Update on Texas SAFE Act and Dodd Frank Mortgage Reform Act Bryan Dunklin texaslaw@email

Owner Financing and Buying Subject to an Existing Loan,Including Wraps, Land Trusts, and Lease/Options Update on Texas SAFE Act and Dodd Frank Mortgage Reform Act Bryan Dunklin texaslaw@email.com www.texasrealestatlaw.net 214-769-7377 DFW REI Club Haltom City, Texas July 27, 2013

Bryan Dunklin Best Speaker award - State Bar of TexasAdvanced Real Estate Law Course 2012 On the faculty of SMU from 1985 to 2008 Taught real estate law, real estate transactions, business law, and real estate fundamentals Dallas Bar Association Real Property Section Chairman in 2004 (820 real estate lawyers) Former general counsel of a national bank Former president and general counsel of a real estate brokerage/syndication/management firm Practicing law since 1980 Licensed real estate broker from 1982 - 2009

Bryan Dunklin SMU undergraduate BA degree with honors SMU Masters of Business Administration Degree - 1981 SMU Law Degree - 1981 Selected to the law review – top 10% of class - Journal of Air Law and Commerce - 1977 Coached successful SMU teams in American Bar Association competitions Selected as an honorary member of the SMU School of Law Board of Advocates – 1994-95

Recent speeches State Bar of Texas webinars State Bar of Texas Advanced Real Estate Law and Real Estate Strategies courses Mortgage Lending Institute – Session Moderator and Steering Committee Texas Land Title Institute and Texas Land Title Association webinar Texas Mortgage Bankers Association North Texas Commercial Association of Realtors Dallas Bar Association Real Property Section Denton County Real Estate, Trusts, and Probate Section Dallas Area Real Estate Lawyers Discussion Group Numerous real estate investors associations and brokerage firms

Disclaimer • These materials are for general educational purposes only. • The law constantly changes by the passage of new statutes, rules, regulations, and by decisions made by the courts. No representation or warranty is given that the general information provided is applicable to your circumstances. No legal advice is being given. Information may not be current. • No attorney-client relationship is established by the presentation of these materials. • You are advised to consult an attorney with respect to your specific circumstances.

Q & A • I encourage questions. Please write them down and wait until the Q&A period. I’ll be available at breaks and after the seminar. • “He who is afraid to ask is ashamed of learning.” – Danish proverb • “He who asks a question is a fool for five minutes. He who does not ask a question remains a fool forever.” – Chinese proverb • Please be considerate of the speaker and other seminar participants. Step outside to talk or phone. • “The simple act of paying attention can take you a long way.” – Keanu Reeves

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Today’s topics • Three seminars: • Update on Texas S.A.F.E. Act • Update on Dodd Frank Act • Texas law affecting Seller financing techniques • Buying subject to an existing loan • Wraparound / all-inclusive notes • Contracts for deed • Lease with an option • Land trusts

The problem when the investor is buying • Investors want to buy property without having to be personally liable for repaying the debt. • Investors sometimes want to keep in place the existing financing (attractive rate or other terms). • Investors may prefer to have the seller finance the purchase of the property to avoid having to be personally liable on the debt and to expedite the closing. • Investors don’t want to pay high interest rates or high closing costs. • Investors don’t want to be sued if they don’t pay the loan. • Investors don’t want to be delayed by the approval process.

The problem when the investor is a landlord • Investors want to find good tenants who will be motivated to take good care of the property. • Investors want to find good tenants who will pay more money up front, and pay higher monthly payments, for the right to buy the property in the future at a fixed price. • Investors want to find good tenants who will eventually want to buy the property at a premium price.

The problem when the investor is selling • Investors want a buyer who will pay a premium price. • Investors want a buyer who will pay cash, or who will lose significant earnest money if the buyer doesn’t close. • If the investor has to finance the buyer’s purchase of the property, then the investor wants a buyer he knows has a track record of paying on time and taking care of the property. • If the buyer doesn’t pay on time or take good care of the property, the investor wants to be able to get back title and possession of the property easily, quickly, and inexpensively.

Options • Conventional financing • Lease with an option • The tenant has an option to purchase the property • Contract for deed • The buyer doesn’t get a deed until the full purchase price is paid • Land trust • The buyer is assigned the beneficial interest in a trust and eventually has the right to control the sale of the property • Seller financing with a note and deed of trust • The seller is given a note and a deed of trust and can foreclose if the buyer doesn’t pay

Two key factors • Due on sale clause • Inflation and rising interest rates • Enforceable? Garn - St. Germain Depository Institutions Act of 1982 • Stricter lending standards • Record defaults and foreclosures • Weaker secondary market • Declining values • Overhand on the market • Dodd Frank

Due-on-sale clause • Sometimes called a "due-on-transfer" clause, is a contractual provision in a mortgage or deed of trust that gives the lender the option to require the borrower to pay the full amount remaining on the loan when the borrower transfers any interest in the property without first obtaining the consent of the lender.

