In July, of 2010, the United States Congress and Senate passed a law called the Dodd-Frank Act. Over 2000 pages of financial reform aimed at preventing another financial crisis - but does it? To those business owners and lenders who have read and understood the Act, it is clear that the implications to prospective clients are disastrous. The Act's provisions will create a gigantic financial crisis in their life because lenders will refuse to lend to them due to the onerous, impractical, and unrealistic provisions forced upon them by the Act, and because it makes a clear case for attorneys to sue any lender who makes a loan to someone who isn't perfect. The authors of this website feel that it is immoral in the least, and unconstitutional at the most, to dictate to an individual person or company how he can borrower or lend his own money. These regulations curtail the rights of owner occupants to get a loan on their property unless they qualify for a Fannie, Freddie, FHA, USDA, or VA loan. That means 7 years from date of foreclosure for Fannie and Freddie loans, and 3 years from date of foreclosure for FHA borrowers. It is wrong to make a law that clearly states that any lender that makes a loan to someone that is outside of the guidelines can be sued.
The authors of this white paper are a group of small private money lending firms in Las Vegas, Nevada. Every day, these firms lend to borrowers who want to acquire or refinance the property that they live in, and the demand for these loans has never been higher, nor more needed, than during this time of limited credit availability. The goal of this website is to shed light on the reasons why we say unequivicobly: "the latest regulations of the Dodd-Frank Act, as written, shall be end of lending to anyone who doesn't have perfect credit, the perfect job, the perfect bank account, and the new regulations are the perfect way for the big banks and the GSE's to become the only source of money in the United States for property owners who live in, or intend to live in, the property they are using as collateral for the loan."
It isn't that we don't like making low cost, low interest rate loans. It's because all of the investors/banks/credit unions that have money, and who are willing to lend to people that don't have perfect lives, will stop lending their money under these rules. People with money will not take the risk that they can be sued simply because they made a loan outside of the Dodd-Frank box. That means local banks, credit unions, and private lenders will be forced to only lend on investment properties to investors. Owner occupants who can't qualify for a GSE loan will be out of luck. No exceptions. Lenders have to be able to trust in order to lend out their money, and these new regulations make it too easy for the legal community to urge borrowers to sue their lender for lending outside the Dodd-Frank box. That is a risk that NO lender will want to assume, therefore, all out-of-the-box lenders will just not lend to owner occupants. Lenders volunteer to lend their money. Would you lend your money to an out-of-the-box borrower if you knew that you couldn't charge enough to make a profit, knew that their was no penalty if the borrower didn't make the payment, knew that you could be sued and have "no defense", and knew that a foreclosure could take over a year because of the new rules? No, you would not. And that is exactly what all of the out-of-the-box lenders have decided to do.
For further information, please contact Corinne Cordon at email@example.com.
White Paper: The Consequences of the Dodd-Frank Act With Respect To Out-of-the-box Loans:
A Moral Case for Private Mortgage Lending
“The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.”
Economics in One Lesson, (1946)
In the wake of the financial crisis that resulted from the collapse of the U.S. mortgage market, an angry American public demanded action from their elected representatives. Congress’s response was the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Proponents of the act aimed to pass a law that would protect the American public from the dishonesty and fraud that undermined the integrity of our financial markets. As it relates to mortgage lending, the Dodd-Frank Act seeks to reform the industry by purging deceitful lenders while “…ensuring that responsible, affordable credit remains available to consumers.”
In a twist of irony, the act with “Consumer Protection” in its title will unintentionally harm the very consumers it was drafted to protect. The new rules effectively put an end to the private lending industry’s ability to lend to an “owner-occupant” – someone who wants to live in the house that they have purchased. The private lending industry is comprised of citizen lenders and licensed mortgage professionals who work together to meet the credit needs of the people in the communities in which they live.
A MORAL CASE
In communities throughout America consumers need access to mortgage financing that is unavailable to them through banks. It isn’t because the borrowers are a bad credit risk. It is because the banks don’t offer a product that meets the borrowers’ needs. Traditional mortgage products don’t have the flexibility of terms to satisfy every borrower. An entire market exists comprised of citizen lenders who are willing to invest their own money in borrowers. It is a vibrant market far removed from Wall Street. In the private mortgage market borrowers and lenders meet to create their own loans to satisfy their own needs.
