In this tele-class, I surveyed some of the new statutes that get investors sued or threatened with lawsuits.  This class was just a brief introduction to these laws, so read and listen to my other materials on these topics to learn more.

http://www.myreiadvisor.com/teleclass-20-matt-griffith-on-laws-that-investors-get-sued-over-the-most.html

Regulators Suggest Land Contracts Are Not Subject to New Law

Background

In 2008, Congress passed and President George Bush signed into law the Housing and Economic Recovery Act, (Public Law 110-289) (HERA). HERA is designed to assist with the recovery and the revitalization of America’s residential housing market – from modernization of the Federal Housing Administration, to foreclosure prevention, to enhancing consumer protections.  The SAFE Act is a key component of HERA.

The SAFE Act is designed to enhance consumer protection and reduce fraud by encouraging states to establish minimum standards for the licensing and registration of state-licensed mortgage loan originators. The SAFE Act requires states to have licensing and registration systems by July 31, 2010. Indiana’s SAFE Act law was passed last year and goes into effect in June 2010. An easier-to-read version of the Indiana law appears in the Indiana Administrative Code.

You Need a License, If You Are a “Loan Originator”

You need a loan originator’s license, if you are a loan originator as defined by the new Indiana law enforcing the SAFE Act. In a sentence, anyone who offers or provides a residential mortgage loan or extends credit for a home purchase is deemed a loan originator and is required to get a license.

You Might Be a “Loan Originator”

The SAFE Act defines “loan originator” as “an individual who (1) takes a residential mortgage loan application; and (2) offers or negotiates terms of a residential mortgage loan for compensation or gain.” This definition is broadly interpreted. If you sell a residential property on credit, YOU ARE PROBABLY A LOAN ORIGINATOR under the SAFE Act.

Indiana’s Law Has (Already) Changed, Since July 1, 2010

Indiana passed its Safe Act statute with an effective date of July 1, 2010.  Originally, the following regulation appeared to draw land contracts into scope of the Safe Act:

“Mortgage transaction” means a loan or consumer credit sale in

which that is or will be used by the debtor primarily for personal, family, or household purposes and is secured by a mortgage, or a land contract, or other equivalent consensual security interest on a dwelling or residential real estate.

(emphasis added).

Sometime in July 2010, Indiana proposed a new regulation that deleted the term “land contract” from the definition of a “mortgage transaction.”  The new definition reads as follows:

“Mortgage transaction” means a loan or consumer credit sale that is or will be used by the debtor primarily for personal, family, or household purposes and is secured by a mortgage or other equivalent consensual security interest on a dwelling or residential real estate upon which is constructed or intended to be constructed a dwelling.

Clearly, the term “land contract” was deleted from the regulation.  However, the question is this:  Is the definition of a “mortgage transaction” still broad enough to include land contracts?

In an effort to get this question answered, a number of lawyers and real estate brokers have contacted the Indiana Department of Financial Institutions and have spoken with Jim Harrell, Assistant to the Supervisor-Consumer Credit, about the applicability of the Safe Act to land contracts.  What this author has been told is that Department of Financial Institutions deleted the term “land contract” from the regulations, because the Department of Financial Institutions believes the statute should only apply to transactions where title to the real estate has transferred to the consumer-borrower.

A Word of Caution

This author has concerns that the Safe Act is so broadly written that future regulators could apply the law to land contracts, or at least argue that land contracts fall within the scope of the law.  We should assume that neither Jim Harrell nor anyone else from the Indiana Department of Financial Institutions will testify in defense of someone using a land contract in years to come.  Nor would this evidence be admissible in an Indiana court.

The new regulations make no mention of title to land transferring as a definitional component of the new law.  In fact, with regard to ownership of real property, the terms “title,” “transfer,” and “deed” appear nowhere in the new regulations.  There is arguably no language in the Safe Act or Indiana law supporting the interpretation given by the Indiana Department of Financial Institutions.