Due-on-sale clause • “In the event that the grantor [borrower] transfers any interest in the property without the prior written consent of the lender, the lender may, at its option, declare the entire principal balance of the loan immediately due and payable.”

Texas Real Estate Forms Manual due-on-sale clause • "If Grantor transfers any part of the Property without Lender’s prior written consent, Lender may declare the debt secured by this deed of trust immediately payable and invoke any remedies provided in this deed of trust for default. If the Property is residential real property containing fewer than five dwelling units or a residential manufactured home occupied by Grantor, exceptions to this provision are limited to (a) a subordinate lien or encumbrance that does not transfer rights of occupancy of the Property; (b) creation of a purchase-money security interest for household appliances; (c) transfer by devise, descent, or operation of law on the death of a co-Grantor; (d) grant of a leasehold interest of three years or less without an option to purchase; (e) transfer to a spouse or children of Grantor or between co-Grantors; (f) transfer to a relative of Grantor on Grantor’s death; and (g) transfer to an inter vivos trust in which Grantor is and remains a beneficiary and occupant of the Property."

Due-on-sale litigation • Before 1982, courts in different jurisdictions interpreted due-on-sale provisions differently • Congress intervened to provide a consistent interpretation • Garn-St. Germain Depository Institutions Act

Garn-St. Germain Act • Congress sought to clear up the different interpretations of the enforceability of due-on-sale clauses by the state courts by intervening in 1982 and preempted the issue by the passage of federal legislation known as the Garn-St. Germain Depository Institutions Act. 12 U.S.C. § 1701j-3(d)(2000)

Garn-St. Germain Act • Due-on-sale clauses are enforceable in residential loan transactions except in the following situations: • 1. Death of the borrower – transfer to the heirs • 2. Divorce of the borrowers – transfer to one spouse • 3. A lease, not coupled with an option to purchase, of less than three years

Inter vivos trust exception a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property . . .”Transfer to a living trust, that does not involve a transfer of the beneficial interest or a transfer of the possession of the property”

Garn-St. Germain Act regulations • § 591.5(b)(1)(VI) “A transfer into an inter vivos trustin which the borrower is and remains the beneficiary and occupant of the property, unless, as a condition precedent to such transfer, the borrower refuses to provide the lender with reasonable means acceptable to the lender by which the lender will be assured of timely notice of any subsequent transfer of the beneficial interest or change in occupancy.”

Garn-St. Germain Act • §591.5(b) Specific limitations. With respect to any loan on the security of a home occupied or to be occupied by the borrower, • (A) A lender shall not (except with regard to a reverse mortgage) exercise its option pursuant to a due-on-sale clause upon: … • (iii) A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety; • (iv) The granting of a leasehold interest which has a term of three years or less and which does not contain an option to purchase (that is, either a lease of more than three years or a lease with an option to purchase will allow the exercise of a due-on-sale clause);

Garn-St. Germain Act • (v) A transfer, in which the transferee is a person who occupies or will occupy the property, which is: • (A) A transfer to a relative resulting from the death of the borrower; • (B) A transfer where the spouse or child(ren) becomes an owner of the property; or • (C) A transfer resulting from a decree of dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement by which the spouse becomes an owner of the property; or

Garn-St. Germain Act • (vi) A transfer into an inter vivos trust in which the borrower is and remains the beneficiary and occupant of the property, unless, as a condition precedent to such transfer, the borrower refuses to provide the lender with reasonable means acceptable to the lender by which the lender will be assured of timely notice of any subsequent transfer of the beneficial interest or change in occupancy. • (B) A lender shall not impose a prepayment penalty or equivalent fee when the lender or party acting on behalf of the lender • (i) Declares by written notice that the loan is due pursuant to a due-on-sale clause or • (ii) Commences a judicial or nonjudicial foreclosure proceeding to enforce a due-on-sale clause or to seek payment in full as a result of invoking such clause.

