Interview With Dan Deppen Of Call The Underwriter

 

Kevin Shortle chats with Dan Deppen, owner of Call The Underwriter and Fusion Notes, to share how they help investors with seller financing. Dan shares valuable tips on how to remain compliant in this process to avoid incurring penalties and facing headache-inducing legal problems. He explains the eight elements they go through to determine a borrower’s ability and the right way to do due diligence. Dan also explores how they execute processes at Call The Underwriter, including their strategic use of automated tools to streamline and speed up tasks.

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Interview With Dan Deppen Of Call The Underwriter

Thank you, as always, for tuning in to the show. If you enjoy it, please subscribe and give us a nice five-star rating there. I do appreciate that. It’s a good motivation to keep bringing you great guests like I have for this episode. Before I get into that, though, I want to talk a little bit about the Noteworthy Convention. As you know from tuning in to this program or seeing some of the other social media that I do, you know that I’ve been talking about going to the Noteworthy Convention.

I didn’t quite know how many people were going to show up. I knew who the speakers were. I knew it was a good lineup and everything. It has been a while since Noteworthy has done an event, so I came in very open. I was pleasantly surprised. It was a great group of people, and that’s important. It was a great group of speakers. The content was well laid out. The after-hours networking was good.

Overall, it was a good event. I would strongly encourage all my readers to attend the next time that we have one. Ben, with whom I’m associated who owns Noteworthy, was very happy with it as well and reinvigorated to keep putting that out there. It’s important for our industry to get together. We talked about a lot of things. It was good for me to see some old faces, people I’ve trained twelve-some-odd years ago and new people in the industry. It was a good mix. It’s nice to see the longevity.

Can you make a career out of this business? Can you do it full-time? Can it replace your income? Can it replace your job? The answer is yes. It takes effort. You also want to do it the right way. It’s important that you do all things the right way, especially if you’re in business. When I did my tip of the day, that’s one of the things that I brought up.

If you’re a business entity doing business in the note investing arena, you are held to a higher standard. If you’re not doing things correctly, you’re fine until something goes wrong. When something goes wrong, everything else starts to fall. That’s what you don’t want to do. You’re held to a higher standard. My advice is to always do it the right way, the legal way, and the ethical way, and you’ll never get into any problems. That starts from the very beginning.

The note business includes creating notes and buying notes that somebody else created. That’s it. If you’re creating notes, you’re doing seller-financing. If you are buying notes that somebody else created, you are going back and re-examining how somebody created the note. We’re going to start talking about the creation of a note.

A lot of the inventory that we see as note investors does come through building relationships with real estate investors, real estate investment companies, and real estate investment funds that go out, buy real estate, fix it up, turn around, and sell it with financing, sometimes with wraps, subject-tos, or cash deals. We’re looking at buying those notes. They’re in business with a consumer. We’re in business buying those notes. We have to make sure that things are done right.

There are things that you need to do to stay in compliance. Thankfully, we have little compliance to deal with in our industry. We have more than we did in the past. When I first started many years ago, it was the Wild West. It was whatever anybody made up because there weren’t a whole lot of rules and regulations about it. That has all changed with the advent of the Dodd-Frank Act. That’s what we’re going to be talking about and going into in this episode. It’s an important topic.

I’m happy to say that I’ve got the new owner of Call the Underwriter. For those of you who’ve been tuning in to me for a while, you have heard me talk about Call the Underwriter before because I’ve had Russ O’Donnell, the original owner of Call the Underwriter, and then I had Max on as well, who took over for us. Dan Deppen is my guest. He is taking Call the Underwriter and automating some things.

He’s got some interesting things about how he’s going to bring even more value to that service. I’m excited about it. I met Dan at Noteworthy. We had some conversation and I said, “Let’s save the rest of this for the show. We’ll learn as we go through.” I know he has got some great things for us. Everybody, please welcome Dan Deppen.

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Dan, how are you doing? 

