Private Lender Volume 3-Issue 6 by American Association of Private Lenders

P r i va t e L e n d e r O f f i c i a l

E z i n e

o f

Spring

A . A . P. L .

Forward A Peek Behind the Curtains - Bob Cox AAPL Member Spotlight - Pouyan Broukim

CFPB Laws & Regulations - Anthony F. Geraci

The Journal of the American Association of Private Lenders Volume 3 - Issue 6

Private Lending â&#x20AC;&#x201C; Itâ&#x20AC;&#x2122;s about more than money. The American Association of Private Lenders is about the self-reliance and rugged individualism that built America. Our purpose is to advance the interests of the entire peer to peer community. We lend our experience, enterprise and energy to elevate the standards of our industry and give you a voice in your future. Build your future with us. Join AAPL today.

913-888-1250

AAPLonline.com

C on te n t s : In This Issue: Viewpoint Nurturing A Growing Industry

Industry

- Larry Muck (pg.3)

CFPB Laws & Regulations Have Come To a City Near You

- Anthony F. Geraci (pg.18)

A Peek Behind The Curtains

I n t e r vi e w

- Bob Cox (pg.22)

Private Lending: Member Spotlight - Pouyan Broukim shares his insights

(pg.6)

Membership 2013 Membership Directory - Board of Advisors and Founders - Active Lender Directory - Member Service Provider Directory

Business E-mail Could Be Binding for Private Lenders

(pg.29-33)

- General Counsel at Vertical Mail (pg.12)

What To Do If Your Borrower Files Bankruptcy - Manny Singh (pg.14)

AAPL V i e w p o i n t : Nurturing A Growing Industry - Larry Muck

It was in the lobby of a hotel in San Jose at the

Have you ever been exposed to underwriting? Although lacking in any exposure to the applicable sciences, she did possess a willing spirit and a very valuable tool…significant funding ability.

The demeanor of the women who approached me was quiet but earnest. “Excuse me,” she said, “but I have a question. I’m thinking about making private loans and was wondering if you could help me get started.” Further conversation uncovered the fact that she was one of Silicon Valley’s techno-wealth mavens and it seemed to her that she could not only help her community but also earn greater returns through Private Lending activities.

I may have actually said the following words out loud…”Get thee to a fund manager!”

Investors Success Conference that the growing interest in Private Lending really was brought home to me.

I asked her a few questions, to which each of her answers was “No”…Do you have any experience in lending?...Do you have any legal training?... Do you have any background in finance, marketing, or similar business disciplines?...Do you understand the intricacies of property valuation?...

On the other end of the scale, I was contacted by a hedge fund manager on Wall Street. He had been involved in mortgage securitization with a large firm and now was working to funnel funding into alternative investments. His stated goal was to develop a fund that would be a passive investor in rehab construction loans. Flying this up the flagpole with some of our lenders did generate some interest, but it also occurred to me that passive investing combined with rehab loans is truly an oxymoron. Many private lenders shy away from construction lending because of the added risk manifesting itself in reliance on an accurate budget, draw and inspection management, and subcontractor liability. These

areas, if not adequately managed, create potential for risk of loss not present in other lending arenas.

obvious reasons. Their capital base can also be concentrated in a few larger funding sources that tend to limit the scope of what they do.

The point of the foregoing was to illustrate the fact that our industry is seeing burgeoning interest in the space. Consequently, competition for deals has increased with an attendant decline in yield in some areas, and a relaxation of terms. Many of our seasoned veterans find themselves in a position of needing to park funds or decline investments because the ability to deploy capital is not as easy as it was a year ago.

These tendencies create a situation that limits flexibility in their operations and make it more difficult to adapt to changing market conditions. Change and adaptation is difficult for most people, but the landscape is rapidly transforming and it requires a dynamic approach in order to continue to thrive. There is no such thing as standing still; youâ&#x20AC;&#x2122;re either moving forward or moving backwards.

Is there still low hanging fruit? Sure. But it is not as plentiful; therefore, it requires our industry participants to do a few things that have implications for the long-term viability of their operations.

