Dodd-Frank and the resulting regulations by the Consumer Financial Protection Bureau have seriously rocked the world of real estate investing; at least with respect to residential homes and owner finance. So much so that investors are leaving the market or moving to commercial real estate, errors and omissions (malpractice) insurance carriers for attorneys are ceasing to write policies to cover attorneys that handle residential real estate, and real estate attorneys are leaving the residential real estate business.
The issues with Dodd-Frank are many, but for most real estate investors, the most important pieces center on 4 areas: the penalties, the ability to repay, the appraisal regulations, and loan servicing and foreclosures.
For the first time in history, small real estate investors are subject to federal regulation in their real estate business. That’s because instead of making the law and the regulations apply to those entities regulated by the federal government, the regulations were drafted to apply to all residential consumer loans. By changing the focus of the regulatory scheme from regulating the entity to regulating the product, the feds power now extends to the small investor.
Before engaging in any transactions that are subject to Dodd-Frank, the investor needs to know what they are up against. At any point up to three years after a loan is originated, the borrower can come back against the lender and claim that the lender did not have a good faith belief that the borrower could reasonably repay the loan. If proven, the borrower is entitled to get up to three years of their payments back from the lender, plus attorney fees. Additionally, the borrower can assert as an affirmative defense to any foreclosure action occurring at any time after the loan is written that the lender did not have a good faith belief that the borrower had a reasonable ability to repay the loan. If proven, the lender must give the borrower up to three years of credit for their payments, meaning that the foreclosure can not practically take place until the borrower is three years behind.
So how does a lender comply and show they had a good faith belief that the borrower had a reasonable ability to repay the loan? The Consumer Financial Protection Bureau has set out about a thousand pages of regulations for lenders on determining the ability to repay of a borrower. A summary of those rules can be found on the CFPB’s website at: http://www.consumerfinance.gov/mortgage-rules-at-a-glance/. The rules on writing a “Qualified Mortgage” can be found there as well.
Even though the regulations and the publicity surrounding the regulations has focused on the ability to repay regulations, rehabbers and others who flip houses are also touched by the new regulations. Appraisal regulations require multiple appraisals in situations where the new purchase price exceeds the amounts paid by the investor by certain parameters. The requirement of multiple appraisals has doomed many deals so far, and lenders take a dim view of the requirement, instead opting to decline to write the loan all together.
Investors who hold notes are not immune from the regulations either. Prior to the foreclosure regulations in Dodd-Ffrank, the foreclosure of a loan on real property was a matter for state law. In the regulations however, the CFPB has required that a lender wait 4 months before beginning a foreclosure proceeding on top of the required state time. Lenders are also required to engage in loan modification and remediation efforts, and comply with new disclosures and statement requirements.
The overreaching regulation of the small investor community has forced the firm to essentially cease assisting real estate investors in their real estate investing. However, we will still represent some investors on a limited basis. For a further explanation of our position, please see the attached pdf file. Explanation of Legal Fees for Real Estate Document Preparation final 1-28-14