HAS DODD-FRANK MOVED MY CHEESE?BY KEVIN W. HARDIN - Page 14

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HAS DODD-FRANK MOVED MY CHEESE?
BY KEVIN W. HARDIN, JD, CMB, CMC, CMPS & KEVIN FALLON MCCARTHY, ESQ.
OVERVIEW
This article is an in-depth look at the Seller Carryback
Financing components of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act). In it, the
authors detail the issues a seller must be aware of before
completing a carryback financing transaction. These include:
• Understanding what properties are covered
by the Secure and Fair Enforcement for
Mortgage Licensing Act (SAFE);
• The two exemptions available for sellers and real estate
agents: the One in One Year Rule, wherein financing
is provided for one property in a 12-month period and
the Three in One Year Rule wherein the seller finances
three or fewer properties in any 12-month period.
• The role of licensed real estate agents and
brokers in these transactions. Specifically, what
actions cross the line between performing
a sale and becoming a loan originator.

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HAS DODD-FRANK MOVED MY CHEESE?BY KEVIN W. HARDIN - Page 14

  1. 1. A R I Z O N A R E A L T O R® M A G A Z I N E 1 4 Legal Hotline 8 REALTORS® “Ring” in $200,000 for Charity 9 Dynamics in Housing Demand: A Look at Gen X and Gen Y Buyers 14 Has Dodd-Frank Moved My Cheese? 18 Homeowners Protection Signed Into Law 19 Lori Doerfler Elected Treasurer A A R U P D A T E S 11 President Obama Signs Flood Insurance Bill Into Law 11 RAPAC Major Investors Spend One-On-One Time with Legislators I N T H I S I S S U E Questions or Comments: editor@aaronline.com Excluding author photos (or if otherwise indicated), images are © iStockphoto LP. A P R I L 2 0 1 4 V O L U M E 3 6 | I S S U E 4 Remembering James “Jim” Brodie Page 12 Page 6 H E A R T B L E E D AAR Members Encouraged to Change Passwords
  2. 2. A P R I L 2 0 1 42 APRIL IS FAIR HOUSING MONTH THE REALTOR® COMMITMENT TO A MARKET FREE OF DISCRIMINATION Over 100 years ago, in furtherance of its commitment to business integrity and fair dealing, the National Association of REALTORS® (NAR) adopted its Code of Ethics. The Code of Ethics defines, guides, and regulates the professional conduct of REALTORS® and demonstrates REALTORS’® level of commitment, emphasis on education and dedication to their profession. The Arizona Association of REALTORS® (AAR) is responsible for enforcing the Code of Ethics. Among the core principles of the code is a promise to provide equal professional service to all clients and customers. Article 10 of the Code of Ethics therefore prohibits REALTORS® from discriminating practices and requires that equal professional services be provided to all individuals as part of a REALTOR’S® commitment to fair housing. Because NAR firmly believes in equal opportunities in housing, in November 2010, NAR’s Board of Directors passed an amendment to Article 10 of the Code of Ethics prohibiting members from discriminating on the basis of sexual orientation. While the inclusion of sexual orientation was intended to be all-encompassing, NAR ultimately decided to add “gender identity” as a definitional clarification. Effective January 2014, Article 10 of the Code of Ethics therefore reads as follows: REALTORS® shall not deny equal professional services to any person for reasons of race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity. REALTORS® shall not be parties to any plan or agreement to discriminate against a person or persons on the basis of race, color, religion, sex, handicap, familial status, national origin, sexual orientation or gender identity. (Amended 1/14) REALTORS® , in their real estate employment practices, shall not discriminate against any person or persons on the basis of race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity. (Amended 1/14)
  3. 3. A R I Z O N A R E A L T O R® M A G A Z I N E 3 Moreover, Standard of Practice 10-3 was amended as follows: REALTORS® shall not print, display or circulate any statement or advertisement with respect to selling or renting of a property that indicates any preference, limitations or discrimination based on race, color, religion, sex, handicap, familial status, national origin sexual orientation, or gender identity. (Adopted 1/94, Renumbered 1/05 and 1/06, Amended 1/14) The 2014 amendment to Article 10 therefore not only reaffirms NAR’s and AAR’s commitment to fair housing, it is also a reflection of our collective commitment to a market free of discrimination. i Visit this article on AARonline.com — comment with your thoughts & share to your social networks. Fair Housing Resources from NAR April 2014 marks the 46th anniversary of the 1968 landmark Fair Housing Act. Each year REALTORS® recognize the significance of this event and reconfirm our commitment to upholding fair housing law as well as our commitment to offering equal professional service to all in their search for real property. View Resources Online http://www.realtor.org/programs/fair-housing-program
  4. 4. A P R I L 2 0 1 44 BY MACK, WATSON & STRATMAN Copyright © 2014, all rights reserved.­ The following is for informational purposes only and is not intended as definitive legal or tax advice. You should not act upon this information without seeking independent legal counsel. If you desire legal, tax or other professional advice, please contact your attorney, tax advisor or other professional consultant. Q&As are not “black and white,” so experienced attorneys and brokers may disagree. Agents are advised to talk to their brokers/managers when they have questions. Licensee Must Disclose Felony ISSUE: Is a real estate licensee required to disclose to the Arizona Department of Real Estate (ADRE) a felony guilty plea? ANS WER : Yes. Pursuant to A.R.S. § 32-2153, the ADRE may sanction a licensee, deny a license renewal or deny an original license application if, among many others, the licensee or applicant has been convicted of a felony or of any crime of forgery, theft, extortion, conspiracy to defraud, a crime of moral turpitude, or any other like offense, been guilty of fraud or dishonest dealings or not shown that the licensee