The freedom to use one’s own property for its highest and best use is the basic right of every man. Individuals who invest their money in private mortgage lending have spent their lives employing their talents, intellect, and labor to create their wealth. They are willing to invest the product of their life’s work in their fellow citizens so they too can create their own wealth. It is a benefit to all parties involved. Unlike federally related mortgages, there is no risk to the public. Individual investors bear all the risk.
There is a perfect sports analogy to compare Wall Street banks to the private lender. Ted Williams and Sam Snead were good friends. For those too young to remember, Ted Williams was a hall of fame baseball pitcher and Sam Snead was a legend in professional golf. The two friends regularly compared the game of baseball to golf and argued over which sport was more difficult. On a fishing trip Ted said that golf was clearly easier. After all, the crowd doesn’t yell “boo” and the ball just sits there waiting for you to hit it. Sam replied that unlike baseball players, golfers have to play their foul balls.
And so it has been with Wall Street and private mortgage lenders. Why would a Wall Street banker care how many bad loans were fouled off into the stands. He could stay in the batter’s box and continue to swing. As longs as the process continued to produce mortgage loans the money would continue to flow. Loans were packaged and sold as securities. By the time loans went bad it would be out of the banker’s hands and in the lap of the final buyer. Not so with a private lender. When a borrower defaults on a loan it is the lender who feels the pain. Before money ever changes hands the lender has every incentive to ensure that the borrower has the capacity and willingness to meet their commitment. Their success is inseparably connected to the success of the borrower. That is the essence of an ethical transaction. No party takes advantage the other and both parties share a beneficial interest in a successful outcome.
Investors benefit because they receive interest payments in an easy to understand transaction. They know exactly to whom the funds are lent, how the principal and interest will be paid, and their investment is secured by the property pledged as collateral. It is completely transparent. In the event of default there is an efficient process of unwinding the transaction. The borrower can sell the property and recover any available equity after paying off the obligation to the lender, or, the borrower can surrender the property and the lender is free to sell it to recover the original investment.
We are currently in an environment where many borrowers have blemished credit or a record with a foreclosure. Their history keeps them from qualifying for conventional or FHA financing. Without access to the additional credit provided by private mortgage lenders, borrowers who were denied credit would be forced to rent their housing. Private lenders give them the opportunity to own their homes and build equity. The federal government has long recognized the benefits of home ownership and has created government entities with the sole purpose of promoting home ownership. Beyond the benefits of home ownership, there are cases where private lenders help borrowers to reduce their monthly housing expense. Either way, it is an opportunity for borrowers to enjoy the benefits of home ownership while repairing their credit so they can qualify for a conventional or FHA mortgage.
Prior to Dodd-Frank, Section 32 of the Truth In Lending Act imposed strict guidelines on high-cost loans with respect only to the refinancing of an owner-occupied dwelling. Purchases were excluded from Section 32, and borrowers had the right to negotiate the terms and conditions of their private money loan with their private money lender on a purchase. Now, the Dodd-Frank Act extends the scope of the high-cost loan provisions to any “residential mortgage loan”. A “residential mortgage loan” is defined as any “consumer credit transaction that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling or on residential real property that includes a dwelling, other than a consumer credit transaction under an open end credit plan or, for purposes of sections 129B and 129C and section 128(a) (16), (17), (18), and (19), and sections 128(f) and 130(k), and any regulations promulgated thereunder, an extension of credit relating to a plan described in section 101(53D) of title 11, United States Code."
The new provisions of the Act, found in section 1431 pertain only to those borrowers who will live in the home, and does not impact properties being purchased for investment purposes. For owner-occupants, the Act: 1) dictates the terms and conditions of the prospective loans which severely limit options for all lenders; 2) imposes mandatory pre-loan counseling even for borrowers who are buying their 20th house; 3) imposes strict qualifying criteria for borrowers that are more onerous than conventional qualifications (since when does the government have the right to force a lender to deny someone who doesn't have pay stubs, or other documentation?; 4) mandates that borrowers provide tax returns to the lender for verification of income as opposed to the traditional methods private money lenders use to verify income; 5) mandates that the lender not charge enough for the loan to stay in business; 6) mandates two appraisals be performed on the property if the borrower is buying a property that has been renovated; 7) makes it almost automatic that a lender can be sued for up to 3 years if they made an out-of-the-box loan; 8) mandates no balloon payments at any time; 9) states that lenders have "no defense" if they make a loan outside the box and 10) mandates duplicate appraisals in many situations. These regulations aren’t just onerous, they are in direct opposition to the use and purpose of private money lending, namely speed and ease of application and they increase the cost of a loan unnecessarily.