I’m doing great. Thanks for having me on. I appreciate it. It’s good to talk some more after the convention.

Navigating Seller Finance Compliance Rules

I believe in the service. It’s foolish if you’re creating notes to not utilize it. It’s not only staying in compliance, but adding value to the notes that people create. Some people look at it as, “Isn’t that going to delay what I’m doing?” If you’re a real estate investor, let’s say, time is of the essence. You want to get into that property, fix it up as quickly as possible, sell it as quickly as possible, and create the paper as quickly as possible. I get it. Some people might look at this and go, “Isn’t that going to slow down the whole thing?” What would your answer be to that?

The answer is if you’re doing a residential owner-occupied loan and you do it in a compliant way, it will slow you down a little bit. The reason for that is that there are some requirements to send out disclosures on certain timelines. You have to send a loan estimate to the borrower and you have to give them 7 business days to review all of that, and then there’s a closing disclosure where they have 3 business days to review. You can’t change the terms at the last minute and shove the paperwork in front of them.

If you figure you’ve got that seven-day waiting period and you’ve got some time to do the underwriting and then to close, it’s probably going to be about two weeks, generally, give or take. That depends on how quickly the borrower is able to get all their information in and how quickly you can turn the crank on the underwrite and get all the disclosures out. Generally, it is about two weeks from when you kick off the process to when you close. Generally, there’s also a certain amount of time between when you put a property under contract and when you close.

I agree. I’ve done about 150 or so rehabs like that. I didn’t seller-finance them, but I sold them out for cash or to people who already had financing lined up. This was years ago. There is time in there. For me, it doesn’t look like it’s a delay. If you plan on creating notes, put this into your planning mechanism. I didn’t start to market my properties until they were about 90% to 95% complete. You didn’t want people walking in and seeing the walls weren’t put up yet or something. You’ll see something and you’re like, “What did this look like before?” You wait until it’s maybe a little dusty still and you’re in the final stages. That’s weeks before it’s going to get to a close anyway.

If you incorporate this into your methodology as a real estate investor and get this process started, it’s not going to delay you at all, number one. Number two, you’re coming in with somebody who’s better qualified. What the heck is wrong with that? If somebody’s not willing to go through a qualification process, is that somebody you want to seller-finance with anyhow? That’s a lot of what investors need to do. Go ahead. 

A lot of my takeaways, having nerded out on some of the rules, is if you look at what’s required by Dodd-Frank and for compliance and ability to repay, all of that is stuff that I would want to be doing anyway to de-risk the loan. I don’t find anything onerous there. To your point, if you build that in as part of your process and you plan ahead, it’s no biggie. If you wait until the last minute and then you’re like, “Let’s do this now,” then that might tack on some time and heartache at the end. It’s not that difficult to comply with. People make more out of it than what it is.

You took a deep dive into this. This is something you mentioned at Noteworthy when we chatted. It dawned upon me later on. I said, “He took a deep dive into this,” but the lens you look through, though, was somebody who’s had a fund, an experienced note investor. Fusion Notes, right?

Yeah.

It’s different from somebody who’s coming from a compliance or a mortgage background, looking at that versus someone like yourself. If you’re putting together a fund and everything else, you have regulations. You have to do it the right way. Why? It’s because of the law, and secondly, because you want to protect yourself. You, with that mindset looking into this, probably looked at it quite differently than someone else. What were some of the things that you discovered?

The first thing when I started diving into it, I assumed that the ability to repay requirements would have hard black and white lines. I was expecting to see, “Your debt-to-income needs to be X percent and the credit needs to be whatever.” I was fortunate enough to have a conversation with a guy here in Colorado who helps mortgage brokers and lenders get set up. He helped create a lot of the state-specific mortgage rules here in Colorado. For some reason, they do this thing where there are national rules, and then every state puts their personal spin right on it.