or applicant is a person of honesty, truthfulness and good character. The disciplinary actions disclosure is required by the ADRE to determine qualifications and suitability of the licensee to hold an Arizona Real Estate License. Under A.A.C. R4-28-301(F), a licensee, including the broker, must report to the ADRE within 10 days any convictions, judgments or adverse actions relating to, among others: (1) misdemeanor or felony conviction, deferral of judgment or sentencing; and (2) order, judgment or adverse decision involving fraud or dishonesty or involving a real estate transaction. A plea of guilty with regard to a felony is a deferral of judgment. Here, the real estate licensee pled guilty to a felony. As such, the real estate licensee (and his or her broker) is required to make a disciplinary action disclosure within 10 days of such guilty plea. i Arizona REALTOR® Magazine — April 2014 Brokerage http://www.aaronline.com/legal-hotline-q-a-brokerage A Title Company May Pay Commission Directly To An Agent With Proper Assignment From The Brokerage ISSUE: Can a broker instruct the escrow company to pay the commission directly to the buyer, who is also a licensed real estate agent, or alternatively, instruct that the commission be applied toward the buyer/agent’s down payment? ANS WER : Probably. A.R.S. § 32-2155(A), among other things, requires a licensee to receive commissions only from their broker and also requires a broker to pay commissions only to real estate licensees. However, there are a limited number of exceptions to A.R.S. § 32-2155(A). For instance, if the broker is entitled to the commission, the broker is allowed to assign the commission directly to the agent, and the commission can be paid by the escrow company to the agent at closing. See ADRE Substantive Policy Statement 2005.08. i Arizona REALTOR® Magazine — April 2014 Commissions http://www.aaronline.com/legal-hotline-q-a-commissions Dodd-Frank Financing Restrictions Do Not Apply To Investors Who Do Not Reside At The Property ISSUE: Do the seller financing provisions of the Dodd Frank Act apply to transactions in which the purchaser is an investor and will not be residing at the property? ANS WER : No. The seller financing provisions of the Dodd Frank Act apply to “consumer credit transactions,” not business credit
  5. 5. A R I Z O N A R E A L T O R® M A G A Z I N E 5 ABOUT THE AUTHOR Richard V. Mack Richard V. Mack is a shareholder at Mack, Watson & Stratman, which provides the AAR Legal Hotline service. He is a State Bar of Arizona Board Certified Real Estate Specialist and AV rated by Martindale Hubbell. He has also been designated as a Southwest Super Lawyer. Mr. Mack practices commercial litigation with an emphasis on real estate litigation. He is admitted to practice in the state and federal courts of Arizona and before the 9th Circuit Court of Appeals. Mr. Mack graduated Magna Cum Laude from Southwestern College in Winfield, Kansas with a Bachelor of Business Administration, with an emphasis in economics, and received his Juris Doctor from the University of Arizona. http://www.mackwatsonstratman.com transactions. Comment four to 12 CFR § 1026.3(a) states that “credit extended to acquire, improve, or maintain rental property (regardless of the number of housing units) that is not owner-occupied is deemed to be for business purposes. This includes, for example, a single-family house that will be rented to another person to live in.” Note: If the owner expects to occupy the property for more than 14 days during the coming year, the property cannot be considered non-owner-occupied. i Arizona REALTOR® Magazine — April 2014 Financing http://www.aaronline.com/legal-hotline-q-a-financing Professional Office Building Owner and Tenant Are Obligated To Make Public Restrooms Wheelchair Accessible FAC TS: The commercial office building was constructed in 1960. The building has multiple offices and rents office space to various types of business. The owner/landlord (Landlord) recently rented office space to a tenant who operates a professional services business (Tenant) and who happens to have a disabled employee that requires the use of a wheelchair (Employee). The door to the office bathroom is only 24-inches wide. In this regard, the Employee’s wheelchair will not fit through the bathroom door and the Employee cannot access the bathroom. ISSUE: Must the Landlord and/or Tenant alter the bathroom so that it is accessible to a disabled person in a wheelchair? ANS WER : Yes. Title III of the Americans with Disabilities Act (ADA) covers, in pertinent part, “places of public accommodation” and “commercial facilities” and extends to private entities. See 28 CFR § 36.101, et al. Pertinent here, places of public accommodation are facilities whose operations affect commerce and include various categories enumerated under the ADA. Of these categories, service establishments such as offices of accountants and lawyers, insurance offices, and professional offices of health care providers are included. According to the ADA, both the Landlord and the Tenant have full responsibility for complying with all of the Title III requirements applicable to that place of public accommodation, i.e., the Tenant’s office. The Title III regulation permits the Landlord and the Tenant to allocate responsibility in the lease for complying with particular provisions of the regulation. However, any allocation made in a lease or other contract is only effective as between the parties, and both the Landlord and the Tenant remain fully liable for compliance with all provisions of the ADA relating to that place of public accommodation. Read More Legal Hotline Q&As on AARonline: www.aaronline.com/manage-risk/legal-hotline Have you signed up for the Legal Hotline? The Legal Hotline provides all AAR broker members (designated REALTORS® ) free access to a qualified attorney who can provide information on real estate law and related matters. FIND OUT HOW BROKERS CAN ACCESS THE LEGAL HOTLINE www.aaronline.com/wp-content/uploads/2013/08/3- Legal-Hotline-Access-Process-fillable.pdf BROWSE MORE LEGAL HOTLINE TOPICS ONLINE www.aaronline.com/manage-risk/legal-hotline WANT MOREQ&A?
