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“ARE LAND CONTRACTS NOW SAFE UNDER THE SAFE ACT?”

Matt — Tue, 27 Jul 2010 20:47:11 +0000

Regulators Suggest Land Contracts Are Not Subject to New Law

Background

In 2008, Congress passed and President George Bush signed into law the Housing and Economic Recovery Act, (Public Law 110-289) (HERA). HERA is designed to assist with the recovery and the revitalization of America’s residential housing market – from modernization of the Federal Housing Administration, to foreclosure prevention, to enhancing consumer protections. The SAFE Act is a key component of HERA.

The SAFE Act is designed to enhance consumer protection and reduce fraud by encouraging states to establish minimum standards for the licensing and registration of state-licensed mortgage loan originators. The SAFE Act requires states to have licensing and registration systems by July 31, 2010. Indiana’s SAFE Act law was passed last year and goes into effect in June 2010. An easier-to-read version of the Indiana law appears in the Indiana Administrative Code.

You Need a License, If You Are a “Loan Originator”

You need a loan originator’s license, if you are a loan originator as defined by the new Indiana law enforcing the SAFE Act. In a sentence, anyone who offers or provides a residential mortgage loan or extends credit for a home purchase is deemed a loan originator and is required to get a license.

You Might Be a “Loan Originator”

The SAFE Act defines “loan originator” as “an individual who (1) takes a residential mortgage loan application; and (2) offers or negotiates terms of a residential mortgage loan for compensation or gain.” This definition is broadly interpreted. If you sell a residential property on credit, YOU ARE PROBABLY A LOAN ORIGINATOR under the SAFE Act.

Indiana’s Law Has (Already) Changed, Since July 1, 2010

Indiana passed its Safe Act statute with an effective date of July 1, 2010. Originally, the following regulation appeared to draw land contracts into scope of the Safe Act:

“Mortgage transaction” means a loan or consumer credit sale in

which that is or will be used by the debtor primarily for personal, family, or household purposes and is secured by a mortgage, or a land contract, or other equivalent consensual security interest on a dwelling or residential real estate.

(emphasis added).

Sometime in July 2010, Indiana proposed a new regulation that deleted the term “land contract” from the definition of a “mortgage transaction.” The new definition reads as follows:

“Mortgage transaction” means a loan or consumer credit sale that is or will be used by the debtor primarily for personal, family, or household purposes and is secured by a mortgage or other equivalent consensual security interest on a dwelling or residential real estate upon which is constructed or intended to be constructed a dwelling.

Clearly, the term “land contract” was deleted from the regulation. However, the question is this: Is the definition of a “mortgage transaction” still broad enough to include land contracts?

In an effort to get this question answered, a number of lawyers and real estate brokers have contacted the Indiana Department of Financial Institutions and have spoken with Jim Harrell, Assistant to the Supervisor-Consumer Credit, about the applicability of the Safe Act to land contracts. What this author has been told is that Department of Financial Institutions deleted the term “land contract” from the regulations, because the Department of Financial Institutions believes the statute should only apply to transactions where title to the real estate has transferred to the consumer-borrower.

A Word of Caution

This author has concerns that the Safe Act is so broadly written that future regulators could apply the law to land contracts, or at least argue that land contracts fall within the scope of the law. We should assume that neither Jim Harrell nor anyone else from the Indiana Department of Financial Institutions will testify in defense of someone using a land contract in years to come. Nor would this evidence be admissible in an Indiana court.

The new regulations make no mention of title to land transferring as a definitional component of the new law. In fact, with regard to ownership of real property, the terms “title,” “transfer,” and “deed” appear nowhere in the new regulations. There is arguably no language in the Safe Act or Indiana law supporting the interpretation given by the Indiana Department of Financial Institutions.

Under the new regulations, the term “loan” still includes “the creation of debt by the creditor’s payment of or agreement to pay money to the debtor or to a third party for the account of the debtor; or the extension of credit by a person who engages as a seller in credit transactions primarily secured by an interest in land.” That language sounds like a land contract to many real estate lawyers.

The new regulations do not exclude land contracts. Nor does the statute or regulations contain any language distinguishing situations where title has or has not transferred, as part of a “mortgage or other equivalent consensual security interest on a dwelling or residential real estate.” The term “land contract” has merely been deleted from the definition of a “mortgage transaction.”