Can the lender call the note due if there is a due on sale clause and the property is sold without the lender’s consent? • Clearly the answer is “yes.” • So if a lender has this contractual right, why wouldn’t it exercise its right to call the note due? When current market interest rates are below the rate of interest provided in the note secured by the real estate, or when the real estate that secures the loan has a value that is less than the amount owed on the note, many lenders make a conscious decision to not accelerate the debt even if they discover that the property has been transferred by the borrower without the lender's consent. They reason that to call the note immediately due and payable might result in the lender taking back the property and recognizing a loss on an otherwise performing loan.

Will the lender exercise it’s right to call the note due under its due-on-sale clause? • As mortgage interest rates have fallen from the high levels of the early 1980s, lenders have frequently not been aggressive in exercising their rights under the due-on-sale clause. Instead many lenders have sometimes preferred to allow the loan contract to remain in place so long as it is being timely paid. As current interest rates rise, it can be expected that more lenders will elect to accelerate the debt when it is discovered that the borrower has transferred an interest in the property without the lender’s consent. • They can, and they might.

Case law ondue-on-sale clauses • Courts in Texas routinely uphold the enforceability of due-on-sale clauses • In recent case law developments in Texas, the Dallas Court of Appeals in 2005 refused to find in favor of the borrower asserting a cause of action for wrongful foreclosure of a commercial loan as a result of the borrower's transfer of the mortgaged property to a corporation owned by the borrower under an unrecorded deed which the borrower claimed was never delivered. Adams v. First National Bank of Bells/Savoy, 154 S.W.3d 859 (Tex.App.—Dallas 2005, no pet.). The court found that there was evidence in the borrower's corporate financial statement and in the borrower's own comments to the lender that the property had been transferred. Even though the lender did not give the borrower a notice of its intent to accelerate the debt, the court found that the borrower had waived her right to notice of intent to accelerate.

Key statutes whenowner financing is involved • Texas SAFE Act • licensure required for Residential Mortgage Loan Originator (RMLO) • HB 10, HB 2774, HB 277981st Legislature – 2009 • Dodd Frank Mortgage Reform Act • Lender must document borrower’s ability to repay

Key statutes whenowner financing is involved • Texas Property Code § 5.016 regarding sale of residential property where lien remains in place • Texas Property Code § 5.061 – 5.085 regarding executory contracts

Texas SAFE Act Texas Secure and Fair Enforcement for Mortgage Licensing Act of 2009 Responds to the federal mandate that states adopt the Federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008, or equivalent, to license, register, and regulate residential mortgage loan originators. Effective April 1, 2010

Texas SAFE Act If you lend money, or arrange for the lending of money, or if you advise someone about mortgages, even if it’s your own money, or if you touch a mortgage in any material way, there are regulations affecting you, and licensing will probably be required if a loan is originated on residential property other than when selling your personal residence

Texas SAFE Act Federal SAFE Act Establishes the Nationwide Mortgage Licensing System and Registry (NMLS) "Residential mortgage loan" - a 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 or on residential real estate

Texas SAFE Act (19) "Residential mortgage loan originator": (A) means an individual who for compensation or gain or in the expectation of compensation or gain: (i) takes a residential mortgage loan application; OR (ii) offers or negotiates the terms of a residential mortgage loan; and (B) does not include: (i) an individual who performs solely administrative or clerical tasks on behalf of an individual licensed as an RMLO or exempt from licensure under § 180.003, except as otherwise provided by § 180.051;

Texas SAFE Act (B) does not include: (ii) an individual who performs only real estate brokerage activities and is licensed or registered by the state as a real estate broker or salesperson, unless the individual is compensated by: (a) a lender, mortgage broker, or other residential mortgage loan originator; or (b) an agent of a lender, mortgage broker, or other residential mortgage loan originator;

Texas SAFE Act EXEMPTION. The following persons are exempt from this chapter: (3) a licensed attorney who negotiates the terms of a residential mortgage loan on behalf of a client as an ancillary matter to the attorney's representation of the client, unless the attorney: (A) takes a residential mortgage loan application; and (B) offers or negotiates the terms of a residential mortgage loan; (5) an individual who offers or negotiates terms of a residential mortgage loan secured by a dwelling that serves as the individual's residence

Texas SAFE Act Sec. 180.051. STATE LICENSE REQUIRED; RENEWAL. (a) Unless exempted by § 180.003, an individual may not engage in business as a residential mortgage loan originator with respect to a dwelling located in this state unless the individual: (1) is licensed to engage in that business under Chapter 156, 157, 342, 347, 348, or 351; and (2) complies with the requirements of this chapter.