  6. 6. A P R I L 2 0 1 46 LEGAL HOTLINE | CONTINUED Title III of the ADA prohibits discrimination against any individual with a disability. Accordingly, individuals with disabilities may not be denied full and equal enjoyment of the goods, services, facilities, privileges, advantages, or accommodations offered by a place of public accommodation. Under Title III, architectural barriers must be removed when it is “readily achievable” to do so. According to the ADA, architectural barriers are physical elements of a facility that impede access by people with disabilities. Determining if barrier removal is readily achievable is necessarily a case-by- case judgment under Title III. However, the ADA presumes that “widening doors” is readily achievable. That being said, in this case, it would likely be found that widening the bathroom door to accommodate the Employee’s wheelchair would be readily achievable. Therefore, the Landlord and the Tenant are responsible for accommodating the Employee by widening the bathroom door for wheelchair accessibility. Note: This does not address Title I of the ADA dealing with an employer’s obligations to a disabled employee with respect to making accommodations, as this would be outside the scope of the AAR Legal Hotline. i Arizona REALTOR® Magazine — April 2014 Fair Housing http://www.aaronline.com/legal-hotline-q-a-fair-housing Seller Bears Risk of Loss During Escrow FAC TS: Thebrokeragerepresentsboththebuyerandseller.Theparties’ contractprovidesthat$15,000ofearnestmoneybecomesnon- refundableaftertheacceptanceoftheBuyer’sInspectionNotice andSeller’sResponse,whichhasalreadyoccurred. ISSUE: If the property experiences a complete loss (i.e., is destroyed by fire) prior to the close of escrow, will the buyer be entitled to a return of the non-refundable earnest money deposit? ANS WER : Probably. Under the terms of the AAR’s Residential Resale Real Estate Purchase Contract (the Contract), the risk of loss during the escrow period is on the seller, and either party may elect to cancel the Contract if the cost to repair the damage exceeds 10 percent of the purchase price. While this provision does not speak directly to the return of earnest money (particularly when it is deemed non-refundable), the fact that the risk of loss is placed on the seller is significant. Under general equitable principles, it is likely that a court would hold that rescission is appropriate and that the parties should be returned to the status quo ante, meaning that the earnest money deposit would likely be refunded to the buyer. i Arizona REALTOR® Magazine — April 2014 Contracts (General) http://www.aaronline.com/legal-hotline-q-a-contracts-general/ AAR MEMBERS ENCOURAGED TO CHANGE PASSWORDS AAR members may have heard of a recently discovered Internet security issue — called Heartbleed – that impacted many websites on the internet, including AAR’s websites www.aaronline.com, blog.aaronline.com, azgri.com and reteach.us. Rest assured, AAR was quick to fix the issue on all of our sites and no passwords were compromised. http://heartbleed.com/?e_t=1811b06c187243db8787de3ac5282701&utm_ medium=2000&utm_source=31&e_t_s=body To be extra careful, we’re strongly encouraging you to reset your password, not only on AAR’s website, but also on any of these sites you may have accounts with. RESET PASSWORD http://www.aaronline.com/login/forgot-password/ When you pick a new password remember to make it complex (by adding special characters and/or numbers) and unique (don’t use it on any other sites). i Visit this article on AARonline.com — comment with your thoughts & share to your social networks.
  7. 7. A R I Z O N A R E A L T O R® M A G A Z I N E 7 LEGAL HOTLINE | CONTINUED Property Manager Is Not Required To Hold Pre-Paid Rent FAC TS: The brokerage represents the landlord. The tenant has requested to pre-pay all rents at the beginning of the lease term. ISSUE: Can the brokerage deliver the pre-paid rent to the landlord, or must the brokerage hold the money in trust in the event the landlord breaches its obligations under the lease (i.e., the property is foreclosed during the lease term)? ANS WER : A property manager does not have an obligation to hold pre-paid rent in trust in the event the landlord breaches the lease. A landlord is entitled to demand the rental funds when they are received (less any property management fees), regardless of whether the tenant pays on a monthly basis or in advance. Lines 63-64 of the AAR Property Management Agreement provide, for example, that “Broker shall not disburse tenant’s refundable security deposits, prepaid rent or other prepaid funds to Owner until earned, unless instructed otherwise by Owner.” If, however, the broker retains the pre-paid rent, it must be held in the broker’s trust account. i Arizona REALTOR® Magazine — April 2014 Landlord/Tenant http://www.aaronline.com/legal-hotline-q-a-landlordtenant AAR Delivers Important Resources to Help Our Members Succeed As a member of the Arizona Association of REALTORS® , you have many resources available to you to help you grow your business and manage your risk. Take a look at all the resources provided to you by AAR. Read it now online! http://aar.uberflip.com/i/291717 THE NEW MEMBER RESOURCES GUIDE