The implications for our Association are fairly significant. We must embrace the change that is occurring and assist our members in meeting the challenge. We can do that in a number of ways:

Our members tend to be specialists and serve particular niches in which they are comfortable. They also tend to be geographically focused for

â&#x20AC;˘

Assist those that are interested in developing their skill set by providing access to information and training

•

Help our members identify and attract new capital sources…lord knows there is a lot of money on the sidelines and more to come as the stock market peaks and the bond market falls over the next few years.

•

Provide a platform for sharing lending opportunities between members… one’s turn down is possibly another’s sweet spot.

•

Develop a funnel that rewards trained brokers for submitting the best funding requests to our members.

On behalf of our founders: Tim Bricker, Anthony Geraci, Wallace Groves and Jack Rollins And our Board of Advisors: Josh Fischer, David Owen, David Williams, Bill Worsley, Mike Wrenn, and Robert Wallace We say thank you for your continued support. I look forward to building this association with you and for you. We’ll talk soon.

• Develop a national clearinghouse for opportunities that touch multiple geographies. We are working hard to build relationships that address each of these area. Association members help other members to improve performance and enjoy more success. In exchange for this effort, we would ask that you consider referring other Private Lenders to us. Identification of non-member lenders is important to us. Your referrals are important to the growth of the association and to our ability to deliver on the strategic initiatives outlined above. So, if you’re interested in helping in this effort, please drop me a note at lmuck@aaplexpo.net. Include in the subject line “lender referral program” and we’ll tell you about our affiliate marketing program that allows you to share in the growth of our membership. Thank you for your interest and your involvement in the building of our industry.

Larry Muck Executive Director

If you are interested in becoming an AAPL Partner please contact Larry Muck at

913-888-1250 or lmuck@aaplonline.com or visit www.aaplonline.com

I nte r v i e w Private Lending AAPL Member Spotlight: Pouyan Broukhim of PB Financial Group Corp. Known as one of California’s Premier Hard Money Lenders, Pouyan Broukhim shares his insights, challenges, and experience in one of the nation’s toughest and most profitable private lending markets in the country.

Private Lender: Give our readers some insight into your product mix and company background.

require cash-out on existing income-producing properties or investors who are looking to grow their portfolio of income-producing properties.

Broukhim: I founded PB Financial in January of 2006 as a small brokerage funding transactions ranging from $100,000 to $2,000,000. Since then, I have worked to develop PB Financial to a level that funded over $75,000,000 in 2012 in residential and commercial properties in the great state of California.

Private Lender: Are there certain types of transactions you prefer more than others?

We have two different products that we provide to our investors and borrowers. The first is a flip product for short-term investors who are looking to maximize the current market condition to take advantage of distressed properties. The second is a product geared towards individuals who are looking to hold properties from 3 years to 10 years. These investors/borrowers either

Broukhim: PB Financial is looking to lend on residential properties, apartment buildings, warehouses, industrial properties, gas stations, and other types of income-producing properties in California. Private Lender: What would you consider your “Sweet Spot”? Broukhim: PB Financial’s “Sweet Spots” are pur-

chases in California with borrowers who have skin in the game. We usually like our borrowers to have about 30%-40% in down payment. However, we have

been facing lately?

distressed properties. Because of these new challenges, we have reduced our rates and costs to a level that is affordable to small investors. We understand that without these investors there would not be a market for private lenders like us.

Broukhim: The main challenge that we have faced

Private Lender: Tell us about your underwriting

been known to provide higher LTV for qualified individuals and qualified properties.

Private Lender: What types of challenges have you

has been when clients call us about other supposed private money lenders who have failed to deliver on their promise and now they need a legitimate lender to pick up the pieces and close within a short amount of time. We usually like a minimum of 10 days to close a loan, but we understand that isn’t always possible. We have been known to fund transactions within 5-7 days in emergency situations.

Private Lender: Where do you see the market going over the next 12 months?

Broukhim: I see that the market is becoming very

difficult for the Mom and Pop investors, as big corporate money managers and hedge funds are competing with small investors by paying premium prices for

processes—more importantly what do you really look for when evaluating a scenario?

Broukhim: We understand that because of the

recent housing downturn, individual investors have taken a credit hit. So we use the “Make Sense” or “Make Cents” underwriting process. We do not like to punish our borrowers because of past problems. We like to provide a helping hand, or to provide a value to our investors/borrowers by looking at the overall picture. Therefore, we look for individuals who are trying to capitalize on opportunities and provide them with “Make Cents” financing options.

