seller financing of dwellings will have to meet TILA requirements unless you are selling your own personal residence and holding the financing!
So, the question is, who tattles on you if you don’t have a mortgage loan originator’s license and/or you don’t comply with TILA or any of the other consumer protection laws?
I don’t know what the front-end enforcement mechanism is for this. I don’t know who tattles, or if there’s a way for the authorities to find out if they decided to be curious.
I do know that if you don’t do what you are supposed to do in this area, and the buyer/borrower defaults on their loan, and you try to foreclose on them, lawyers will climb out of the woodwork to make your life expensive and miserable.
Let’s suppose the purchaser/borrower defaults on the seller financing you hold. You start foreclosure proceedings. The borrower hires a lawyer and sues YOU for violation of TILA. Under current law, they can’t sue you for violation of the mortgage loan originator’s license law, but they can turn you in to the Banking Department. After that, the Banking Department will investigate all your seller financing transactions and slap you with a fine that can be up to $25,000 per loan!
That’s what lots of borrowers are doing to mortgage lenders today. It’s the “forensic audit” foreclosure avoidance and income production tactic of choice for many defaulted borrowers. Do you want to be on the receiving end of THAT?
My advice? Use a licensed and bonded mortgage loan originator if you are going to sell “dwellings” and hold the financing. Let THEM take care of all the TILA and other disclosures. Otherwise, you might try to save a few dollars today and end up paying through the nose later if you get sued by a defaulting buyer.
My question: If we have to do all the same things a big lender has to do, then do we also get bailout money if our purchasers default on their seller-financed mortgages?
Note: I am going to reprint that earlier newsletter issue, about mortgage loan origination licensing, as a blog post. That way, it will be included in the archives and convenient for you to review.