So, until regulators expressly exclude land contracts from the Safe Act, be cautious in the use of land contracts.

Exclusions

There are exceptions under the SAFE Act. Here are a few:

• Selling a home you previously occupied/lived in as your residence.

• Certain clerical and administrative tasks.

• Selling a home to an immediate relative, as defined by the statute.

• Selling commercial buildings, as defined by the statute.

• An attorney who negotiates terms of a residential mortgage loan with a prospective lender on behalf of a client as an ancillary matter to the attorney’s representation of the client, unless the attorney is compensated by a lender, mortgage broker, or other mortgage loan originator or by an agent of such lender, mortgage broker, or other loan originator.

What Is a “Dwelling”

The SAFE Act’s definition of “residential mortgage loan” includes a loan secured by a consensual security interest on a “dwelling” and cross-references the definition of dwelling in section 103(v) of the Truth in Lending Act (TILA) (15 U.S.C. 1601 note). Regulation Z, which implements TILA, defines dwelling to mean “a residential structure that contains 1 to 4 units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence.”

As always, feel free to contact this author for specific answers to your real estate investing and legal questions, or call for a consultation. Good luck and Happy Real Estate Investing.

SAFE Act Catches Lawyers By Surprise

Matt — Mon, 12 Jul 2010 02:44:38 +0000

I have been writing and talking about the SAFE Act- which makes most land contracts in Indiana unlawful- for months now. I thought that I was the only lawyer in town who had heard of the new law. No one seemed to know about it.

That recently changed, as a wave of panic swept through the local real estate bar in recent weeks. And boy oh boy, are there some shocked and angry real estate lawyers out there. This is a horrible new law in that it makes it unlawful for many people to sell their own real estate on contract.

It has been such a rude awakening for so many lawyers that a Continuing Legal Education class was quickly organized for next Friday in a matter of weeks. Usually, CLE’s are planned months and months in advance.

Congratulations to those of you who listened to my teleclass on the SAFE Act or who read my blog. You knew about this crazy new law long before many real estate lawyers did.

If you want to learn more about the SAFE Act and the several new laws that have passed recently, register for the July 17 real estate class. Details are here.

You can also listen to the teleclass on this blog.

MATT TO SPEAK AT IMPORTANT REAL ESTATE CLASS

Matt — Sat, 10 Jul 2010 20:13:35 +0000

2010 Real Estate Update: New Laws- New Strategies

“A Day of Essential Learning,” presented by

2009 and 2010 had more law change that effect investors than any other time period. Discover the top critical law changes that effect investors.

At this seminar, you will discover the top ten things real estate investors and landlords get sued for and why, if you aren’t careful, you will be sued too! Learn the Safe Act exemptions!! Unveil the how to turn tax $ into a valued investment!! Master the most critical changes to save you thousands!!Use these law changes to transform them into $$$ instead of liability.

When: Saturday, July 17, 2010

8am – 4pm

Where: George’s Neighborhood Grill, 6935 Lake Plaza (71^St & Binford Ave.), Indianapolis

317-577-1600

Cost: $79 per person (spouses only $35 more!)

Seating Limited to the First 40 Registrants

REGISTER AT www.REIProfitCenter.com

Or call Selina at 317-526-6609.

Matt Speaks on Indiana’s new SAFE Act During TeleClass

Matt — Wed, 30 Jun 2010 20:13:36 +0000

The Indiana SAFE Act regulates mortgage loan originators and mortgage transactions in Indiana, effective July 1, 2010. Surprisingly, it also regulates most land contract sales of residential properties. In this TeleClass, held on June 30, Matt talks about the new law and its wider implications. Listen in. . .

“MOST LAND CONTRACTS ARE NOW DEAD IN INDIANA”

Matt — Thu, 10 Jun 2010 20:02:19 +0000

If you are engaging in any of these real estate transactions in Indiana, you should read this article-

● Selling residential property on land contract.
● Extending credit to any home purchaser.