We agree with the majority of Americans that reform is needed to prevent a repeat of the sub-prime meltdown and we agree that some of the regulations could be beneficial to borrowers; however, we don’t see how most of them of Wall Street regulations to private money and local banks will benefit communities and private citizens at any time, in any way. Private money loans did not cause the meltdown, borrowers will have less access to credit, investment capital will leave communities for other markets, mortgage professionals will exit the industry, and the cost of borrowing will increase. Private citizens should remain free to lend their own money without interference and borrowers should remain free to negotiate with private lenders the loan terms that satisfy their needs.
WHAT IS WRONG WITH THE REGULATIONS?
Forces two appraisals be performed: two issues here. Forces lenders to order two appraisals, even if the lender is happy with the first appraisal, and states that the lender has to pay for the second one. WHAT? Why should a lender have to order another appraisal if it isn't needed? Is the first one not good enough? And the lender has to pay for the second one? What happens if the loan doesn't close? Not only do all lenders work for free 100% until the loan closes, but now they have to come out of pocket to order a duplicate appraisal? When a loan doesn't close, the loan officer and the bank do not get any money. They don't get paid per hour. If we have regulations that keep appraisers in check, why are we being forced to order and pay for, two appraisals? Who is this benefitting? Besides the appraisers, I mean.
Forces business owner to do work and not be paid: Forces lenders to pay for staff to do extensions and modifications, but says that they cannot charge for the service. Since when can the government mandate that a business owner do work and not be paid for it? Already the law forces loan officers, lenders, underwriters, processors, etc. to work for free. The only time they get paid is if the loan closes.
Price fixing: the regulations state that a lender cannot charge enough to cover his costs for the loan by imposing a maximum fee allowed to be charged. Isn't this America? Don't we have a system of free enterprise? What makes the government so powerful that it can force a a business owner do work and not get paid for it?
Forces a lender to never have a balloon payment under any circumstances: would you be willing to lend your money to your neighbor for 30 years? How about if you knew you would be paid back within 5 years? Would you lend it then? Loans without balloons cost more, because you are using the lender's money for a longer time.
Regulators don't know how much work a lender does when someone is late on their payment, when someone needs their loan extened, or when someone needs and extension of their loan. This is akin to price fixing, without even having any idea of what it costs to do the work
Remove the restriction of no balloons on high cost loans, or allow balloon payments at 5 years.
Change the QM rule so that it only addresses ability-to-repay. It should not say anything about fees or interest rate. If a lender makes a loan that doesn't meet ability-to-repay requirements, then he should not have "no defense" because a lender does make a loan that can't be paid back. Wall Street MBS made loans that couldn't be paid back, not community lenders. But in no case should a lender be able to be sued because he charges a little bit more, or a lot more, on fees or interest rate. That is called Free Enterprise.
The analysis of the unintended consequences on private lending arising from new Dodd-Frank rules produces a recurring theme—rules intended to reform Wall Street and federally regulated mortgages will harm the consumer. Title XIV of the Frank-Dodd Act is replete with limitations that may have success in curbing Wall Street dishonesty but will bring the demise of community lenders who never engaged in Wall Street style abuses. The most harmful limitations include a prohibition on balloon payments, mandatory HUD approved counseling for prospective homeowners, mandatory duplication of appraisals, and elimination of fee income for work done as a mortgage broker modifying or extending a loan. For a passive student of the Dodd-Frank Act such rules seem necessary to protect consumers and to lower the cost to obtain a mortgage. However, a careful analysis of the effects on all groups reveals the opposite. Borrowers will have less access to capital, professionals will leave the industry, the available credit that does remain will be harder to find and come at a much higher cost because of the fear of litigation that mortgage professionals will be susceptible to because they dared to lend to an owner-occupant. The nature of private money lending is “private, easy, and fast” and that nature does not lend itself to extensive verification and cumbersome regulation, and possible legal ramifications from the United Stated federal government.
Regulators could easily change the definition of “federally related residential mortgage loan” in the Frank-Dodd Act to only pertain to loans funded by a federally regulated financial institution or loans sold to a GSE such as Fannie Mae or Freddie Mac, not loans brokered between two individuals (including their LLC’s Trusts and Corporations), and managed by a licensed mortgage professional, or loans made by a community bank or credit union.