What he explained to me was that the way it works is that it’s defined in a nebulous way. You have to make sure the borrower can repay the loan. Every lender is expected to create their own standards for what that means, and then stick to those regularly and then adjust them if they start to see a high default rate.

Every lender is expected to create their own standards. They stick to those and regularly adjust them in case they see a high default rate. Click To Tweet

At first, I had a lot of heartburn with that. I was like, “That’s so nebulous. How do you know if you’re good?” Having gotten into it more, I think that makes sense because you’re going to have lots of different scenarios. You’ll have different types of properties like land versus high-end homes, versus other ones. You’ll have differences in region and country. Market conditions and interest rates are going to fluctuate over time, so the ability to repay is going to be a moving target.

If they had set a hard bar, then they would’ve landed in a spot where you’d have a lot of scenarios where they don’t make sense and where the hurdle is overly conservative. They’d also have other scenarios where the bar is too low. What we do at Call the Underwriter is use some of the benchmarks from some of the federal programs for things that we use. Lenders ultimately, though, have discretion on where they want to set the line on debt-to-income, credit, and other things.

The balance point is that the government can’t stifle seller-financing because then, there is a percentage of people who won’t be able to buy. They can’t completely shut it down, nor do they want to, but they want to have some regulations in place where investors are not taking advantage of people. I always jokingly say, “You have to show they have the ability to pay. What the heck does that mean?” They have to keep it loose like that because if they make it too strict, you’re losing an avenue that some people can buy.

Why And How To Do Seller Financing

Let’s face it. Seller-financing can be used with anybody. We did a note one time. This was years ago. The borrowers were husband and wife. One was a judge and the other was a cardiologist. I can’t remember which one is which. It doesn’t matter. Their credit scores were 800. You were like, “Why would they want seller financing, which typically is at a higher interest rate?” They didn’t want to deal with it. They’re both busy people. They said, “We’ll do this and maybe we’ll refinance down the road and move on.”

Most of the people who use seller-financing, either number one, don’t like banks, don’t like to work with banks, and don’t want to go through the minutia, or they simply can’t meet the guidelines of what a bank is looking for. It’s either intimidation of the process or avoidance of the process, or, and you can correct me if I’m wrong here, they simply can’t fit the same guidelines as a bank, and seller-financing is the avenue that they choose. Is that your experience?

Yeah. The bank guidelines are tough to hit. One of the interesting things to me is that they put the ability to repay rules in place after the financial crisis, when banks were doing all sorts of insane things in the early 2000s. Lawyer rules, lawyer loans, no income, no jobs, and all this stuff. The government said, “You’ve got to have a minimum bar.”

What’s interesting is that in the time since, banks have become, for various reasons, much more conservative. Their standards are way above the minimum, and then that white space in between is where a seller-finance plays. There seems to be a growing gap between them. The other thing that happened was when they defined those rules, part of the compliance rules is that there are limits on the fees you can charge borrowers. It’s not like hard money lending. You can’t say, “I’m going to have six points and repayment penalties.”

 

There’s a limit on the fees you can charge as a percentage of the loan balance. Generally, if you go over about 3%, you get into illegal territory. Less than 2% is best practice. A lot of times, too, if it’s a lower value loan, if it’s a $150,000 sale, banks have certain fixed costs below a certain level. A lot of times, they say it’s not worth their while to mess with because they’re limited in what they can charge on loan origination and that kind of thing.

That’s another great point. I did a whole presentation on that years ago. I said, “A lot of the loans that we see are Midwest and Southeast.” For my audience, which is scattered throughout the United States and even overseas, a typical home of a good working class, 3-bedroom, two-bathroom, 1200 square feet somewhere in Ohio or Indiana, that’s around $80,000. It’s shocking for a lot of people who are from California and New York. You couldn’t buy a dog house. I get it. That’s why we work in these areas.

If you went to Bank of America’s website or Wells Fargo’s and looked at their loan minimum, it’s about $80,000. They won’t do anything less than that because they lose money. That’s the thing. That’s where a lot of banks opted out of the community rule. If you wanted to do loans in this area or in this state, you had to set aside a certain amount of money for lower-income loans.

