Ep. 24 | Dodd-Frank and SAFE Act, Am I Breaking the Law?

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On this episode of The Mobile Home Park Lawyer, Ferd talks about the Dodd-Frank Act and the SAFE Act and how they impact park-owned homes. Ferd goes through how to maneuver under these acts and explains why it is best to only own the land.

 

“I know a lot of park owners don’t want to be in the home business, they want to be in the land business.”

 

HIGHLIGHTS:

0:00 – Intro
1:27 – If you don’t want to be in the home business how do you get rid of the homes?
1:38 – Option 1: sell for cash, but not everyone has the cash
1:50 – Option 2: sell it through 21st Mortgage, but there are some issues there too
2:32 – Option 3: is to do a rent-to-loan or lease with an option to buy, but you have to stay within the Dodd-Frank and SAFE acts
3:26 – The SAFE Act is for uniform licensing standards nationwide
4:48 – Get a separate LLC for the home and the land and never own anything in your own name
6:18 – The Dodd-Frank act is essentially stopping the “banks are too big to fail” thought process and protecting consumers from abusive financial practices
6:58 – It was unintended that mobile homes and manufactured housing are included Dodd-Frank act
8:25 – Doing this could impact your financing

 

FULL TRANSCRIPTION:

Welcome back mobile home park nation. Here again today, we’re going to talk about a topic that I think is near and dear to a lot of us. And that is park-owned homes. I’m being a little facetious because I know a lot of park owners don’t want to be in the home business, they want to be in the land business. I regularly tell people my goal is to own zero homes, but in all practicality, it’s never going to, I’m never going to get there. Just the necessity of bringing in homes and selling them for cash or selling them for 21st Mortgage can be challenging. At times it’s harder to find good buyers. So I ended up having to rent some homes and I have a, you know, those could work out too, but it really limits your ability in my opinion, to expand and to buy more parks because homes require more cash because they’re harder to finance on the buy. They require more maintenance, they require more and just more headache or more, more brain damage I like to say.

So key question then is if I don’t want to be in the home business, how do I get rid of the homes. Obviously, if you sell them through cash or sell them through 21st Mortgage. That would be ideal. So that’s kind of your first options, right? Option oneself cash. Well here’s the problem with that. Obviously, not everybody’s got that kind of cash. So, it’s called $20,000 for a used home. It’s hard to find 20,000 buyer. So, what do you got next? Okay, so you sell it through 21st Mortgage that works sometimes, but 21st Mortgage, I’ll cover this in a different episode, but there’s some challenges of that program. And one, you typically have to have at least 10 vacant lots. So, if you’ve got to, like I’m under contract right now on a small parks, it is a 20-unit park. It’s only got 17 occupied. So, all I can ever get is three more. So, I’m going to be ineligible to use 21st Mortgage for that part. So that’s not really a good option for me there.

So, I got one, cash two, finance loan. 21st Mortgage is not the only player in the game and there’s PEP, there’s Vanderbilt. Sometimes you can get a local bank or a local credit union to finance your buyers. It’s a little harder. So really you get to kind of option three. A lot of people say hey, can I do a rent to own, can I do a contract for deed? Can I do a lease with an option to purchase? What about this rent credit? And I say, can I, because practically, yeah, you can probably do some of those combinations and I’ll cover what each those looks like in subsequent episodes here. But the gray area and it, it’s not really that grey, to be honest on paper, the risk, if you will, from a legality standpoint is complying with the Dodd-Frank act and the safe act.

So, I get this call and I get this question all the time, and I’m probably giving up lots of legal work by putting this on a podcast instead of having this 30-minute discussion with people. But I’m tired of having the same discussion to be honest. So here we go. We’re going to jump into today Dodd-Frank and the SAFE Act. And then in subsequent episodes, I am going to tell you the options, what works, what doesn’t, pros and cons.

So first off, what the heck is the SAFE Act? Well, it stands for the secure and fair enforcement for mortgage licensing act. Okay, whatever that means. It’s from 2008, this act was intended really to kind of provide a uniform or consistent licensing standards nationwide. Because before that each state had their own licensing standards. And I say, licensing is for making loans. If you sell a home on terms on paper seller carrier, whatever you are going to call it. We call it a contract for deed. You know, maybe it’s a rent own. Maybe it’s a lease with option to purchase, depending on the nature of those in the terms, those are basically disguised mortgages. You’re basically a lender. And by rule by law and the SAFE Act, you’re supposed to be a mortgage loan originator, or work with a mortgage loan originator. Okay. Well, what does that mean? Well, that means you’re basically a bank. That obviously comes with lots of scrutiny, lots of, you know, audit, lots of brain damage, lots of expense.