Private Lender: Do you work with wholesale brokers? If so, how do you support and protect them?

Continue on pg. 9

Broukhim: Yes, PB Financial Group does provide

wholesale pricing to small and big brokerage houses. In fact, Brokers are our number #1 clients, and we make sure that they earn a good living and are satisfied with our products and services. We also do not charge any upfront fees, to show brokers and investors/borrowers alike that we understand that closing is our number #1 priority.

Private Lender: Do you face a lot of competition in your market? What really sets you apart?

with every loan and they are able to sleep comfortably at night.

Private Lender: Has your ROI to your investors been stable? Any spikes or surges?

Broukhim: The ROI has decreased as the Treasury

and prime rates have decreased. However, as these rates eventually go up, our rates will end up also rising, but I do not expect that to happen for another year or two.

Private Lender: Do you have any advice for new

Broukhim: I do not feel PB Financial has much

competition in relation to what we provide in terms of product flexibility, service, rates, and costs. If we make a commitment, we deliver on our commitments.

Private Lender: How have you dealt with defaults over the years? Have you seen an increase or decrease?

Broukhim: Defaults have fallen dramatically since

2008 and 2009. The main way we have dealt with defaults has been in communication with our borrowers. We stress to our borrowers that we are very hands on and are not looking to own their property. We work with each defaulted borrower to either cure their defaults in a manageable way or work out an exit strategy that is beneficial to the borrower in question and PB Financial and Associates. This way everyone comes out a winner.

Private Lender: What makes your organization

Private Lenders in regards to dealing with or attracting investors?

Broukhim: The method that I have employed has

been to treat my investorsâ&#x20AC;&#x2122; funds as my own funds. I never put my investorsâ&#x20AC;&#x2122; funds where I would not want to put my own. This method has taken me far and I believe it will take PB Financial to a new level within a short time.

Private Lender: Are you planning on launching

any new niche or specialty-type products in the immediate future that you have not offered before?

Broukhim: I am always looking to provide un-

matched niche programs and growing our base from California to Arizona and Nevada. As PB Financial grows, we expect new and exciting programs to be offered.

Private Lender: Is there anything else you would

attractive to potential investors?

like to share with our readers about your organization?

Broukhim: Our investors always say we have the

Broukhim: Private lending is a growing industry,

best loan package. We place ourselves in the shoes of the investors and make sure that we answer all their questions and give them a very strong opinion of value. This way, investors know all the risks associated

and great opportunities exist for us and for those seeking our services. Not all lenders are the same, so it is important that prospective borrowers do their due diligence. We strive for unmatched reliability Continue on pg. 11

B ec o m e A M em ber T oday ! Formed in 2009, the American Association of Private Lenders (AAPL) is the national organization represent-

ing the private real estate and peer-to-peer lending industry. Our membership includes private money lenders, hard money lenders, mortgage fund managers, brokers, and service providers from around the United States. We believe our principles â&#x20AC;&#x201C; excellence, ethics, and education â&#x20AC;&#x201C; are the cornerstone for success in the industry. AAPL members are leaders in the industry and embody the character, dedication, and experience critical for success. Our vision is a national industry of private lenders that is clearly defined and well organized around the shared principles of cooperation, education, ethics, and accountability. AAPL operates as a codifying force and an unbiased knowledge custodian for lenders, investors, borrowers, media, and general public.

J oin

the

AAPL C o m m u n i ty T o d a y :

Explore our Membership Options for Private Lenders Here Explore our Membership Options for Service Providers Here

More info at aaplonline.com

Larry Muck | 913-599-2020 | David Lang | 913-599-2020

and service, and consider ourselves the “Premier lender in California.”

Here’s The Key To Your Real Estate Insurance Needs . . .

Private Lender: Thank you very much for your time and sharing valuable industry insight with our readers.

To reach this Veteran AAPL Member, you will find his contact information below.