They lose like crazy on those loans, so a lot of those banks ended up saying, “We’re not going to do that. We’re not going to lend in those areas.” That’s where the non-banks crept into that. These voids created by the rules and regulations of which seller-financing is a part are a very real deal, especially in these so-called lower price ranges. For an $80,000 home in Ohio, everybody is a completely different thing. It’s a nice home, but you can’t get bank loans on it. They can’t make money. How are they going to get the loan? Through seller-financing.

I’m talking with Dan Depen here. The company is called Call the Underwriter. You can go to CallTheUnderwriter.com for more information. We’re talking here about doing loans from a business to consumers. If you’re doing hard money loans and you’re a company, and you’re lending to an investor who’s a company, an LLC, or what have you, Dodd-Frank rules don’t apply because they look at business people and say, “You should be an expert in your field. You don’t need our help.” The government does look at this as, “If you’re a consumer, you don’t know enough about anything. You need our help.” That is what we could break that down to.

Automating The Entire Process

What we’re talking about is these loans that we’re doing as a business to a consumer right away. I wanted to point that out to everybody. It’s a smart thing to do. How are you automating the process? We started talking about whether this is a drag on time for an investor. The answer is no. You put it in your system and you won’t even notice it. It’s done in time. You’re working on some things to expedite the processes as well. Is that correct?

Yeah. I’m trying to make it easier. It’s a work in progress. It’s a work in process. It’s like a giant elephant. I’m taking little bites at it every day. Traditionally, these processes have worked for RMLOs. It tends to be one person going back and forth in their email box with a bunch of files and maybe a spreadsheet, and then their loan software to try to keep track.

I’ve been building a lot of stuff on Zoho CRM. Part of that is having standard FAQs and responses to people and doing things to educate people ahead of time on the common questions so they know what to do. It’s setting up some pretty simple workflow automation. When someone submits a deal to us, they get an email back with instructions, “Here’s what you need to do next.” They’ll get the initial invoice back right away. It’s things like that to try to streamline the process.

There are two of us underwriting files. There, hopefully, should be three here soon. We are setting up some backend systems so that multiple people can work on the same file if needed. You can keep it straight and keep things moving. One of the things I’m trying to do is try to make it so that having a file move forward is not dependent on one individual who may get sick or have something going on. I want to have this thing where we can always have somebody on call to keep things moving along in the process.

Underwriting is one of the things that attracted me to buying loans because it works the same way. Even though every loan, in some ways, is its own special butterfly, they lend themselves to rinse-and-repeat processes. I did a similar thing for buying loans. I’m sure you’ve done it way beyond what I have where you know, you know the property value, the loan balance, the loan terms, and different characteristics. You can put that into a model and figure out what you need to do. They’re all different, but you can build a system and then rinse and repeat.

Even though every loan in some ways is its own special butterfly, they lend themselves to a rinse-and-repeat process. Click To Tweet

What you’re probably running into is a two-way street. You could completely automate this program, but the problem is sometimes, the consumers are like, “That’s all well and great, but I don’t have a computer or I’m not as savvy on a computer as I can.” As much as you could automate something, you still have to keep it very tactile with some people, simply because they may not have the computer skills necessary to jump on and follow through.

I could envision a little system of, “Here’s where you are in your account. Log in with your password.” Not every consumer is going to be as adept at that as needed to be. Sometimes, a language barrier may come into play there as well. Investors who are tuning in to this program, understand that this is a part of your new process, or it should be. Get it where it’s in your overall checklist. Get this thing started, but set your borrowers up immediately on, “Here’s what you can expect.”