Las Vegas, Nevada
President Capella Mortgage
A Private Lending Firm
Las Vegas, Nevada
President, Direct Investors Capital
A Private Lending Firm
Las Vegas, Nevada
THIS IS WHAT THE LAW SAYS:
There are two distinct parts to the Dodd-Frank Act as it relates to mortgages. However, both parts affect all 'residential mortgage loans' which is defined as any loan made to an owner occupant - whether purchase or refinance.
You can see the detailed definitions below, but you will notice that we are taking a stand against others who say that Dodd-Frank affects investor owned real estate. After careful, in depth, analysis of the Truth in Lending Act, and the Dodd-Frank Act, which modifies Truth in Lending Act, we believe that all sections are only referring to "residential mortgage loans" which are defined as "consumer credit transactions", which mean owner occupied properties - except for the section on ability to repay, which pertains to all residential loans.
PART 1: ALL RESIDENTIAL LOANS
RESIDENTIAL MORTGAGE LOAN DEFINITION: Residential Mortgage Loans - "The term ‘residential mortgage loan’ means any consumer credit transaction that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling or on residential real property that includes a dwelling, other than a consumer credit transaction under an open end credit plan or, for purposes of sections 129B and 129C and section 128(a) (16), (17), (18), and (19), and sections 128(f) and 130(k), and any regulations promulgated thereunder, an extension of credit relating to a plan described in section 101(53D) of title 11, United States Code."
ABILITY TO REPAY: The Dodd-Frank Act states that the mortgage broker must prove "ability to repay" the debt on ALL residential loans. Discussions around this subject indicate that many are thinking there needs to be a number set for the back-end and front-end ratios.
The standards set for verification of income include: credit history, current income, expected income, current obligations, debt to income ratios, employment status, and other financial resources OTHER THAN THE CONSUMER'S EQUITY IN THE DWELLING OR REAL PROPERTY that secures repayment of the loan.
The special rules for 'non-standard' mortgages (Section 129C) include no prepayment penalties, arbitration prohibitions, restrictions on negative amortization, loss of anti-deficiency protection, policy on acceptance of partial payments, and methods of determining ability to repay. They are summed up here:
1. Creditors must determine ability to repay.
2. Creditors must document and verify ability to repay, without taking into account the equity in the home, and the borrowers ability to sell the property, or refinance into a conventional loan. THIS IS A PROBLEM FOR HARD MONEY LOANS AS MANY TIMES, THE EXIT STRATEGY IS SELLING THE PROPERTY, OR REFINANCING INTO A BETTER MORTGAGE.
3. Creditors must follow special rules for non-standard mortgage loans (variable rate loans, interest only loans, negative amortization loans, and refinances of hybrid loans. "Qualified loans" are entitled to simpler rules.
4. Prepayment penalties are prohibited.
5. Mandatory arbitration clauses are prohibited for loans secured by a consumer's primary dwelling.
6. Creditors must provide special disclosures if a loan is subject to a state anti-deficiency statute.
7. Must disclose policy of accepting partial payments.
8. Four new initial TILA disclosures are required for closed-end mortgages (not a home equity line of credit.)
9. Monthly statements or coupon books must have specified information on them.
10. Any verification of income must be verified by IRS Transcripts or a method that verifies income by a third party according to regulations prescribed by the Consumer Financial Protection Bureau.
On all non-standard loans that have interest only payments, the creditor must calculate the ability to repay based on the fully amortizing payment amount.
When the consumer plans on selling a different dwelling within 12 months, and gets a temporary loan for less than 12 months, which is called a bridge loan, then the ability to repay is not subject to the non-standard loan rules.
ANTI-STEERING: One section that is particularly strange is that the loan originator (loan officer) must present at least three options to the borrower for the loan that the borrower expressed an interest in. The loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business, and for each type of transaction in which the consumer expressed an interest, must present the consumer with loan options that include:
1) the loan with the lowest interest rate;
2) the loan with the lowest interest rate without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the loan, a demand feature, and
3) the loan with the lowest total dollar amount for origination points or fees and discount points;
Then the loan originator must have a good faith belief that the options presented to the consumer are loans for which the consumer likely qualifies.
Well folks, for consumers that only qualify for hard money, that is close to impossible. How many lenders in your town are willing to lend hard money on a residential property? And how many hard money lenders will make a loan with a 7 year balloon, fully amortizing, with a low interest rate: A loan officer is very conversant with the programs offered by his wholesale lenders, and he knows the borrower's situation, and sometimes there aren't many options available to the consumer except hard money. Washington should recognize this.