The SAFE Act
The SAFE Act is designed to enhance consumer protection and reduce fraud by encouraging states to establish minimum standards for the licensing and registration of state-licensed mortgage loan originators. The SAFE Act requires states to have licensing and registration systems by July 31, 2010. Indiana’s SAFE Act law was passed last year and goes into effect in June 2010. An easier-to-read version of the Indiana law appears in the Indiana Administrative Code.

You Need a License, If You Are a “Loan Originator”
You need a loan originator’s license, if you are a loan originator as defined by the new Indiana law enforcing the SAFE Act. In a sentence, anyone who offers or provides a residential mortgage loan or extends credit for a home purchase is deemed a loan originator and is required to get a license.

“Anyone who offers or provides a “residential mortgage loan,” such as a land contract, is a loan originator and is now required to get a license.

You Might Be a “Loan Originator”
The SAFE Act defines “loan originator” as “an individual who (1) takes a residential mortgage loan application; and (2) offers or negotiates terms of a residential mortgage loan for compensation or gain.” This definition is broadly interpreted. If you sell a residential property on credit, such as is the case under a land contract, YOU ARE A LOAN ORIGINATOR under the SAFE Act.

Exclusions
There are exceptions under the SAFE Act. Here are a few:
• Selling a home you previously occupied/lived in as your residence.
• Certain clerical and administrative tasks.
• Selling a home to an immediate relative, as defined by the statute.
• Selling commercial buildings, as defined by the statute.
• An attorney who negotiates terms of a residential mortgage loan with a prospective lender on behalf of a client as an ancillary matter to the attorney’s representation of the client, unless the attorney is compensated by a lender, mortgage broker, or other mortgage loan originator or by an agent of such lender, mortgage broker, or other loan originator.

What Is a “Dwelling”
The SAFE Act’s definition of “residential mortgage loan” includes a loan secured by a consensual security interest on a “dwelling” and cross-references the definition of dwelling in section 103(v) of the Truth in Lending Act (TILA) (15 U.S.C. 1601 note). Regulation Z, which implements TILA, defines dwelling to mean “a residential structure that contains 1 to 4 units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence.”

Conclusion.

Most small investors who sell residential property on land contract are now required to have a mortgage loan originator’s license. Obtaining a license is not easy, fast or cheap. As a result, most investor will no longer sell on land contract.

As always, feel free to contact this author for specific answers to your real estate investing and legal questions, or call for a consultation. Good luck and Happy Real Estate Investing.

It’s a boy!

Matt — Sat, 05 Jun 2010 05:34:47 +0000

I’d like to announce the birth of my son-

Blake Matthew Vivo Griffith

June 5, 2010 - 3:35 a.m.
7 lbs., 7 ounces
21.5 inches long

Baby and mom are doing great. I’ll be in and out of the office next week. Thank you for all the love, support and messages of encouragement.

Matt Appears on “The Buzz”

Matt — Fri, 04 Jun 2010 15:51:01 +0000

Lawyers talk. So why not use TokBox?

Matt — Wed, 19 May 2010 03:04:50 +0000

My use of TokBox to improve how I communicate with my clients and control overhead/fees was recently featured on the MarketingTechBlog. Check it out-

http://www.marketingtechblog.com/marketing/talk-to-me-with-tokbox/

LLC OR CORPORATION- SELECTING THE RIGHT BUSINESS STRUCTURE

Matt — Sun, 09 May 2010 02:13:19 +0000

You have decided to start or maybe purchase a business. Now what?

One of the first and most important decisions you now face is deciding what form of business entity to own and operate your business venture. There are several options, including-
• a sole proprietorship or general partnership;
• a limited partnership;
• a limited liability company;
• a limited liability partnership;
• an S-corporation; or
• a regular corporation- a C-corporation.

For nearly every business owner reading this article, the choice is fairly simple. Most Indiana businesses should operate either as an S-corporation, regular corporation, or limited liability company. These three entities offer business owners limited asset protection and relative ease of operation. In deciding the best business structure to utilize, each business owner should consider a variety of general factors and also the circumstances unique to the business, its owners, and its opportunities and challenges.