Maybe you have handouts or something. Maybe you don’t. You can let us know in a minute. Maybe you have a package that an investor can say, “Get started on this. Start to fill this out. We’ll have the Call the Underwriter contact you and follow up. This is important. Get this done. Start looking up your taxes. Get your paperwork set up. It will make this process quicker.” That’s what it’s going to take sometimes, is that investor pushing that consumer to do it. I’m sure there are going to be some times where consumers are like, “I can log in. I can do all this. I can upload the documents and make it all easier.”

It’s a mix. The majority are okay. I’ve turned a lot of the forms that the borrower has to fill out into online forms that we can move right into our CRM. It has eliminated a lot of this manual. In the beginning, I was getting emails from people with like nine cell phone photos of a loan application that you’re manually transcribing. Some still do need help, and that will always be the case. That percentage is probably a little smaller than I would’ve guessed.

The number one request I was getting was a request for a native Spanish speaker to get on the phone with some of their borrowers. I’ve got that part-time. There’s a checkbox on the intake form, like, “If you think you need that, I can have Carlos reach out to the borrower,” and he’ll help them right through the process. It will never be 100%, but better than 0%.

Eight Elements In Determining A Person’s Ability To Repay

Even taking the forms and making them where you don’t have to take information, reload them, and all that is a great step forward on this. You’re based out of Colorado. The company is based in Colorado. Could you do business nationwide, or are there some states that prevent it?

We can do it nationwide. We’re an underwriting service that helps the lender. The lender is originating the loan. You can originate up to three loans in a year without an RMLO license. That’s how most of our clients do it. I acquired the company an individual RMLO license for Texas. If you’re in Texas, we can do as many as you want. I should have the Arizona license here shortly. Once we get that up to speed, we’ll be looking at additional states, mostly around the Southeast. Texas, Arizona, Florida, Georgia, and the Carolinas are some of the hotspots for seller-finance.

On a breakdown as to qualification, there are eight required elements that you look at. What are those elements that you look at with the ability to repay?

I can’t list all eight on the fly, but I’ll give you the overall process. The first thing we need to understand is where the borrower’s income comes from. Do they have a W-2 job or are they self-employed? A lot of borrowers are on social security or VA benefits. You want to understand the stability of that, like how long they have been doing it, and then you want to get that income documented.

If they’re a W-2 employee, it’s generally a W-2 and a couple of recent pay stubs to verify what they’re earning. If they’re self-employed, those are a little trickier. We generally want to get twelve months of bank statements. Those are a little more work because you have to comb through there. Sometimes, people co-mingle business stuff and personal stuff.

It’s also good if we can get the previous year’s tax return from them. That gets tricky because, depending on the type of business, a lot of times, tax return understates the actual income, depending on what they’re doing, especially if it’s something where they can claim depreciation and things like that. If they’re doing social security VA benefits, then we want to see their award letter. We’ll do a soft credit pull on them and look at their other monthly obligations. We’ll look at the terms of the loan, like what the PITI is and what the other monthly payments they have are, whether that be auto loan, credit cards, and things like that.

We look at their total monthly debt bill and their total monthly income and figure out their debt-to-income ratio. We use 57% as the benchmark, which comes from FHA. I believe other lenders like to go lower down in the forties. You theoretically can go higher than that. Personally, I would not feel comfortable at a 57% debt-to-income ratio. If I were buying a house and it was putting me at 57%, I’d figure out something else. I wouldn’t want to go there.

In case you’re newer to the business, a 57% debt-to-income ratio means 57% of their money every month is going towards paying for the house. If something goes wrong and they miss a week of work or whatever, it’s a lot.

We look at their credit. We look at their credit score. 620 is our benchmark, but that’s another one where different lenders have different standards. If they’re below that, we mitigate that.

FHA is going as low as 580, too. It’s crazy.