Pouyan Broukhim PB Financial Group Corp Office: 877-824-8402 x 102 Cell: 310-990-6890 Fax: 866-318-4471 PBroukhim@PBFinancialGrp.com www.pbfinancialgrp.com

PB Financial NMLS #357614|Pouyan Broukhim NMLS #348736

(for spot color, silkscreen, or embroidery)

“

The Right Coverage At The Right Time

”

• Occupied, vacant, and renovation properties can be included on the same schedule • Seamless monthly billing and reporting • Realistic insurance-to-value parameters • Theft coverage available on vacant locations • Coverages underwritten by AM Best “A” or better rated insurers, such as Lloyd’s of London, Scottsdale, Allianz/Fireman’s Fund • Insure multiple owner/controlling entities under one inventory schedule • Basic or Special form coverage options • Premises liability of $1 million per occurrence • Liability coverage only is available • Available in all 50 states • Insure properties held in IRAs, Trusts, LLCs, Corporations, etc. • Embedded program(s) available for property managers, private lenders, and turnkey operators • Coverage available for non-US citizens

(for any black and white application)

For a Coverage Proposal, Visit or Call:

www.nreinsurance.com

888-741-8454

B u si n ess : E-mail Could Be Binding for Private Lenders N e g o ti ati n g e l e c t r o n i c a l ly c o u l d l o c k Here’s how to protect both of you.

Imagine you’re negotiating a purchase trans-

action by e-mail with the real estate agent representing the buyer. The price has been agreed to, and you’re working out the buyer’s financing options. The buyer is able to be pre approved, and you e-mail, “We’re almost there.” A draft purchase offer is written up and e-mailed to the buyer’s agent, but before anything is signed, a better offer comes in. The seller wants to go with that one, so you immediately inform the buyer’s agent of the situation. The buyer is upset and wants to enforce the deal. Much to your horror, the e-mails you exchanged may be enough for the buyer to sue to enforce the deal. This was the case under a ruling last year in Massachusetts. In that case, Feldberg, et al. v. Coxall, attorneys representing the buyer and seller exchanged a series of e-mails about the deal; the last e-mail had attached to it a revised but unsigned offer to purchase. When the seller pulled out of the deal, the buyer sued, claiming the “deal had been sealed” in the last e-mail.

your client into a deal.

- General Counsel at Vertical Mail

The seller argued that nothing had been signed, as required under a law called the Statute of Frauds which varies by state but generally requires certain agreements to be signed, and sought dismissal of the claim. The judge ruled against dismissal, though, saying that, under a state law, called the Massachusetts Uniform Electronic Transactions Act (similar laws exist in other states), an e-mail signature block or even the “from” portion of the e-mail may constitute a valid electronic signature in cases where the parties are conducting the transaction electronically, as these parties by all appearances were doing. The judge denied the seller’s motion to dismiss, opening the door for the court to look at whether the e-mails, in fact, constituted a binding agreement. As it turned out, the buyer and seller settled out of court a few months later, so the question was never brought before a judge. But by opening the door for the court to look at the issue, the judge was effectively saying an e-mail exchange

could very well prove to be binding. Although the ruling was by a lower court judge—so it isn’t binding on other judges—it may provide a model for other judges as they consider similar cases. There are steps you can take to protect yourself against inadvertently binding your client to a deal when exchanging emails. Here are two suggestions:

Thanks to VerticalMail’s General Counsel for this useful tip. VerticalMail specializes in B2B email marketing to over 1 million Mortgage and Real Estate subscribers. Learn more at verticalmail.net or call (888) 710-7915 for more information.

1. Watch what you say in e-mails. If you’re

representing the seller, always say that the terms of the deal must be approved by the seller and that negotiations are preliminary until an offer or contract is signed. Conversely, if you are representing or working with the buyer, it’s prudent to push for confirmation that a deal has been reached to avoid a situation like the Massachusetts case, in which the seller jumps at a higher offer at the last minute.

2. Use a disclaimer. You can insert a disclaim-

er in your e-mail signature that looks something like this: “E-mails sent or received shall neither constitute acceptance of conducting transactions via electronic means nor create a binding contract until and unless a written contract is signed by the parties.”

3. Keep a copy of all email

communications. Set your e-mail client to save a copy of every e-mail you send and receive on the server. Archive your emails at the end of every year. Treat them just as you would treat any important item in a borrower’s file. This Massachusetts case is a good reminder that e-mails can come back to haunt you. Watch what you say, and remember that your e-mails could ultimately become an exhibit in court.

