Chapter 4Legal Issues for Investors
When you invest in a trust deed there are certain legal issues that you need to consider. Regardless if you secure your trust deed investment through a single lender (whole) or by more than one lender (fractionalized), you will still need to follow certain rules and regulations as stated by real estate law. Real Estate Law
The Real Estate Law includes what is commonly referred to as the “multi-lender law”. This multi-lender law has certain restrictions which it can impose on the investor. Some of these laws include, but are not limited to the following: ® The investor must have their loan serviced by a mortgage loan broker (MLB) and have a written agreement. Furthermore, the investor and the MLB need to arrange for a third party to take part in loan servicing. The third party should be a qualified, licensed real estate broker. ® A loan can have no more than 10 note holders or lenders. ® The investor is not permitted to invest more than 10% of their annual income or net worth ® Based on the type of property that is considered collateral, defined loan-to-value ratios are not to be exceeded ® Only under limited circumstances is the MLB allowed to “self-deal”. ® The investor’s loan is not permitted to be indirectly secured though any other deed of trust or promissory note, and is only secured directly through the property. TILA - Section 32
Aside from the Real Estate Law, you may find that your loan documents will feature another legal document known as the federal Truth-in-Lending Act (TILA). The TILA was amended in 1994 and was created in respect to loans that are secured by a borrower’s principal property. The rules of the TILA affect all mortgage transactions that are described as having fees or rates that are above a specific amount or percentage. Such mortgage transactions are known as “high rate/high fee” or “Section 32” loans.
A loan that is considered to be high rate is one where the appraisal exceeds ten points on the Treasury Security yield that has similar development. A high fee loan, on the other hand, is one where the total fees and points are greater than 8% of the total loan amount. If you have any questions concerning the TILA, you can contact the Federal Trade Commission, as the TILA regulations are enforced by them. As you can see there are many legal issues for investors to consider before they invest in a deed of trust. Make sure you understand all legalities concerning trust deeds before you make your investment.
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