  8. 8. A P R I L 2 0 1 48 REALTORS® “RING” IN $200,000 FOR CHARITY Editor’s Note: In 2014, AAR will be featuring Arizona REALTORS® who rock – specifically when it comes to serving their community! These REALTORS® have thrown caution and selfishness to the wind – and their communities are better because of it. Do you know a REALTOR® that rocks? Let us know. Send us an email at editor@aaronline.com. According to the Salvation Army, Wednesday is the most difficult day to find volunteers to help collect donations during the holidays. It’s so hard, in fact, that The Salvation Army actually pays people to man the red kettles, taking money away from those that need it most. When JoAnn and Joseph Callaway learned this, they did something about it. Last year, the Callaways assembled 1,096 of their closest real estate industry friends, along with local Salvation Army volunteer coordinators, to ring the bells at red kettle locations every Wednesday during December. REALTORS® , loan officers, escrow offices and title companies came together and kept the bells ringing for more than 180 kettles during December. These volunteers raised more than $117,000 and saved the Salvation Army $85,000 in expenses – an impact totaling more than $200,000. A big thank you to all who volunteered! If you’d like to get involved with The Salvation Army, visit http://www.salvationarmyusa.org/usn/volunteer i Visit this article on AARonline.com — comment with your thoughts & share to your social networks. Joseph and JoAnn Callaway (“Those Callaways”)
  9. 9. A R I Z O N A R E A L T O R® M A G A Z I N E 9 Continued DYNAMICS IN HOUSING DEMAND: A Look at Gen X and Gen Y Buyers BY RON LAMEE, SVP RESEARCH AND MEMBER VALUE ARIZONA ASSOCIATION OF REALTORS® Slow demand continues to keep Maricopa County real estate in a buyer’s market, with the Cromford Market Index holding around 84. Stories of lower-than-normal demand are coming in from other parts of the state as well. This month, we look for clues about reasons for low demand in NAR’s 2014 Home Buyer and Seller Generational Trends. U.S. consumers in their mid-30s and younger historically make up the largest group of first-time home buyers; consumers in their 40s and 50s tend to be repeat buyers. But, lately these two groups have been shying away from homeownership. In a weak jobs market, strapped with hefty financial loans, some Gen X and Gen Y buyers simply can’t afford to buy. According to NAR’s generational study, 56 percent of Gen Y homebuyers (under 34 years) stated that student loans delayed saving for their purchase. Forty-six percent of Gen X (age 34-54 years) cited large credit card debt as the barrier to saving. To give you an indication of how serious student loan and credit card debt is in the U.S., the New York Federal Reserve recently released these figures for outstanding U.S. consumer debt for Q4 2013: NAR, 2014 Home Buyer and Seller Generational Trends TOP 3 FACTORS DELAYING SAVING FOR A HOME PURCHASE
  10. 10. A P R I L 2 0 1 410 MORTGAGE DEBT $8.05 TRILLION STUDENT LOAN DEBT $1.08 TRILLION AUTO LOAN DEBT $863 BILLION CREDIT CARD DEBT $683 BILLION HELOC $529 BILLION NY Federal Reserve Report, 2/18/14 http://www.newyorkfed.org/newsevents/news/research/2014/rp140218.html While debt has been growing, real income has been dropping—major declines can be seen across all age groups under age 65 since the late 90s. With higher down payment requirements, the ability to save has impacted first-time homebuyers and also repeat homebuyers. To add to their woes, many repeat homebuyers must contend with having homes underwater. According to NAR’s study, one in five Gen X had a previous home that was financially underwater and they couldn’t sell when they wanted to. This all supports what numerous analysts are saying: the combination of debt, flat wages and low credit scores are impacting demand for housing. While this sounds a little pessimistic, it’s not all doom and gloom. Affordability remains positive at 122.8, meaning a U.S. family with median income buying a median-priced home has 122.8 percent of the income needed. After rising quickly in 2011, home prices have been fairly flat for nearly a year as have mortgage rates. Affordability for first-time homebuyers is a dozen points lower but still above 100. In addition, the “desire to own a home of my own” is especially strong among Gen Y. In fact, 49 percent gave that as their primary reason for buying a home. That said, it’s important to note that desiring a home is different from taking necessary steps to buy one—NAR’s study only considers those who made the commitment, not those on the sidelines. Of those who have purchased a home, 91 percent of Gen Ys purchased their home through a real estate agent, slightly more than buyers as a whole. Gen Y tends to be very satisfied with their agent with 88 percent valuing their agent’s honesty and integrity and 88 percent valuing their agent’s knowledge of the process. Debt and low credit scores seem to be negative influences on home purchase among Gen Y and Gen X. While flat or declining real income is a concern, stable home prices and mortgage rates are positive influences. i Visit this article on AARonline.com — comment with your thoughts & share to your social networks. Sources/additional reading: NAR, 2014 Home Buyer and Seller Generational Trends. Doug Short, Real Income Decreases http://www.advisorperspectives.com/dshort/updates/ Household-Incomes-by-Age-Brackets.php NAR, Monthly Housing Affordability Index http://www.realtor.org/topics/housing-affordability-index/data Cromford Report http://cromfordreport.com/ DYNAMICS IN HOUSING DEMAND | CONTINUED ABOUT THE AUTHOR Ron LaMee Ron is the Senior Vice President of Research and Member Value for the Arizona Association of REALTORS(R).