What To Do If Your Borrower Files Bankruptcy - Manny Singh

As all lenders know, the last few years have

been relatively weak in the commercial lending arena. There has also been a rise in bankruptcies over the last few years. But as the economy improves, the bankruptcies are decreasing. If you are faced with a bankruptcy, however, you cannot bury your head in the sand. You have to be proactive, or you will have results that are not in your favor. You also have to use your legal

monies wisely, as you can run-up tremendous bills when receiving bankruptcy counsel. The bankruptcy arena is a minefield for the novice attorney. Even seasoned attorneys who do not know bankruptcy can experience adverse results that negatively impact you, the lender. Hereâ&#x20AC;&#x2122;s the scenario: You are a lender. You are happy. Youâ&#x20AC;&#x2122;re getting payments on your loan. But suddenly the payments stop. You try to negoti-

ate the loan terms with your borrower; however, they file bankruptcy. What do you do? First, you need to determine the type of bankruptcy that has been filed. There are several kinds of bankruptcies. The ones that apply to you will most likely be a Chapter 7, Chapter 11, Chapter 12, or a Chapter 13 bankruptcy. Each bankruptcy is different. In addition, you need to determine who filed the bankruptcy. Was it the corporation or the guarantors? If you have a commercial loan, you probably lent the corporation money and had the individuals sign as guarantors. If this was not the case, you received poor advice from your attorneys. Before we go any further, I want to go back and briefly define Chapter 7 and Chapter 11 bankruptcies, because if a corporation filed the bankruptcy, it will be either Chapter 7 or Chapter 11. A corporation cannot file a Chapter 13 bankruptcy. (Chapter 7 and 13 bankruptcies will be discussed in greater detail in upcoming issues of Private Lender.) The first type of bankruptcy is a Chapter 7. A Chapter 7 is a liquidation bankruptcy, where the company or the individual is liquidating their assets. A Chapter 11 bankruptcy is generally a re-organization. Here a company, and sometimes an individual, will file for a Chapter 11 to re-organize their debts. Very specific and harsh rules apply here. The harsh rules I’m referring to are in regards to various deadlines. For the lender, there are

deadlines for filing a proof of claim, joining the creditors committee, and making a motion for adequate protection. If there’s an assignment of rents clause in your mortgage, you need to have your lawyer make that motion so that you are getting the rents assigned to you. You also need to make sure that there is adequate insurance on the property. The United States trustees office recommends the surrendering of the property if there’s no insurance on the property. “Surrender” means that the borrower/debtor does not want to keep the property and is looking to surrender the property back to the lender. If the property has been abandoned, you cannot take any self-help provisions. You have to ask for court permission. Any action on your behalf, including calling the borrower, could be considered a violation of the automatic stay 11 USC 362. The best thing to do in situations like this is to hire competent bankruptcy counsel. You cannot contact the debtor/borrower directly. You have to go through their attorney. You are allowed to call the attorney; however, that attorney does not have to call you back, depending upon what they’re trying to do to you or to your rights as the lender. If the borrower/debtor wants to keep the property, the attorney will be sweet as molasses! A Chapter 13 bankruptcy, which can only be done for individuals or couples and not for corporations, is re-organization that has specific debt limitations. More information regarding Chapter 13 bankruptcies will be presented in the next issue of Private Lender.

Continue on pg. 17

N ew

e m b e r s h i p

webs ite

We are pleased to announce that the re-design of the Association’s website, aaplonline.com, is complete. We are very excited about the website and there will be many new items available in the coming months. Among the highlights to you as a member of the AAPL are: • Members Only Section • Forums • Ability to send private messages between members • Presentations from previous AAPL Conferences

This is your community, and the more that you as an AAPL Member engage in it, the more valuable it will become to all members. The Association is actively seeking news, white papers, and other information to post both online and here in Private Lender. If you would like to contribute to the knowledge base, we’d love to have you participate. For more information on the benefits of membership in the American Association of Private Lenders, please visit aaplonline.com or contact David Lang at dlang@aaplonline.com