Before forming a new business entity, a good business attorney will spend time with a business owner to discuss and consider factors such as these-

• Will the business consist of an operating entity or a holding company?
• What are the likely tax liabilities arising from the business?
• If an operating entity is chosen, can FICA taxes be minimized?
• How will the business be financed?
• What is the exit strategy?
• What business risks are being avoided?
• Do the owners and managers have the requisite training and vigilance to maintain a more complicated structure?
• What are the costs, benefits and burdens of creating a particular business structure?

As explained above, a business should be operated as a limited liability entity to protect the assets of the owners. That is the central reason to form a business entity.
One of the first and most important decisions you now face is deciding what form of business entity to own and operate your business venture. There are several options, including-
• a sole proprietorship or general partnership;
• a limited partnership;
• a limited liability company;
• a limited liability partnership;
• an S-corporation; or
• a regular corporation- a C-corporation.

For nearly every business owner reading this article, the choice is fairly simple. Most Indiana businesses should operate either as an S-corporation, regular corporation, or limited liability company. These three entities offer business owners limited asset protection and relative ease of operation. In deciding the best business structure to utilize, each business owner should consider a variety of general factors and also the circumstances unique to the business, its owners, and its opportunities and challenges.

Before forming a new business entity, a good business attorney will spend time with a business owner to discuss and consider factors such as these-

• Will the business consist of an operating entity or a holding company?
• What are the likely tax liabilities arising from the business?
• If an operating entity is chosen, can FICA taxes be minimized?
• How will the business be financed?
• What is the exit strategy?
• What business risks are being avoided?
• Do the owners and managers have the requisite training and vigilance to maintain a more complicated structure?
• What are the costs, benefits and burdens of creating a particular business structure?

As explained above, a business should be operated as a limited liability entity to protect the assets of the owners. That is the central reason to form a business entity.

One of the first and most important decisions you now face is deciding what form of business entity to own and operate your business venture. There are several options, including-

•   a sole proprietorship or general partnership;
•   a limited partnership;
•   a limited liability company;
•   a limited liability partnership;
•   an S-corporation; or
•   a regular corporation- a C-corporation.

For nearly every business owner reading this article, the choice is fairly simple. Most Indiana businesses should operate either as an S-corporation, regular corporation, or limited liability company. These three entities offer business owners limited asset protection and relative ease of operation. In deciding the best business structure to utilize, each business owner should consider a variety of general factors and also the circumstances unique to the business, its owners, and its opportunities and challenges.

Before forming a new business entity, a good business attorney will spend time with a business owner to discuss and consider factors such as these-

•   Will the business consist of an operating entity or a holding company?
•   What are the likely tax liabilities arising from the business?
•   If an operating entity is chosen, can FICA taxes be minimized?
•   How will the business be financed?
•   What is the exit strategy?
•   What business risks are being avoided?
•   Do the owners and managers have the requisite training and vigilance to maintain a more complicated structure?
•   What are the costs, benefits and burdens of creating a particular business structure?

As explained above, a business should be operated as a limited liability entity to protect the assets of the owners. That is the central reason to form a business entity.

Sole proprietorships and general partnerships offer no protection to their owners or to the entity itself. By contrast, limited liability companies, limited partnerships and corporations are limited liability entities which provide significant but limited protection from liabilities arising from the business’ operations. Generally, what is at risk for an owner is the value of the investment made by the owner in the entity. Business lawyers refer to this as “inside out protection,” because the liabilities arising inside the entity will not reach the assets of the owner held outside of the entity.

Of course, selecting the right entity is just the first step in this process. Careful drafting of documents, the proper filing of documents with governmental offices and establishing processes and procedures to follow the so-called “corporate formalities” are equally important steps in limiting the liability risks to the business’ owners. These topics are addressed in other articles, but the entire process starts with the list of factors relevant to selecting the right entity.

If you are starting a new business or are unsure whether your current entity is properly structured, contact your business attorney to review the issues raised in this article.

Matt — Sat, 01 May 2010 07:17:18 +0000

I started the Griffith Law Group to serve the needs of solopreneurs, entrepreneurs, small to medium sized business, and business owners. We also help real estate investors, builders, building trades, property managers and other real estate professionals.

We encourage you to sign up for our electronic newsletter, through which we share important business news and information about changes in the law that might impact your business or real estate interests. Learn more at www.IndyBizLaw.com.

Matthew A. Griffith, Attorney

Matt@IndyBizLaw.com