Under the new regulations, the term “loan” still includes “the creation of debt by the creditor’s payment of or agreement to pay money to the debtor or to a third party for the account of the debtor; or the extension of credit by a person who engages as a seller in credit transactions primarily secured by an interest in land.”  That language sounds like a land contract to many real estate lawyers.

The new regulations do not exclude land contracts.   Nor does the statute or regulations contain any language distinguishing situations where title has or has not transferred, as part of a “mortgage or other equivalent consensual security interest on a dwelling or residential real estate.”  The term “land contract” has merely been deleted from the definition of a “mortgage transaction.”

So, until regulators expressly exclude land contracts from the Safe Act, be cautious in the use of land contracts.

Exclusions

There are exceptions under the SAFE Act. Here are a few:

• Selling a home you previously occupied/lived in as your residence.

• Certain clerical and administrative tasks.

• Selling a home to an immediate relative, as defined by the statute.

• Selling commercial buildings, as defined by the statute.

• An attorney who negotiates terms of a residential mortgage loan with a prospective lender on behalf of a client as an ancillary matter to the attorney’s representation of the client, unless the attorney is compensated by a lender, mortgage broker, or other mortgage loan originator or by an agent of such lender, mortgage broker, or other loan originator.

What Is a “Dwelling”

The SAFE Act’s definition of “residential mortgage loan” includes a loan secured by a consensual security interest on a “dwelling” and cross-references the definition of dwelling in section 103(v) of the Truth in Lending Act (TILA) (15 U.S.C. 1601 note). Regulation Z, which implements TILA, defines dwelling to mean “a residential structure that contains 1 to 4 units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence.”

As always, feel free to contact this author for specific answers to your real estate investing and legal questions, or call for a consultation.   Good luck and Happy Real Estate Investing.

I’d like to announce the birth of my son-

Blake Matthew Vivo Griffith

June 5, 2010 –  3:35 a.m.
7 lbs., 7 ounces
21.5 inches long

Baby and mom are doing great.  I’ll be in and out of the office next week.  Thank you for all the love, support and messages of encouragement.

Limited liability entities- such as corporations and limited liability companies- require basic maintenance.  Yet, amazingly, a large percentage of Indiana corporations and Indiana LLC’s are not updated by management or owners.  What they risk by failing to upkeep these entities is nothing less than having a court ignore the “corporate shield” by applying liability directly on the owners of the corporation or LLC.

It is not expensive or hard to maintain an Indiana corporation or Indiana LLC.  The necessary tasks should begin with a visit to your business attorney, CPA and insurance agent.  However, those are just the three most important tasks to complete.  There are several others. 

Here is a short list of important tasks to complete regularly-

1. Visit yourIndiana business attorney to review the corporate records and status of the business.
2. Visit your CPA for a review of the financial health of the company.
3. Visit your insurance agent to contact a full insurance review.
4. Hold an annual meeting of the owners- members in an LLC and shareholders in a corporation.  Elect LLC-managers or corporate directors at these meetings.
5. Hold an annual meeting of the directors in a corporation.  Elect officers at this meeting.
6. Create minutes of all annual meetings.
7. File biennial reports with the Secretary of State.
8. Update an assumed business names with appropriate filings with the Secretary of State and county recorder.
9. Remind officers and key personnel on the appropriate operations of a limited liability entity.
10. Review all contracts, processes and procedures that might lead to liabilities.
11. Conduct a risk audit, which should include a physical inspection of your business facilities.

Of course, each business has unique needs, but this list generally applies to businesses of all types and sizes.

Businesses often experience difficulties in collecting monies owed to them by their customers and clients as soon as the business first begins offering its goods and services. Every business has experienced some difficulty in getting paid all it is owed, and many business plans are formed with the presumption that a certain percentage of the business’ accounts receivable will go uncollected. The problem of collecting accounts receivable is not usually the cause of a business’ failure, as more businesses fail from undercapitalization. However, collections problems can prevent a business from growing and will always negatively affect the business’ profitability.