As soon as a person files a bankruptcy, and if there are court proceedings, a document called a Suggestion of Bankruptcy is filed, or you as the lender will get a notice of the filing of bankruptcy. As soon as you hear that your borrower has filed bankruptcy, depending on the type of bankruptcy, you as the lender have to cease all actions against the borrower. This is called “the bankruptcy automatic stay.” The citation for the code is section 11 USC 362. This is one of the most powerful statutes that exist in the United States code. The 362 basically says that almost any kind of legal action against the borrower has to be stopped. If you receive notice of the bankruptcy, you need to find a competent creditor lawyer who specializes in bankruptcies. You must make sure that the lawyers you hire are bankruptcy specialists; otherwise, your case will be in serious jeopardy. Making sure your paperwork is drawn up properly affords you many options, including some-

thing called “adequate protection.” If all your paperwork was drawn properly, you can invoke the “assignment of rents clause.” With a good bankruptcy attorney, you should not have any problems getting your assets back or getting a satisfactory bankruptcy settlement. If a company has filed bankruptcy and the individual guarantors have not filed bankruptcy, you as the lender can continue to take legal action against the individuals. However, you cannot proceed against the corporation. If, on the other hand, only the borrowers have personally filed bankruptcy, it does not stop you from proceeding against the corporation. Once you learn that a bankruptcy has been filed, you will have to be very careful in all legal proceedings. Many creditors have been sanctioned by the bankruptcy code for even the tiniest of violations of the bankruptcy stay. Many thanks to Attorney Manny Singh for this useful information. If you have a borrower in default and in need of expert legal guidance, please call (954) 7221300 or visit http://www.lawofficesofmannysingh.com/

I nd us tr y : CFPB Laws and Regulations Have Come To a City Near You - Anthony F. Geraci

The CFPB has been working rapidly the past

year, since Robert Cordray was appointed director, proposing over thirty rules and finalizing at least ten of those. Of those ten, four of them have been linked to getting Dodd-Frank fully enforced and enacted. This article will address two of the most important ones to the private lending industry: the new high cost laws and the new qualified mortgage requirements. When I spoke of these laws at the annual AAPL conference, these laws had just been proposed. You can now find comfort in the laws being final. Both laws will be effective January 10, 2014, so there is time to modify your pipeline and deals to adjust accordingly.

I. High Cost Laws The high cost laws have always applied to consumer purpose loans secured by owner-occupied

dwellings. This was not changed by the CFPB. However, some familiar exemptions, additional prohibitions, and additional disclosures and requirements are required to originate high cost loans. Also, since these laws were covered in the September, 2012 article in Private Lender, I will only discuss changes to the proposed rules since that article has already covered this topic, and I will add new discussions that the article did not discuss.

Covered Loans

Exemptions From Being a Covered Loan

Covered loans and their triggers remain unchanged from our previous discussion of the high cost laws.

What was unclear in September is what exemptions the CFPB would allow from the high cost law. Historically, HELOCs and â&#x20AC;&#x153;residential mortgage transactionsâ&#x20AC;? were exempt from TILA.

Continue on pg. 20

Insurance for

Real Estate Investors

Vacant

Renovation

Occupied

nreinsurance.com 888-741-8454

AAPL SPring

ConferenCe

Residential Mortgage Transactions were transactions where a consumer was purchasing their primary residence or they were initially constructing one. Now the CFPB’s final rules have only the following exemptions: (1) initial construction of a primary dwelling and (2) reverse mortgages. The CFPB no longer exempts HELOCs NOR a consumer acquiring their primary residence from the high cost laws.

Point and Fees Calculation

While what is a covered loan has remained the same, the way the points and fees are calculated has changed slightly. In my opinion, the rules are actually clearer on what is considered a point or fee than in previous versions of TILA. Here is a quote from the Official Staff Commentary regarding the subject:

American Association of Private Lenders Spring Conference July 28-30, 2013; Crystal Gateway Marriott; Arlington, VA Featured Topics: • • • • • • • •

Different Investment Models Where & How to Source Notes Due Diligence Legal; Escrow; Important Documents Loan Servicing – Performing Loan Default Servicing – Non-Performing Exit Strategy Execution IRA – How to/Benefits of Buying within an IRA

Charges not retained by the creditor, loan originator, or an affiliate of either. In general, a creditor is not required to count in points and fees any bona fide third-party charge not retained by the creditor, loan originator, or an affiliate of either. For example, if bona fide charges are imposed by a third-party settlement agent and are not retained by the creditor, loan originator, or an affiliate of either, those charges are not included in points and fees, even if those charges are included in the finance charge.

This is important to know since charges like escrow fees, recording fees, etc. used to be points and fees to be included under the points and fees test. But these fees are no longer included due to this definition.