I’ve seen some scary credit reports. I pulled one. I’ve seen one that was in the mid-400s, which I didn’t even know was possible. In that event, it’s not necessarily disqualifying, but then we like to get a verification of rent letter from a landlord saying, “This person paid their rent for the last twelve months.” If we can ascertain that they’ve made their housing payment on time for the last twelve months, and oftentimes, their rent payment was higher than their new mortgage payment, then that can be okay. Some of the red flags that can be problems would be recent bankruptcies, foreclosures, and things like that. If they got 60 days behind on their mortgage in the last year or two, that’s a rough one. If they weren’t paying on time on the regular mortgage, then that one can be a challenge as well.

It doesn’t say anything about credit. It’s more the ability to pay.

It’s weird. They include credit and what are their eight elements of ability to pay. To me, though, that’s not an ability to pay. That’s more like a willingness to pay, a lot of times.

Some people lost their jobs and went bankrupt. They’re working their way back, and they can afford it.

Those are the main things.

Where’s the income coming from? How much is the income? What does the credit look like? These are among the eight things that you’re looking at. Speaking of credit, other than social security numbers, what else can you take for credit?

We can also take ITIN numbers. The requirement is that we have to be able to pull credit. You can do that with a social security number or an ITIN number. You’ve got to at least have one.

What’s the ITIN number, for everybody?

I forget what it stands for, but it’s the one where they’re paying taxes, but they weren’t necessarily born in the US is the way I think of it.

If they don’t have a green card or something like that, then they’re not going to be certified.

It’s a misconception. Sometimes, people think they can’t qualify as a borrower because they have an ITIN, but you can. I’ve seen some where they’ve had a green card and a green card number but no ITIN. We can’t use that because we can’t pull credit off a green card number.

With the ITIN, you’re here and you’re paying taxes, but not quite a citizen. Texas is a big state for seller-financing. I’ve seen that on other stuff. Notes have been great with that.

There are a lot of lenders that almost specialize in that kind of borrower because they tend to be very sound borrowers for the most part.

How Call The Underwriter Works

There’s a cost to this service. If I’m the investor that hires you and I’m your client, I’m going to have to pay you, not the borrower, but a lot of times, we can pass that expense to the borrower. Explain how that works.

The short story is that it’s free for you. This is seller-finance, so it’s a little different than the traditional mortgage world. In the traditional mortgage world, the consumer goes to a mortgage broker and they say, “Find me a loan,” and they go shop for loans. This is the opposite. You’re starting with the lender. They’ve got a house they’re selling and they have loan terms, and then they’re finding the consumer.

 

We work on behalf of lenders, and because we work on behalf of lenders, we can’t collect money from consumers. If you think about it, let’s say a consumer came to us and paid us money, and then the lender said, “I’m not giving you the loan.” The consumer’s going to complain like, “What kind of scam is this?” That’s not going to be good. The lender has to pay Call the Underwriter, but then what the lenders always do is they include it as one of their closing costs when they close, and then they get reimbursed by the borrower.

The way we do it to keep the incentives right is we invoice it in two steps. The fee is $799, but the lender gets invoiced $149 when they start. Sometimes, we get into these files, and you find out the borrower is not going to work out. We do it that way so that if the lender does have a bad borrower, they’re not out to $799. They’re out to $149.

One of the things I always highly encourage people to do for a variety of reasons is to pre-screen their borrowers. If you have a short conversation with the borrower upfront, you’re going to identify 90%-plus of problems upfront. That also provides a little bit of an incentive for the lender to do that pre-screen process. Once we get through the underwrite, everything’s looking good, and we’re ready to send out the loan estimate, then we invoice the lender for the remaining $650, and then they get reimbursed by the borrower when they close.

With the pre-screening, what does that look like? Your website is called CallTheUnderwriter.com. Everybody, you can go to that website. If you scroll down to the bottom, you’ll see that there is a prescreening worksheet that you put together. If you could, outline what a prescreen worksheet is.