  11. 11. A R I Z O N A R E A L T O R® M A G A Z I N E 11 AAR UPDATES PRESIDENT OBAMA SIGNS FLOOD INSURANCE BILL INTO LAW On March 21, 2014, President Obama signed the “Homeowner Flood Insurance Affordability Act” into law. This law repeals FEMA’s authority to increase premium rates at time of sale or new flood map, and refunds the excessive premium to those who bought a property before FEMA warned them of the rate increase. The bill limits premium increases to 18 percent annually on newer properties and 25 percent for some older ones. Additionally, the bill adds a small assessment on policies until everyone is paying full cost for flood insurance. i For more information, watch this video from NAR: RAPAC MAJOR INVESTORS SPEND ONE-ON-ONE TIME WITH LEGISLATORS http://www.realtor.org/videos/help-passed-on-flood-insurance-ratesVisit this article on AARonline.com — comment with your thoughts & share to your social networks. Visit this article on AARonline.com — comment with your thoughts & share to your social networks. Recently, AAR members attended several events where they had one-on- one time with legislators. On Monday, March 17, RAPAC Major Investors and members of the associations Legislative Committees spent an intimate evening at the Phoenix Art Museum with members of the Arizona Senate and House of Representatives. Legislators in attendance included Senators Andrea Dalessandro and Barbara McGuire and Representatives John Kavanagh, Jeff Dial, and Warren Petersen, among others. On Friday, March 21, AAR joined the Arizona Multihousing Association, Arizona Rock Products Association, Home Builders Association of Central Arizona, NAIOP, Rose Law Group and SAHBA, in hosting a Republican Gubernatorial Candidate forum. This event featured Republican Gubernatorial primary candidates: Ken Bennett, Doug Ducey, Christine Jones, Scott Smith, Al Melvin and Frank Riggs. i See all the photos here: https://www.flickr.com/photos/aar_eventrewind/sets/72157640074671176/
  12. 12. A P R I L 2 0 1 412 REMEMBERING JAMES “JIM” BRODIE James “Jim” Brodie, 84, of Green Valley, died Tuesday, March 11, 2014. Jim, also known as “Sarge”, was an active member of the REALTOR® family, joining in 1991. In 1999, Jim served as the AAR president – the same year that AAR CEO Michelle Lind joined the organization as general counsel. He was a master jeweler and handcrafted thousands of RAPAC pins over the years. Jim is survived by his wife and business partner, Sandy Brodie. A memorial is planned for later this year. Dave Hollingsworth, who served as AAR president in 2000, said, “I, after being ‘gently’ prodded by Sarge, agreed to follow him from our two years of service as RVPs through the chairs at AAR. His vision was clear then, and even more so today, that the members in Arizona deserved to have the leadership of AAR come to them at least annually to ask how we could better improve the state association. Address their local association needs and listen to their requests to improve their individual businesses. We all learned volumes from Jim Brodie, and he will be sorely missed.” John Foltz, who preceded Jim in 1998 as president of AAR said, “Jim Brodie had a way of grounding all of us in the absolute patriotism of supporting home ownership. His service to our country was carried directly over to his service to the homeowners and REALTORS® he touched. Simplicity and honor in ideas that made a contribution to us all and to me, personally.” AAR Senior Vice President of Research and Member Value Ron LaMee said, “Jim initiated the use of customized, Arizona RAPAC pins to reward donors at various levels. His efforts put a new emphasis and energy in RAPAC that continues today. He was also dedicated to improving agents’ skills and frequently taught classes in Green Valley and Tucson.” Craig Sanford, a long-time friend, said, “Jim taught me that the value of leadership was not only what you did today but what you did today for tomorrow.” AAR Manager, Risk Management Jan Steward said, “The year Jim was president of AAR, I was President of Northern Arizona Association of REALTORS® . Early in his Presidency, Jim came by to visit with me and needless to say, I was very impressed that he was visiting local associations throughout Arizona. Jim said he was reaching out to AAR’s members to see how leadership could better improve the state association. In addition to Jim’s questions the day we met, he presented me with my RAPAC pin, which he created himself, and an authentic Indian Head penny. Jim gave me the penny and told a story about his friend who had cancer. His friend went to the reservation and asked to have the pennies blessed. Jim was given the pennies by his friend to pass-on to others, to help them as well. To this day, I still have the Indian Head penny and RAPAC pin Jim presented me with as well as my memories of an impressive AAR leader.” i
  13. 13. A R I Z O N A R E A L T O R® M A G A Z I N E 13 Major AAR Accomplishments During Jim Brodie’s Presidency • Purchased and moved into 28,000 square foot headquarters • Added full-time lobbyist, Governmental Programs Director and General Counsel (attorney) positions. • Attained the highest membership total ever: 22,948 • Increased participation in the pressXpress™ (400 document fax-on-demand service) by 26 percent • Partnered with the Mortgage Lenders Association and the Arizona Escrow Association for successful “Partners In Profit” conference. • REALTORS® of Arizona Political Action Committee (RAPAC) raised highest-ever total contributions of $79,340. • Developed and implemented REALTORS of Arizona Legislative Link (RALLi™) through the Association’s web site (AARonline.com). • Developed and implemented a local lobbying training program called “Silver Bullet Session” • Developed and made available a Buyer/Seller Inspection Form through the standard forms inventory. • The Association had legislative successes by: 1) defeating a bill that would have expanded new ordinance and regulatory authority governing land transactions in unincorporated areas; 2) supported bill that granted licensing exemptions for corporations selling their own property and closes any window for non-licensed marketplace activity; 3) passed statute change to protect registered professionals (including real estate licensees) from claims related to expert testimony; 4) passed provision that closed a loop that would allow buyer or renter to rescind transaction if certain exempted disclosures were not made; 5) making several changes to “Slumlord” Bill to make passage more palatable for real estate community. • Developed first online, email-based education course (AAR Contract). • Partnered with Timeless Technology to offer hands-on computer training programs through local associations. • Coordinated 74 Graduate REALTORS® Institute modules statewide with 211 members receiving their GRI designation and 569 new members entering the program. Feel free to share your memories of Jim in the comment area online. Visit this article on AARonline.com — comment with your thoughts & share to your social networks. TK