II.

Qualified Mortgage Laws

The new qualified mortgage requirements necessitate that lenders must consider the ability to repay a loan. While this has been the case for owner-occupied loans since 2011, this is the first time it has been extended to non-owner-occupied consumer loans as well. Sponsorship & Exhibiting | Larry Muck | 913-599-2020 General Conference Information | David Lang | 913-599-2020

More info at aaplonline.com

What is a Qualified Mortgage?

Verification of Ability to Repay

As you can see, the framework for the CFPB has come to tightening and prohibiting stated loans in the single-family residence sector. If you have any questions regarding these laws, please contact your attorney or contact myself at anthony@geracilawfirm.com.

Presumption and Compliance with Verification of Ability to Repay

To be a qualified mortgage, the loan has to have all of the following characteristics: (a) a loan that is fully amortized and with at least a 30 year term; (b) where the lender charged no more than three percentage points (3%) of the loan amount; and (c) the borrower had a total debt-to-income ratio of 43% or less. The new mortgage law also states that lenders must consider the borrowerâ&#x20AC;&#x2122;s ability to repay a loan on a fully amortized basis that are substantially equal over the term of the loan, qualify on the highest payment to be paid within the first 5 years of the loan, and, if it is a balloon loan, must qualify them to not only make the payment but also the balloon payment.

Heightened Statute of Limitations

If the loan is not a qualified mortgage, the statute of limitations for borrowers to recover attorneysâ&#x20AC;&#x2122; fees against a lender for violations of the Truthin-Lending Act is extended from 1 year to 3 years.

If you do not make a higher-priced mortgage (almost impossible in the private money world) and the lender makes a qualified mortgage, then a lender is in complete compliance with the qualified mortgage laws and the lenderâ&#x20AC;&#x2122;s verification of the ability to repay this mortgage cannot be challenged.

However, if the loan is a higher-priced mortgage, there is a presumption of compliance if you issue a Qualified Mortgage.

D. Prohibition on Prepayment Penalties

The QM Rule also prohibits prepayment penalties unless the loan is (a) a fixed interest rate Qualified Mortgage; (b) that is not a higher-priced loan.

A Peek Behind The Curtains T h e CFPB’ s F i n a l R u l i n g

D o d d F r a n k & I t s E f f e c t O n P r ivat e L e n d e r s

- Bob Cox

IN MY LAST contribution to this e-zine (Vol-

ume 3 – Issue 5), I spoke about the “New Sheriff ” in town, the Consumer Financial Protection Bureau (CFPB), and how its interpretation of the Dodd Frank Financial Reform Act would affect us, the private lenders. These items were set to be implemented on January 21, 2013. MUCH TO MY HORROR, right on the publication date, the CFPB issued their Final Rulings on Dodd Frank, which among other things

changed the implementation date to January 10, 2014! Although this should have provided me with glee, not having to worry about such things for another year, the final rulings changed a lot of the information I gave you, making me a bit foolish (a feeling that I am already too familiar with).

FIRST, LET ME remind everyone that I am not

an attorney. The information I am presenting

Continue on pg. 24

Real estate InvestoR and

Fund ManageR suMMIt July 28-30, 2013; Crystal Gateway Marriott - Arlington, VA This event will be the Premier Educational Conference on Buying & Selling Notes. It will bring together Investors, Private Lenders, Hard Money Lenders, Fund Managers, Brokers, Attorneys, CPAs and Leading Service Providers to learn and share where the opportunities are and how potential growth and current yields can help deliver returns to you and your clients.

Featured Topics: • Different Investment Models • Where & How to Source Notes • Due Diligence • Legal; Escrow; Important Documents • Loan Servicing – Performing • Loan Default Servicing – Non-Performing • Exit Strategy Execution • IRA – How to/Benefits of Buying within an IRA

Sponsored by the Professional Real Estate Investors and Managers Association In cooperation with LoanMLS and The American Association of Private Lenders Sponsorship & Exhibiting | Larry Muck | 913-599-2020 General Conference Information | David Lang | 913-599-2020

