Page 22 —
COLORADO REAL ESTATE JOURNAL
— December 16, 2015-January 5, 2016
Law & Accounting
A
s the Denver metro
real estate market
continues to sizzle
and sales prices continue to
rise, buyers are increasingly
looking for additional sources
of capital to fund their pur-
chases. One such source, which
often finds its origins around
the dinner table during the hol-
iday season, is a private loan
from one individual to another
for the purchase of real estate.
Common examples of this type
of loan include a parental loan
to a child, which is especially
popular with the millennial
generation, who otherwise may
be unable to fund a down pay-
ment in this rapidly appreciat-
ing market, and a loan between
friends. While this type of loan
may seem like an ideal source
of funds for the borrower and a
safe investment for the lender,
the current statutory scheme in
Colorado creates a few pitfalls
that a lender must carefully
navigate when making such
loans.
The Mortgage Loan Origi-
nator Licensing and Mortgage
Company Registration Act,
codified at C.R.S. § 12-61-901
et seq., is the main statutory
scheme applicable to the type
of private loans described in
this article.
At its most basic level, the act
states that an individual cannot
originate or offer to originate
a mortgage, or act or offer to
act as a “mortgage loan origi-
nator,” unless licensed by the
Board of Mortgage Loan Origi-
nators and registered with the
nationwide mortgage licensing
system as a state-licensed loan
originator. Pertinent to this dis-
cussion, a “mortgage loan orig-
inator” is simply but broadly
defined as an individual who
offers or negotiates terms of
a “residential mortgage loan,”
which in turn is defined as a
loan that is primarily for per-
sonal, family or household use
and is secured by a mortgage,
deed of trust or other security
interest on a dwelling or resi-
dential real estate upon which
is constructed or intended to
be constructed a single-family
dwelling or multiple-family
dwelling of four or fewer units.
Thus, in the case where a par-
ent offers a loan to his or her
child for the purchase of a resi-
dence, and that loan is secured
by a deed of trust on the resi-
dence, the
loan is likely
to be gov-
erned by and
consequently
prohibited by
the act.
The
act
does provide
a
number
of
exemp-
tions to the
prohibi t ion
against loan
originations
by an unlicensed individual.
One common exemption that
individuals may choose to take
advantage of is seller carryback
financing. Under this exemp-
tion, a person, estate or trust
may provide mortgage financ-
ing for the sale of up to three
residential properties in Colo-
rado in any 12-month period
to purchasers of such proper-
ties, so long as each property
is owned by the same person,
estate or trust and serves as
security for the loan. There-
fore, one potential solution to
the parent-child loan prohibi-
tion described above may be to
have the parent first purchase a
property and then later sell it to
the child through seller carry-
back financing. While this solu-
tion may not be ideal due to
the additional risks and costs
involved, the loan will not be
in violation of the act if proper-
ly executed. For more informa-
tion on the various additional
exemptions, please see C.R.S. §
12-61-904.
Even if an unlicensed indi-
vidual qualifies for an exemp-
tion under the act, the individ-
ual must be careful to satisfy
the act’s remaining require-
ments, including the provision
of numerous disclosures. See
C.R.S. § 12-61-911, 914. The
disclosures, mainly in place
to provide consumer protec-
tion against predatory lend-
ing, may seem unnecessary in
a situation where the lender
and borrower know and trust
each other. However, it is still
important that the lender abide
by the requirements and pro-
vide the disclosures because
the failure to do so could put
the lender at risk for penalties
for violations of the act.
Individuals found to have
violated the act face penalties of
up to $5,000 for each violation.
In certain instances, a violation
of the act may be deemed a
Class 1 misdemeanor subject to
criminal sanctions. Fortunately,
a violation of the act does not
affect the validity or enforce-
ability of any mortgage.
Although the legislation
relating to predatory lending
provided in the act is necessary
for the protection of Colora-
do consumers, it is clear some
unintended consequences have
resulted from the current statu-
tory scheme. Continued modi-
fications to the act are needed
to help account for the unin-
tended consequences described
in this article. One relatively
easy modification would be to
add a new exemption to the act
for familial loans. Unless and
until the act is modified, when
contemplating whether to lend
money to a friend or family
member for a residential pur-
chase, it is crucial that an unli-
censed individual consider the
issues created by the act.
s
Mike L. Fredregill
Attorney, Moye
White LLP, Denver
While this
type of loan
may seem like
an ideal source
of funds for the
borrower and a
safe investment
for the lender,
the current
statutory scheme
in Colorado
creates a few
pitfalls that a
lender must
carefully navigate
when making
such loans.