So, for my example of this park in Iowa, where I’ve got three vacant lots, man, if that was my first park. My only park. It would definitely not be worth going through the process being a mortgage loan originator. So, okay then technically, what does that mean?
Well, maybe some of those other strategies or options or alternative routes are now illegal. Okay, That’s scary. So how do I get around this?

Well, I can get around this legally. Well, some States a kind of a diminimous provision. You can sell one home maybe three homes and not be subject to the mortgage loan origination rules. Okay, well the challenge is typically that is limited to an individual person, and I would strongly advise, not ever owning anything in your own name. Don’t own the home in your own name, don’t own the land in your own name, get a separate LLC for the land and a separate LLC for the homes. And if you’re doing a syndication, have a separate LLC on top, that’s the parent. And if you’re doing it, if you’ve got property management, you’d probably, and another separate LLC, it sounds like a lot of legal work. But that property management LLC could be an escort. If you got yourself a law firm, if I want a separate LLC. Perhaps your brokerage, it becomes a lot of paper tigers out there, but anyway, SAFE Act can be, it can be scary if you mess it up. And there is strict criteria set forth in there that you, the seller, and also the buyer must kind of comply with.

And this is kind of a result of the financial crisis, in 2007 area, where there’s a bunch of people out there making shady loans, you know, setting people up to fail. Like, Hey, I’ll sell you this house, here’s 10,000 down, Oh, by the way, there’s an adjustable rate mortgage. And it’s going to jump like crazy at some point. And then the payments are going to choke you, but don’t worry, I’ll come back and I’m going to take your house. And your $10,000 is a sub cost, they’re setting people up for fail to fail. So then that the piggyback on this was 2010, the Dodd-Frank act, this basically, and Dodd-Frank, they were two congressmen. They did this as part of creating the consumer finance protection Bureau, which among other things is designed to protect people and individuals, you know, I think here’s the verbiage of the act, quote, “an act to promote the financial stability of the United States by improving accountability and transparency in the financial system.” Okay, it was trying to stop that, it was starting to end the whole, you know, banks are too big to fail, which resulted in an American tax fairs having to buy out, you know, a lot of it companies and stuff, that was a problem. It also was to protect consumers from abusive financial practices. And that’s kind of the focus on the MH industry.

So there wasn’t, there was a limitation on the amount of there should have been, I think, was the intent to have a limit that if you have a loans under 50,000, for example, which most seller finance mobile homes would qualify as, then you would be exempted, but that didn’t make it to the document. So, Bernie Frank himself has later said it was unintended for the mobile homes, manufactured homes to be in the document. But this is 2000 pages of bureaucracy, So I don’t even know. I doubt Bernie Frank read it frankly. So as a result, that’s the law of the land, which means guys like me, gals like you, we are subject to both the SAFE Act and Dodd-Frank when we’re selling mobile homes, which can be scary. So, there’s lots of strategies and options here. We’ll go over them. I think the current safest route is the rent credit program and it’s kind of the belt and suspenders approach, but there’s pros and cons to each of these options that like I said, I’ll go over here shortly. Ultimately today the lesson is, you know, recognize you need to be a mortgage loan originator, or you’re open to risk. You could try for some of these, you know, one parties exemptions or three property exemptions. But that’s not very many, right. So, Like I sell a lot more houses in three a year, even in different States. That’s not a real good practical workaround, but ultimately the goal is going to be to be safe under the law, but also to divest of these park-owned homes.

Of note, another reason that you want to potentially divest of park-owned homes beyond just getting out of the brain damage in the maintenance business is it could impact your financing. As most people know a lot of banks don’t like having carrying the paper on mobile homes, but I’m in the process right now of a couple of agency refinances. And I’ve been, I am actually delaying one of them, particularly for this reason that I have to get my park-owned home account or percentage below the required level. And depending on if you’re going through, you know, Fannie Mae or Freddie Mac, you’re looking at a maximum of 20% to 25% of the homes being park-owned. So, if you’re doing a rental, that’s park-owned, if you’re doing a contract for deed, they typically say it’s not park-owned. So that’s a plus. If you’re doing a lease with an option to purchase, I think that’s gray depends on your verbiage. If you’re doing a rent credit, that’s still a park-owned home. That’s one of the downfalls, there’s a teaser, you know, the downfalls with the rent credit program. But ultimately if your goal is to get on non-recourse agency debt, you got to trim the park-owned home counts. You got to get it down. So anyway, that’s all for today. More episodes to follow.

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