I’ll explain what it looks like, but first, I’ll explain why it’s so important. It’s one of those things that’s sneaky. It’s not always obvious upfront. The scenario you’re avoiding that I’ve seen a bunch of lenders get into is that they don’t prescreen the borrower. They go under contract. Maybe this whole process takes a couple of weeks to go through, so they’re into this for a couple of weeks. They get to the end, and then they find out, “This borrower’s not very good. This loan might flat-out not be compliant,” or, “This is a pretty sketchy borrower.” They then have this ugly choice. Do they roll with the bad borrower, or do they start over in the process? Time is money. People are hesitant to start over.

When you don’t prescreen and you find out the borrower’s bad later, people get painted into a corner. That’s why it’s critical that you do that. The prescreen process is pretty easy. There’s a one-page guide on the website. You’re having a short conversation with the borrower and asking them those questions about, “How much income do you make? How much are you making every month? Can you document it?”

There are a lot of people who do under the table stuff. They have plenty of money, but it’s not documented. You can’t do anything with that, unfortunately. You want to ask them about red flags, like bankruptcies, foreclosures, and whether they have been late on mortgage or rent payments. 95% of the issues you’re going to be able to suss out right then and there. It’s pretty simple.

That’s smart. On your site, there’s the doc on there. It’s maybe eight questions, everybody. It’s not difficult. If you’re doing this right and you have several people who are interested in the property, I could even see you handing this form out and saying, “Give us the answers to the following questions,” and that weeds out some people right there. It could be a big time saver. You had a spreadsheet on there too.

If you want to do some back-of-the-napkin debt-to-income to figure out if they have enough income, then you can download that and use that. It’s nothing fancy. That was something that people asked me for, so I threw that up a while back.

When I’m looking at notes, my methodology is to keep it simple and not waste time. I look at 3 formulas or 3 ratios when I’m performing notes. If those ratios don’t meet, I’m moving on. It’s very simple. The debt-to-income, because the ratio is so important to this, seems like a logical, simple screening thing to take a look at. You may not even need a spreadsheet if you learn the numbers. You can do the quick math on it and say, “You make this. Here’s what your payment would be on the loan,” and run the numbers. If they can’t meet it, you’re not wasting your time with that particular borrower.

Dealing With Potential Penalties And Most Common Mistakes

I’ll switch gears here. As a note investor, we look at a lot of these notes that people are creating. Believe me, when I’m going through a due diligence folder and I see Call the Underwriter documents, because I’ve seen them so many times, I’m like, “This one’s been done by Call the Underwriter. I’m in good shape here.” I don’t have to go through all of those files. You’ve done that. I look back, “Did this person approve that?” That goes a long way with not only me, but everybody I teach in the business.

There is a difference between someone who’s gone through that process and someone who doesn’t. Part of our job in buying these notes is forecasting what’s most likely or least likely to happen in the future. If I see somebody who’s gone through this process, I understand without having to go through the document.

You saved me time. I see that and I’m like, “Good. Moving on.” I then look at the quick payment history and go, “They’re going to continue to pay. They’ve been pre-screened. They’re in good shape. As long as we don’t have unforeseen stuff, like the loss of a job or income, divorce, and that kind of thing, and they continue to pay, then everything’s going to be great.”

If I had two notes and everything was identical except one was Dodd-Frank certified and one was not, guess which one I’m going to buy? The one that’s been screened. We didn’t talk about penalties. I don’t want to leave on a negative note. If you understand what the penalties can be on some of these deals and you don’t do it the right way, they can be pretty severe.

I’ve never heard of anybody going to court over it. I haven’t heard of any court cases where this has been enforced. I’m not trying to scare everybody, but it’s something that we should be aware of. If you do a loan with a consumer and they, up to three years, end up defaulting and they lawyer up and say, “They never certified me. I never qualified. They set me up for failure,” there are going to be repercussions on that.

There are no limits. They could do that whenever. I’ve done a lot of looking at the court cases where the CFPB and State Attorney General have gone after people. When they go after people specifically for not originating loans right, it tends to be larger players doing objectively terrible stuff at scale. If you create a one-off note, you’re not going to have a SWAT team in your yard even if you did it all wrong.