  14. 14. A P R I L 2 0 1 414 HAS DODD-FRANK MOVED MY CHEESE? BY KEVIN W. HARDIN, JD, CMB, CMC, CMPS & KEVIN FALLON MCCARTHY, ESQ. OVERVIEW This article is an in-depth look at the Seller Carryback Financing components of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). In it, the authors detail the issues a seller must be aware of before completing a carryback financing transaction. These include: • Understanding what properties are covered by the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE); • The two exemptions available for sellers and real estate agents: the One in One Year Rule, wherein financing is provided for one property in a 12-month period and the Three in One Year Rule wherein the seller finances three or fewer properties in any 12-month period. • The role of licensed real estate agents and brokers in these transactions. Specifically, what actions cross the line between performing a sale and becoming a loan originator. ARTICLE For the last year, the real estate industry has been up in arms over the new Consumer Financial Protection Bureau (CFPB) rules that took effect on January 10, 2014. As a law firm representing homeowners, we often become involved in real estate transactions when the borrower has ceased making payments on his or her mortgage, either due to their inability to pay or a reasoned decision to not pay the debt. The seller/ lender has exercised its remedies under the default language in the Deed of Trust or other consensual security instrument and has filed a Notice of Sale / Default. Often, the borrower will walk into our offices enraged. “They are taking my home away!” The borrower wants to know his or her rights and what can be done to keep the home. Typically, the first thing a borrower wants to know is if the borrower can sue the seller/ lender? It is through this filter that we begin our discussion. RESIDENTIAL MORTGAGE TRANSACTION When a seller lends money to a buyer for the purchase of real property, it becomes a residential mortgage transaction. “Residential mortgage loan” means “any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling (as defined in section 103(v) of the Truth in Lending Act) or residential real estate upon which is constructed or intended to be constructed a dwelling (as so defined).” 1 The first step is to identify what kind of buyer/borrower the rule applies to. The relevant sections of the rules are for a consumer credit transaction. “Consumer credit means credit offered or extended to a consumer primarily for personal, family, or household purposes.” 2 This definition certainly means a property that the buyer or family of buyer is going to occupy in whole or in part, now or later. Recently, we have heard stories of some real estate professionals encouraging sellers to instruct the buyer/ borrower to form a limited liability corporation (LLC) or some other entity and then lend to them to avoid the definition of a consumer. The first thing out of a buyer/borrower’s mouth is going to be “They told me to form an LLC to buy the home so they could avoid the rule.” It will not be difficult to show this particular type of possible fraud. What if the buyer/borrower lies before the transaction closes? He says, “I am buying this property as an investment,” but moves into the home as his primary residence on Day One? Would some covenant against occupancy become necessary? These are among the issues a seller must be aware of before completing a carryback financing transaction. What kind of property is covered by the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE)? SAFE covers a one- to four-family dwelling. Financing for business, for property for investment purposes, or an extension of credit to other than a natural person are not covered by this rule. There are also many other exemptions including, without limitation, agricultural, foreign property, commercial property, lots and raw land. It is wise to seek legal counsel in situations in which the property is not easily categorized.
  15. 15. A R I Z O N A R E A L T O R® M A G A Z I N E 15 WHO IS A LOAN ORIGINATOR? “(a) Definitions. (1) Loan originator. (i) For purposes of this section, the term “loan originator” means a person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities: takes an application, offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or through advertising or other means of communication represents to the public that such person can or will perform any of these activities…” 3 SELLER EXEMPTION If a seller issues a residential mortgage to a buyer, they may be considered a loan originator. If they are considered a loan originator, they will be required to be licensed under SAFE. If they are licensed under SAFE, they must make a good faith effort to verify the borrowers’ ability to repay the loan. In addition to the seller, certain activities of a licensed Arizona real estate agent may also subject him or her to being considered a mortgage originator. When the rule first appeared in January of 2013, it essentially took seller financing out of the market. By November of 2013, the final revisions to the rule were made that resulted in clear exemptions for sellers and real estate agents in a seller carryback transaction. First, sellers can take advantage of either of two exemptions. One is the so-called “One in One Year Rule” and the other is known as the “Three in One Year Rule”. 4 One in One Year Rule. The seller must be a natural person, estate or trust and provides financing for only one property in any 12-month period. This does not mean a land trust with 20 investors; it means a trust for family tax planning. The seller will not be considered a loan originator if: • You provide seller financing for only one property in any 12-month period • You owned the property securing the financing • You did not construct, or act as a contractor for the construction of, a residence on the property in your ordinary course of business. • The financing must meet the following requirements: • Have a repayment schedule that does not result in negative amortization • Have a fixed rate or an adjustable rate that resets after five or more years. These rate adjustments may be subject to reasonable annual and lifetime limits. 5 One of the drawbacks of this exemption is the one- year look back. If the seller has done a carryback in the prior 12 months, the seller must wait until it has been 12 months from recording date to recording date. Otherwise, the seller will inadvertently violate the rule. Was the owner of the property the same party that made the loan? If not, no exemption exists. A seller could assume that they are covered by the exemption as they personally discussed the financing options and assisted the buyer in obtaining the financing of the property, however if the Deed of Trust or other equivalent consensual security interest is in the name of another entity, this will result in a violation of the exemption. To avail themselves of the exemption, the seller must be named as the lender or party on the deed of trust or other instrument. The seller cannot have constructed the home or acted as the contractor for the subject property as their ordinary course of business. A seller’s tax return is going to be a very clear way for a buyer to determine in a lawsuit if the seller violated this rule if the seller treated the construction as part of their business. Many home builders in the last decade completed a home on spec and then, due to the collapse of the housing market, moved into it. This fact pattern would be an issue for the seller. The financing cannot result in negative amortization but can include a balloon payment. However, the seller must