The politicians wanted to stop those loan officers who present the most expensive loans to their customers, so that they can get paid the most money. This law will not stop that. Any loan officer that steers his customers into expensive loans is not going to stop because of a law. He is already operating unethically, for his benefit, and he is usually a very smooth operator, and he doesn't care what the law says. And he is probably smart enough to make up options for his customers that are all very expensive. Most loan officers are proud of their ability to get their customer the best loan possible, but there are a few that are thinking of themselves only. The customer must shop around with other loan officers if they suspect that they are not receiving the best deal possible. On the other hand, when a customer only qualifies for hard money - let's say the borrower is just out of BK, or foreclosure, or short sale, then the loan officer knows there is only one option (at this current point in time.) and it is going to be very difficult for a loan officer to find options in their town for hard money, when so few lenders are willing to do hard money.
PART II: HIGH-COST MORTGAGE LOANS
Here are the provisions that are going to kill hard money loans for owner occupants.
The High Cost Mortgage Loan provisions apply only to owner occupants, whether purchasing or refinancing. For the most part it changes what we can lend on, as previously "buying" an owner occupied home could be done using a hard money loan.
On owner occupied refinances, the law is already so onerous that hardly any hard money lenders are willing to do a refinance on a borrower's primary residence.
So, Truth in Lending Section 103(bb) has revised the definition of a Section 32 loan, (or HOEPA loan) from "a consumer credit transaction secured by a principal dwelling" to a definition that no longer excludes "residential mortgage transactions" (an owner occupant buying a house) and "open-end credit plans"; and which has lower thresholds on interest rate and fees.
A high-cost loan is defined as a loan in which:
1.) the APR is greater than 6.5% over Prime Rate on first mortgage loans, or 8.5% over Prime Rate for 2nd mortgage loans. Previously the margins were 8% and 10%, or,
2.) the "total points and fees" exceed 5% of the loan amount for loan amounts greater than $20,000; or $1000 for loan amounts less than $20,000. The "total points and fees" includes all fees, other than bonafide third party charges as long as they are not paid to the mortgage broker, or his affiliates.
3.) the loan documents allow the creditor to charge a prepayment penalty or other penalty after 36 months; or if the penalties exceed, in the aggregate, 2% of the amount prepaid.
High Cost Loans:
1. cannot charge prepayment penalties;
2. cannot have balloon payments;
3. late fees are cannot be greater than 4%, unless the loan documents specifically authorize the charge; and cannot be assessed before 15 days after the due date;
4. acceleration of debt is generally prohibited, (unless the borrower defaults);
5. financing of prepayment penalties, points, and fees is prohibited;
6. evasions of TILA are prohibited;
7. modification and deferral fees are generally prohibited;
8. payoff statement fees are generally prohibited;
9. payoff demand statements must be provided within 5 days of request;
10. PRE-LOAN COUNSELING IS REQUIRED;
11. No creditor may recommend default on an existing loan or other debt prior to, and in connection with, the closing or planned closing of a high cost mortgage that refinances all or any portion of the existing loan or debt.
and if a creditor, who in good faith, unintentionally violates a high-cost mortgage provision, he has an opportunity to cure the violation.
Next, per section 1471 of Title XIV, TILA section 129 H, the lender in a high-cost mortgage, must order two appraisals. The first is to be paid for by the customer, the second must be paid for by the lender. The lender may not use a "broker price opinion" to determine value.
So basically, since my hard money loans are greater than 9.25% interest, they are "high-cost mortgages", which means that I cannot have a balloon payment (which I do have); my grace period has to be changed from 5 days to 15 days; I can't charge to modify or extend the loan; and my borrowers must get counseling before I can give them a loan. Additionally, I must raise my prices by $400 because I am going to have to get a second appraisal. Because I cannot take balloon payments out of my interest-only loans, I will have to stop making loans to owner-occupants because there are no individual investors willing to make 10, 20 or 30 year mortgages.
In the end, unless things are changed in this law, I doubt that hard money lenders will be able to ever lend to owner-occupants again. It's not going to hurt us. It's going to hurt the people who want to buy property to live in. Our government wants to protect us, and some of these provisions I agree with because I don't believe in them (prepayment penalties), but other lenders use them, and in the end, the government cannot protect us to the extent of scaring away all of the lenders willing to lend to "less than perfect people, or less than perfect situations, or less than perfect properties".