There are things a business can do to minimize its risks that an account receivable will become uncollectible. And as is usually the case, preventing the problem from occurring is far less costly than curing the problem once a client or customer fails or refuses to pay you for your goods and services. Whether your business is the sale of pastries, providing rental housing or the construction of high-rise office buildings, the following suggestions, where applicable, should help you increase your collections and avoid much frustration and anguish in the process. Try following these basic collections rules.

Get It In Writing.
It may sound elementary, but it is so very important that you memorialize your agreements with customers, clients and other businesses. Any change, termination or other modification of an agreement should also be memorialized. For example, in a construction context, a “Change Order” form may often be used. To avoid a variety of legal and tax trappings, all written documents, including your regularly used forms, should be reviewed by your legal counsel and tax advisors.

Get Paid In Advance.
Easier said than done, but your goods and services are not free. You should require substantial deposits and down payments before you begin ordering parts or using materials. And you should require payment-in-full before you begin performing services or relinquish control of your property. Remember that until your customer has paid you for a good, the customer is not entitled to the fruits of your labor. This rule may best be exemplified by the landlord who demands rent to be paid on the first day of every month during which the tenant will occupy the leased premises. In essence, the tenant pays in advance. But when the tenant fails timely to make the rent payment, the tenant is essentially a trespasser and the landlord should immediately begin eviction proceedings.

If You Don’t Get Paid In Advance, Get Security.
Obviously, this rule does not apply to leasing agreements or the simple cash transaction such as the sale of a dozen doughnuts. In larger transactions, particular those involving the sale of moveable personal property and real estate, the seller should demand a security interest in something of value. A mortgage, a recorded land contract, a mechanic’s lien and a lien on personal property are familiar examples of security interests. But many people forget that a business can agree to provide services, such as structural repairs to a house, and in exchange receive a security interest in an entirely different property, such as an office building, delivery truck or car owned by the customer. Or alternatively, that same business could require a security interest in the house, office building, delivery truck and car, or some combination thereof. Having a security interest may also improve your chances of recovery in the event the customer files for bankruptcy protection.

If The Customer is Credit Risky, Demand A Co-Guarantee.
Many businesses extend credit to customers while fearing that the customer is a credit risk. In such circumstances, the customer should be made to provide the signature of a co-guarantor who promises to pay the customer’s debt to you in the event the customer does not. Remember, however, that the co-guarantee is only as good as the co-guarantor is creditworthy.

If Your Contract Does Not Allow For Collection Costs,
You Connot Get Them.
The “American Rule” is that litigants pay their own attorneys’ fees. So, if you must retain an attorney to collect a debt, you will pay the attorneys’ fees and most other collections costs. The exceptions to the American Rule are the existence of a written contract allowing the recovery of attorneys’ fees, a statute allowing such recovery; or the assertion of a frivolous, unreasonable or groundless claim or defense. The easy solution to the American Rule is to include a provision in your contracts allowing YOU to recover your attorneys’ fees, collections and court costs. Your customers should not have the same right to recover against you.

The Check Is Never Truly In The Mail.
The lesson here is to begin legal proceedings as soon as possible and not to delay in collecting your money or retrieving your property. Equally important, you should read your written agreements to determine whether you are required to provide any notices or demands to the customer before commencing a collections action against the customer. The longer you wait, the more likely the customer will be difficult to locate; the customer will have been hidden his/her assets; or your property will have been destroyed, devalued or transferred to third-parties.

As a final suggestion, consult your attorneys as soon as you suspect difficulty in collecting a debt. Often a stern letter from an attorney on a law firm’s letterhead can have a dramatic effect on a delinquent customer. You also should consider consulting your attorneys to review your entire billing and collections processes. Thrasher Buschmann Griffith & Voelkel, P.C. has often assisted businesses whose agreements, leases and other forms were outdated or lacking important provisions which would allow the business to pursue additional remedies against a delinquent customer. If we can help you or your business, please contact this author.