  16. 16. A P R I L 2 0 1 416 be aware that certain prohibitions exist with loans having terms that adjust in the first five years of the loan. The financing can be either fixed rate or adjustable but must not reset before five years. The index and margins are discussed in the comments to the regulations. See footnote 9. Because transactions that fall into this exemption do not require the seller to verify the buyer’s ability to repay, this type of financing may be one of the rare types still available to buyers who cannot show, by tax returns and other documentation, that their income is sufficient, but otherwise has sufficient assets and cash flow to make the payments. Three in One Year Rule. The seller is any type of financing entity, including a natural person, estate, trust, LLC, partnership, or corporation and the seller finances the sales of three or fewer properties in any 12-month period. This seller will not be considered a loan originator if: • You provide seller financing for three or fewer properties in any 12-month period. • You owned the properties securing the financing. • You did not construct, or act as a contractor for the construction of, a residence on the property in your ordinary course of business. • The financing must meet the following requirements: • The financing must be fully amortizing. • Have a fixed rate or an adjustable rate that resets after five or more years. These rate adjustments may be subject to reasonable annual and lifetime limits. 6 • The seller must determine in good faith that the consumer has a reasonable ability to repay the loan. The Three in One Year Rule has the same one-year look back aspect as the prior exemption. In addition, a one- year look forward aspect applies to both exemptions. If the seller finances property No.1 under the One Year exemption and then decides to finance property No. 2 under the Three Year exemption, property No. 1 will not be in compliance and the financing on property No. 1 will be subject to rescission. If a seller has more than one property to sell on seller financing, the seller is going to have follow the Three in One Year exemption on property No.1 if they plan to sell property No. 2 within 12 months. The rules for ownership, construction and adjustable rates are the same as the One in One Year Rule. The financing must be fully amortizing. This rule means no interest-only loans and no balloon payments. In addition, the amortization cannot be longer than 30 years but it can be as short as the buyer can afford under the ability to repay rule (ATR). 7 This is where things get very difficult for the seller. How is the seller going to perform this task without a mortgage loan originator? ATR involves analyzing the buyer’s ability to repay in eight categories, including, income, assets, employment, mortgage payment, payments on loans associated with the property, mortgage related obligations i.e. property taxes, insurance, other debt obligations and monthly debt-to-income ratio or residual income. Very clearly, the seller cannot offer stated income financing under this exemption. Although the rules do not require the seller to maintain documentation, what seller would offer seller financing without looking at the buyer’s financial information? Use of third party information providers is acceptable. If the time comes when a buyer takes their seller to court, the burden is going to be on the seller to show that they made a good faith effort to review the buyer’s ability to repay. Specifically, the buyer is going to allege the loan is predatory because it violates the rule: the buyer did not have enough residual income left to meet living expenses after paying their mortgage and other debts. How is the seller to do this? More pointedly, how is the seller going to do this without an attorney or a mortgage loan officer? Seeing the need for assistance, a few law firms and mortgage companies have begun to offer seller carryback services to protect the seller from the issues surrounding the ATR rule. INTEREST RATE How does the seller determine the interest rate? If the interest rate on the seller financing exceeds the limits as set forth under the Home Ownership Equity Protection Act (HOEPA), the seller will lose the protection of the exemptions described above. HOEPA sets those limits at an APR of 6.5 percent above average prime offered rate for first mortgages and an APR of 8.5 percent above average prime offered rate for subordinate mortgages. 8 Therefore, HAS DODD-FRANK MOVED MY CHEESE? | CONTINUED
  17. 17. A R I Z O N A R E A L T O R® M A G A Z I N E 17 the seller must verify the average prime offered rate at the time of funding of the seller financing transaction. REAL ESTATE AGENT EXEMPTION The term loan originator does not include “A person that performs only real estate brokerage activities and is licensed or registered in accordance with applicable State law, unless such person is compensated by a creditor or loan originator or by any agent of such creditor or loan originator for a particular consumer credit transaction subject to this section.” 9 The question becomes: is the licensed real estate agent or broker performing only real estate or brokerage activities in accordance with Arizona law? How does Arizona define this? One of those definitions of allowable activity are: “incident to the sale of real estate, businesses and business opportunities negotiates or offers, attempts or agrees to negotiate a loan secured or to be secured by any mortgage or other encumbrance upon or transfer of real estate, businesses and business opportunities or timeshare interests subject to section 32-2155, subsection C. This subdivision does not apply to mortgage brokers as defined in and subject to title 6, chapter 9, article 1.” 10 Does this mean that a licensed real estate agent can draft or prepare seller-financing documents? No. Does this mean the licensed real estate agent can assist in collecting documents required to perform the analysis of ATR? No. It means the agent can attempt or agree to negotiate the loan only. If the agent is compensated beyond their commission for performing any activity by a creditor or seller, the agent will be considered a loan originator. What if the seller of the property is also a licensed real estate agent? This will not turn the agent into a loan originator, unless they are compensated by a creditor. The agent/seller will be able to sell the property under the exemption. What if the licensed real estate agent is also a licensed mortgage loan originator? The agent will then have to comply with the relevant regulations under the federal and state laws as required for a loan originator. Finally, questions will arise concerning the servicing of the loan. On January 10, 2014, the CFPB made effective additional final rules on mortgage servicing. This article will not go into detail on these rules, but suffice it to say, they are complicated enough that seller should be wary of any attempt to service their seller-financing arrangement personally. These new rules, while being very detailed and complicated, are designed to protect the consumer. It is not CFPB’s goal to limit lending and real estate sales opportunities. It is the goal to protect consumers and ensure that all parties to a real estate transaction are properly licensed and regulated to accomplish this. If at any time any party is in doubt as to the applicability of the regulations to a particular transaction, they should seek appropriate legal counsel. i No content provided in this article should be taken as legal opinion or advice for an individual situation or case. By viewing the information in this article, you are not creating an attorney-client relationship and while we make every effort to make sure the information in this article is accurate, we cannot guarantee the accuracy and are not responsible for any errors or omissions or inaccuracies. ABOUT THE AUTHOR S Kevin Hardin Kevin W. Hardin is the director of the Mortgage Mediation Group at the law firm of McCarthy Law PLC. He holds the Certified Mortgage Banker (CMB) designation from the Mortgage Bankers Association and the Certified Mortgage Consultant Designation (CMC) from the National Association of Mortgage Brokers. Both designations are the highest academic designations of both associations. He has a Bachelors of Science from New Mexico State University and a Juris Doctor from Concord School of Law. Kevin.Hardin@McCarthyLawyer.com 888-909-1030 Kevin McCarthy Kevin Fallon McCarthy Esq. is the Managing Partner of McCarthy Law PLC. Mr. McCarthy graduated magna cum laude from the Sandra Day O’Connor College of Law in 1986 and received his B.S.B.A. with an emphasis in Accounting from Creighton University. McCarthy Law PLC is an Arizona-based law firm focused negotiating large reductions in their clients’ debts without the need for bankruptcy. The firm helps families who are struggling with debt, including credit card debt, medical debt and student loan debt. The Mortgage Mediation Group at McCarthy Law PLC is a practice group within the firm focused on mortgage regulatory and statutory issues. This practice group assists homeowners with California Homeowner Bill of Rights claims, wrongful foreclosure, foreclosure defense, short sale, loan modification, mortgage deficiency defense, mortgage settlement and seller carryback services. HAS DODD-FRANK MOVED MY CHEESE? | CONTINUED FOOTNOTES: 1 Title 24 Part 3400 Sub Part A, §3400.23 2 12 CFR § 1026.2 (12) 3 12 CFR § 1026.36 (a) 4 12 CFR § 1026.36 (a)(4) and (5) 5 see comments 36(a) (4)-2 and 36(a)(5)-1 6 see comments 36(a) (4)-2 and 36(a)(5)-1 7 12 CFR § 1026.43(c) 8 12 CFR §§ 1026.31, 1026.32 and 1026.34 9 12 CFR § 1026.36 (a) (C) 10 A.R.S. 32-2101 (48)(k) Visit this article on AARonline.com — comment with your thoughts & share to your social networks.
  18. 18. A P R I L 2 0 1 418 www.aaronline.com/azre-book HOMEOWNER PROTECTIONS SIGNED INTO LAW A major victory for the Arizona Association of REALTORS® (AAR) was achieved on April 17, 2014, when Governor Jan Brewer signed SB 1482 homeowners’ association amendments omnibus into law. This bill reintroduced protections for homeowners and tenants against homeowners associations which was passed by the legislature and signed by the governor last year, but ultimately challenged in court based on the “single subject rule” of the constitution. As a result of the constitutional challenge, HOAs were left with no restrictions on what documents they could require of a tenant and no limit on what could be charged for the collection of these documents. Over the course of the last year, AAR continued to hear from our membership and the public on the escalating efforts by HOAs to interfere in private contracts and profit off these efforts. Some community associations sought to obtain inappropriate information from tenants, such as a copy of the tenant’s rental application, credit report, lease agreement, and social security number. To make matters worse, these associations charged the tenants unreasonable fees to process this information. As a result, the association actively pursued the establishment of restrictions on the information that can be requested and the amount that can be charged. Pursuant to SB1482, homeowners associations will now be limited as to what information they can seek to obtain from tenants. Additionally, the association will be precluded from charging more than $25 to process this documentation. After many attempts to get this legislation to the finish line, Governor Brewer’s signature solidified the multi-year effort to establish protections for homeowners and tenants. SB 1482 contained a general effective date and will become effective 90-days after the legislature adjourns. i For more information on the bill, please visit: http://www.azleg.gov/DocumentsForBill. asp?Bill_Number=1482&Session_Id=112 Visit this article on AARonline.com — comment with your thoughts & share to your social networks.
  19. 19. A R I Z O N A R E A L T O R® M A G A Z I N E 19 LORI DOERFLER ELECTED 2015 AAR TREASURER Lori Doerfler, ABR CRS GRI, was elected 2015 AAR Treasurer at LORI WILL BE SERVING AS TREASURER IN 2015 WITH LINE OFFICERS: President – Jim Sexton | President-Elect – Paula Serven | Vice President – Paula Monthofer the Board of Director’s meeting on Friday, April 18. Lori has been serving on AAR committees since 2006 and has been involved in the association in the following roles: 2010 – Present Executive Committee 2010 – Present Finance Committee 2010 - 2013 Region 1 Vice President 2007 - Present Director 2013 Chair, Professional Business Development Committee 2013 Chair, RAPAC Trustees 2012 Chair, REALTOR® Issues and Mobilization Committee 2007 - Present Professional Standards Committee 2011 Member, Risk Management Committee 2010 Member, Statewide MLS Task Force 2008 - 2009 Member, Business and Information Technology Committee 2005 - 2006 Member, GRI Workgroup 2006 Graduate, Leadership Training Academy Visit this article on AARonline.com — comment with your thoughts & share to your social networks. Congratulations, Lori!

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