If you’re doing any kind of owner financing, rent-to-own, or lending money that’s secured by real estate, you’d better keep reading.
Did you realize that the Franklin Dodd Act might be applied to small-time lenders?
New laws went into effect on January 1, 2014 that impact the real estate industry – anyone who is in the industry should be really aware of this… it could get scary if you’re not paying attention.
We didn’t think about the impact of this on small investors until we saw Sharon Vornholt’s posting – I’ll include the video below so you can watch the whole interview with Bill Walston, who Sharon says is “is a CPA, tax strategist and master lease option expert.”
Now, this is really designed to target predatory lenders, so folks who are keeping it on the up and up should be ok.
However, you may have a higher level of responsibility to demonstrate that you are doing some due diligence to qualify your buyer before you lend money.
In other words, you have to make sure that your borrowers qualify for the loan.
Hopefully if you’re lending money on real estate, qualifying your borrowers is standard practice. I can’t imagine anyone being so naïve as to loan tens of thousands of dollars… but I bet there are some people reading this who’ve done it for friends and family. Those good intentions could come back to bite you in a major way if you’re not careful… more on that in a minute.
The purpose of the law is to target predatory lenders – those who trick borrowers with fine print and terms that they don’t understand.
There are investors out there who purposefully execute rent-to-own agreements while knowing that the tenants will never actually be able to qualify for a purchase loan. That type of behavior has a lot of stiffer penalties under the new laws.
Those predatory folks include a whole lot of extra fees that would, in theory, be applied to the tenant’s down payment at the purchase. But when the predatory lender creates those terms knowing that they’re going to keep the entire down payment,
Consider the borrower’s ability to repay – if you knowingly overlook his or her lack of qualifications – or fail to check – you could end up paying the fines, penalties and court costs associated if that tenant’s attorney is able to prove that you didn’t do some due diligence.option fee, etc., then it becomes fraud.
If the borrower can prove that you didn’t comply, you may have to refund Every Single Payment they’ve given to you.
That’s right – Every Single Dollar.
So although this will probably discourage predatory behavior on the part of lenders, I do see a big opening for predatory tenants here.
If they’re able to cultivate trust with a naïve homeowner, they may be able to pay rent for a few years… and then get it all back with the help of a shark-attorney.
Ye investors – be warned!
As Bill said, “systems are going to be more important than ever.”
Check it out below:
