Note creation, sale, and relevant laws? - Posted by Paul Collins

Posted by David Butler on January 12, 2001 at 14:21:44:

Hello Tarheel,

Hey… how 'bout those Deacs! Yep, and the 'Heels too. Well, the Devils and the 'Pack too, huh. You must be in Hoop Heaven right now!

You jumped right in with two of the fuzziest areas in the note business… licensing and table-funding! Adding in mobilehome dealer status adds in yet another variable in many states, addressing areas of law with regard to any “freestanding” units you might be dealing with. You are on a pretty good track with both points, however… subject to some clarification!

I hesitate to tell anybody whether licensing is required in any one state, because there are so many gray areas; sometimes confusing statutes; and little case law “on point” on the various possibilities. There is no single clear-cut answer for every individual, in every situation, in every state. Heck, the legal eagles often have a hard time with it on some of the issues! But? I can tell you that one of the primary attractions of dealing in the private note business is the ease of entry with respect to the RELATIVE lack of regulation ? particularly with regard to more lenient licensing requirements ? in comparison to the mortgage and real estate lending/brokering industries.

Many states have no regulations pertaining to note investing activities (for existing notes). And, even in the states that do require at least some licensing, there are various exceptions and nuances in the laws (a great many due to the convoluted wording of some of the regulations requiring licensing). You will also find that in some of the states that do have licensing
requirements, these requirements do not generally apply when buying or selling notes that are secured BY OTHER THAN owner-occupied residential properties of one-to-four units (these other notes make up about 55% of the total inventory of marketable private real estate notes).

In addition to the states that have no note licensing regulations, a great majority of the remaining states do not require any type of licensing for the PURCHASE of existing loan notes (almost universal immunity if purchasing for your own investment). But your own status as a loan originator and a mobilehome dealer can create a need for licensing on the part of the buyers in your state… usually if they buy in any volume. I don’t recall specifically for N.C. - but even if I did, you would want to read it carefully to make sure you don’t cause problems for any small private buyers you might sell those notes to, with regard to lending disclosure or usury requirements.

And the simultaneous closing (table-funding) issue is really out there in a gray area, despite the fact that it has been heavily used industrywide over the past few years. Due to the lack of relevant case law on point, it is still difficult to state CONCLUSIVELY about what is absolutely acceptable procedure in the various states… although some very logical procedures seem to have been generally agreed upon by the more active institutional table-funders as to what SHOULD offer “safe-harbour” rules for avoiding the sale of the note as an ostensible loan transaction.

Keep in mind the several relative factors that are most important in the equation - usury and disclosure requirements. Outside of the potential licensing requirements for a note buyer in North Carolina, the biggest question in my mind would be if you are
maximizing the legal usury limits, and then quickly turning the paper to “prearranged” sources at discounts that then take the return over those limits in terms of the buyer’s yield - would you create a violation? Under the applicable theories of “seller’s exemption”, this yield/usury issue is not applicable in a true note sale. But in most cases, dealers won’t have that exemption to begin with in regards to usury… and in my experience, MH dealers in most states who are originating the loans for buyers are already compelled to follow the lending laws, including usury and disclosure requirements at the time of sale.

And I have seen very little in the various states’ laws that I am familiar with mentioning the issue at all with regard to the sale/purchase of existing security (chattel based) agreements applicable to “freestanding” MH units, as opposed to land/home secured mortgage/trust deed instruments.

I would definitely have an experienced NC attorney investigate the matter under the various scenarios you might envision in terms of financing and selling the notes, and have a letter opinion in file with regard to the matter… not only should that provide some strong guidance, it will also give you some important “good faith reliance on counsel” documentation for your friendly Banking Commission investigator :wink:

By the way, you may find it very useful to have a look at the MH section for both land and “freestanding” units in our FREE report, NOTE GRADING/PRICING GUIDELINES to help gain some idea of marketplace for that paper, at:

We also have one prepared for the MHI site sometime back, HOW TO BEAT THE FLOOR PLAN MAN, at:

Although he is in New Mexico, you may also want to have a chat with Doug Ottersberg, who is very active as a retail dealer and paper meister… Doug wrote a series of articles right here on the website that should have his contact information, beginning at:

If you can’t find it there, feel free to email me for his contact info.

Hope this helps, and best wishes for your success!

David P. Butler

Note creation, sale, and relevant laws? - Posted by Paul Collins

Posted by Paul Collins on January 11, 2001 at 21:26:23:

I am in NC, the state with the most politically motivated ?predatory lending? laws in the union to date that I know of. I am a licensed mortgage broker and a licensed dealer of manufactured housing. I intend to sell pre-owned manufactured housing, aka repos, and the possibility of financing some of our hard-money buyers through a note sale has my interest.

From my understanding, a note buyer can be anyone, with or without a license. This would free us from having to deal with licensed bankers exclusively. (Is this right?) I want to create a note and sell it to a buyer, at a discount that is hopefully smaller than large, and be done with the sale after that. Is this still a legal ?note sale? if we table-fund the transaction or do I have to buy the unit with cash and close the purchase money mortgage prior to the note sale? If we do table-fund the deal, does the note buyer the have to be a licensed banker? Or would a separate transaction at a later date be easier to define as a note sale to a Banking Commission investigator should one knock on my door? (Which they will always do at the most in-opportune times!)

Also, if you are a note-buyer with experience in this area and you are looking for a good lead source, please e-mail me and we can discuss possible business.