Texas SAFE Act A licensed residential mortgage loan originator must enroll with and maintain a valid unique identifier issued by the Nationwide Mortgage Licensing System and Registry (NMLS). In connection with an application for a license as a residential mortgage loan originator, the applicant shall, at a minimum, furnish in the form and manner prescribed by the regulatory official and acceptable to the NMLS information concerning the applicant's identity, including:

Texas SAFE Act (1) fingerprints for submission to the Federal Bureau of Investigation and any governmental agency or entity authorized to receive the information to conduct a state, national, and international criminal background check; and (2) personal history and experience information in a form prescribed by the NMLS, including the submission of authorization for the NMLS and the appropriate regulatory official to obtain: (A) an independent credit report obtained from a consumer reporting agency described by § 603(p), Fair Credit Reporting Act (15 U.S.C. § 1681a(p)); and (B) information related to any administrative, civil, or criminal findings by a governmental jurisdiction.

Texas SAFE Act The regulatory official may not issue a residential mortgage loan originator license to an individual unless the regulatory official determines, at a minimum, that the applicant: Has not been convicted of a felony during the 7 year period prior to the application or at any time preceding the date of application, if the felony involved an act of fraud, dishonesty, breach of trust, or money laundering Demonstrates financial responsibility, character, and general fitness so as to command the confidence of the community and to warrant a determination that the individual will operate honestly, fairly, and efficiently as a residential mortgage loan originator within the purposes of this chapter and any other appropriate regulatory law of this state Provides satisfactory evidence that the applicant has completed prelicensing education courses and provides satisfactory evidence of having passed a written test and has paid a recovery fund fee or obtained a surety bond as required under the appropriate state regulatory law.

Texas SAFE Act A determination that an individual has not shown financial responsibility may include: (1) an outstanding judgment against the individual, other than a judgment imposed solely as a result of medical expenses; (2) an outstanding tax lien or other governmental liens and filings; (3) a foreclosure during the three-year period preceding the date of the license application; and (4) a pattern of seriously delinquent accounts during the three-year period preceding the date of the application.

Texas SAFE Act • H.B. 10, 2774, and 2779 passed by Texas in 2009 • Added Chapter 180 to the Texas Finance Code – Texas SAFE Act • Residential Mortgage Loan Originators must be licensed

RMLO • INCLUDES • An individual who for compensation • takes a residential mortgage loan applicationOR • offers or negotiates the terms of a residential loan • DOES NOT INCLUDE • One who receives the same benefits from a financed transaction as the individual would receive if the transaction were a cash transaction

RMLO • DOES NOT INCLUDE (the de minimis exemption) • “an owner of real property who in any 12 month period makes no more than five mortgage loans to purchasers of the property for all or part of the purchase price of the real estate against which the mortgage is secured”

License requirements • Criminal background check.All fingerprints will be submitted through NMLS for an FBI criminal background check • Education:Prior to taking the licensing test all applicants must take 20 hours of education and the courses must contain no less than 3 hours of Federal Law, 3 hour of ethics, 2 hours of nontraditional mortgage lending plus 12 hours of electives (which can include state required content) • Testing:Has components of all four of the areas listed above. Depending on which test is being taken (date specific) the test is approximately 190 minutes long and costs $110.00 • Credit Report:NMLS conducts the credit check

Penalties • First offense:Class B misdemeanor • All subsequent offenses: Class A misdemeanor • Liability: damages of not < the fee/profit received and not > 3 times the fee/profit received, determined by the Court • A cease and desist order: May assess an administrative penalty not > $1,000 per day for each violation and require a person to pay an applicant any compensation received

Updates to Texas SAFE Act • In 2013, changes made to Texas SAFE in SB 1004, HB 1721, and SB 232 • §157.0121 sets forth exemptions from RMLO requirements, including but not limited to the de miminisexemption • Moves and renumbers certain provisions

Updates to Texas SAFE Act • Finance Code §180.056 gives the SML Commissioner the ability to add additional requirements • Commissioner Foster apparently intends to add a 3 hour requirement on specific Texas legal issues

Updates to Texas SAFE Act • New test: 100 federal questions – NLMS will grade only 90 • 25 state questions which are not Texas specific • Texas mortgage loan originators must take an additional 3 hours of pre-licensing education on Texas rules

Dodd Frank Update • Go to other PowerPoint presentation

Laws Affecting Investor Exit Strategies • HB 2783 – Mortgage broker/loan officer licensure required for a seller of residential properties carrying financing on more than five properties • HB 2207 – Notices required when selling residential properties if liens are to remain in place more than 30 days • Lease/option issues of the “executory contract” statute

Update on Texas SAFE Act and Dodd Frank Mortgage Reform Act Bryan Dunklin texaslaw@email