More info at aaplonline.com

reflects my general understanding based upon my research on the subject, including interviews of and feedback from knowledgeable parties in the industry. There are exceptions to almost every example I give in this article. This is why I feel it is very important to have competent legal representation, especially as the laws get more complex! As I am not an attorney, this is not intended to be the giving of legal advice, and you may not rely upon it as legal advice. I have worked extensively with the knowledgeable lawyers at Ambrose Law Group in this area of law, and if you would like a referral to one of their attorneys, let me know and I will be pleased to provide you with their contact information and introduce you to them. Or feel free to contact them directly (Chris Ambrose at crambrose@ ambroselaw.com or David Ambrose at drambrose@ambroselaw.com)”

OK, WITH THAT BEHIND US, as it per-

tains to mortgage lending, the 2400+ page Dodd Frank Financial Reform Act, Title XIV, AKA

the “Mortgage Reform & Anti-Predatory Lending Act” is less than 87 pages long. The CFPB’s final rulings on those pages (including preamble, explanations, official interpretations, etc.) however are around 2,000 pages long! This is a massive and sometimes very confusing piece of legislation. At the same time, it is very simple for private lenders….let me explain that.

FIRST YOU HAVE TO understand that what the “Mortgage Reform & Anti-Predatory Lending Act” does, among other things, is to revise certain portions of the Truth In Lending Act, (TILA). So a “Covered” transaction per TILA and HOEPA (Homeowners Equity Protection Act, which most of my lender’s loans would fall under), must contain the following three criteria: FIRST, the loan must be made to an individual, (not an entity such as an LLC, Trust, Estate, Etc.).

SECOND, the loan must be secured by the borrowerâ&#x20AC;&#x2122;s principal dwelling. This can be anywhere from 1-4 units and in cludes both purchase and refinance transactions.

P r i va t e L e n d e r O f f i c i a l

E z i n e

o f

A . A . P. L .

THIRD, the purpose of the loan must be

primarily for personal, family, or household purposes.

SO WHAT does that mean to private lenders?

Well, here are some examples. If you make a loan on a residential property that is a rental (unless the purpose of the loan is primarily for personal, family, or household purposes), then it is NOT covered. If you make a loan on primary residence and it can be proved that the proceeds are primarily for business purposes (i.e. they need to infuse cash into their business or start a business for example), then it is probably not covered. But be careful here, as again there are potential exceptions lurking everywhere. If you are working with a primary residence, you must make sure of your facts, and I for one will run these by my attorneys, The Ambrose Group, (contact information above). I want an opinion letter in my file for safety!

IF THE LOAN YOU make meets the three

criteria above, the rules become onerous and the penalties for violation severe. For one thing, no more balloon loans. For another, the borrower must be highly qualified and documented. The list is long and complex. Most private lenders should just avoid them altogether.

WANT TO MAKE sure you are safe? Then

make loans only secured by property that is commercial, bare land, agricultural, construc-

PRIVATE LENDER is the official publication of the American Association of Private Lenders. It is published six times a year. SUBSCRIPTIONS: You can get a free sub-

scription to Private Lender at www. aaplonline.com

ARTICLE SUBMISSIONS, CONTACT:

dan@aaplonline.com

ADVERTISING INFORMATION, CONTACT:

dlang@aaplonline.com

This publication is created to provide information to the private lending industry. The American Association of Private Lenders is not engaged in rendering legal, financial, accounting, tax or other professional service. The views expressed herein may not be those of AAPL. No part of this publication may be duplicated in any way without the explicit written authorization of AAPL. COPYRIGHT ÂŠ 2012 American Association of Private Lenders.

tion or a legitimate bridge loan for a period of 12 months or less. Or to entities, not individuals, non-owner occupied residential property and/ or for business purposes. (Again, competent legal counsel is a good idea, what with all the potential for those “lurking” exceptions!)

PLEASE REMEMBER that these provisions

do not go into effect until January 10, 2014, and are NOT retroactive. (There are a few provisions that do go into effect this June 1st, mainly around appraisal issues.) If you do make a loan that will be a covered transaction between now and then, understand that if you ever need to modify that note, and it is after 1/10/14, then the new rules WILL apply!

THIS IS ONE more reason that membership

in AAPL is so critical for our future. Only with numbers can we influence policy making at the highest levels. The need for “Peer-to-Peer” lending has never been higher, and here we are being hamstrung by well meaning but potentially ruinous legislation. Band together, people, and let’s make some changes and help some borrowers!