Colorado Real Estate Journal - December 16, 2015
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 purchases. One such source, which often finds its origins around the dinner table during the holiday 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 payment in this rapidly appreciating 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 Originator 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 originator,” unless licensed by the Board of Mortgage Loan Originators and registered with the nationwide mortgage licensing system as a state-licensed loan originator. Pertinent to this discussion, a “mortgage loan originator” 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 personal, family or household use and is secured by a mortgage, deed of trust or other security interest on a dwelling or residential 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 parent offers a loan to his or her child for the purchase of a residence, and that loan is secured by a deed of trust on the residence, the loan is likely to be governed by and consequently prohibited by the act. The act does provide a number of exemptions to the prohibition against loan originations by an unlicensed individual. One common exemption that individuals may choose to take advantage of is seller carryback financing. Under this exemption, a person, estate or trust may provide mortgage financing for the sale of up to three residential properties in Colorado in any 12-month period to purchasers of such properties, so long as each property is owned by the same person, estate or trust and serves as security for the loan. Therefore, one potential solution to the parent-child loan prohibition described above may be to have the parent first purchase a property and then later sell it to the child through seller carryback financing. While this solution may not be ideal due to the additional risks and costs involved, the loan will not be in violation of the act if properly executed. For more information on the various additional exemptions, please see C.R.S. § 12-61-904. Even if an unlicensed individual qualifies for an exemption under the act, the individual must be careful to satisfy the act’s remaining requirements, including the provision of numerous disclosures. See C.R.S. § 12-61-911, 914. The disclosures, mainly in place to provide consumer protection against predatory lending, 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 provide 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 enforceability of any mortgage. Although the legislation relating to predatory lending provided in the act is necessary for the protection of Colorado consumers, it is clear some unintended consequences have resulted from the current statutory scheme. Continued modifications to the act are needed to help account for the unintended 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 purchase, it is crucial that an unlicensed individual consider the issues created by the act.