To your point, the one that will get you is the one where the borrower defaults typically early on. You start foreclosing, and then they fight it and say, “This guy was a predatory lender. I never had the ability to repay.” In which case, the judge will ask you, “Did you send out all the disclosures per trade? Did you validate the borrower’s ability to repay?” If you’ve got this whole underwriting package, say, “No, we did all this stuff. Here’s all the data.” You’re good. It’s very simple. That’s where it protects you from the downside of having a non-compliant loan.

The other scenario that’s way more common is if you’re going to resell the loan because the potential buyer of the loan is going to want to see that. A lot of people won’t make an offer if you don’t have it. It’s going to be easier to sell, and it’s going to sell for quite a bit more if you have that. That’s the main benefit of it.

I agree with you. The legal penalties are going after the big players. The old Harbor case was based upon that. This is all public record, so I’m not talking out of school. You can Google search it. It’s pretty widely known out there. They were taking these houses and weren’t quite fixing them up at all, sometimes not at all.

The first person who comes along with $500 or $750, they do seller-financing for them. They were doing this on a large scale. That becomes a target because you’re doing that. If you’re a consumer and you’re doing this on a smaller scale, there’s no Dodd-Frank police that are looking for what you’re doing. I don’t want to scare you in that fashion.

After hearing all of this, your takeaway should be, “If I’m creating loans, why not have a qualified person?” 1) It’s smart, 2) You’re staying compliant, so you don’t have to worry about those issues down the road. It’s adding value to your note. Those three reasons alone are reasons enough in my mind to do it the right way. As a note investor, we can buy notes that have this or do not have this, but I certainly give more credence. Believe me. It is something that when I see that in a folder, I’m like, “Yes.”

You don’t have to pay for it. The borrower pays for it. It’s nuts not to do it.

It’s $799. Split it with them then. Ultimately, the investor’s collecting back from the borrower. If you want to split it to them as being a nice guy or pass the whole cost along, that’s up to you and your business model. The benefits far exceed $800 or whatever it costs. Let’s face it. If you were a landlord, I would hope that you would do a screening process for your tenants. You hear landlords with horror stories go, “I should have screened them better.” It’s like, “You think?”

It can be a nightmare. I’ve bought a lot of non-performing notes over the years. I’ve had easy foreclosures and hard ones. Even if you’re in a non-judicial state, it doesn’t always go the way you think it is. Borrowers will file for bankruptcy to drag it out. It was a one-off. There are all kinds of stuff. Sometimes, people sell it as, “You foreclosed. You’ll get it back.” Sometimes, but not always. That option can be nasty.

As you said with COVID and all of that, what judge wants to put a person out of their house? We don’t want to put people outta their house, but they can’t stay for free forever. That happens. We should be doing everything we can to put in the best possible person who can’t afford it. They’re happy, we’re happy, and everybody moves on.

I’ll call out another quick couple of things not to do that I see people doing. You mentioned earlier. If it’s an investor loan or LLC buying it, Dodd-Frank doesn’t apply. Dodd-Frank applies when it’s owner-occupied. Sometimes, people go, “I’ll make an LLC, and the LLC bought it, and you’ll live there. Like, you’re deep into fraud. You can get into serious trouble if you’re doing that.

The other thing you see people doing, and some people teach this, is, “When you create the loan, have the borrower sign a deed in lieu, so if they default, you don’t foreclose. You record the deed in lieu.” Number one, it’s sketchy as hell. Number two, the deed in lieu is effective from the date they signed it. If you collect payments for three years and then try to enforce the deed in lieu, then technically, you need to give the borrower all that money you took from them because the thing is off. That can get nasty as well.

 

I got to look into that. It’s not the date of recording of the quick claim if you file it.

I had someone look into that for me. I’m pretty sure that’s correct. Somebody who runs a nationwide closing company was telling me that a lot of states are disregarding those. If somebody signed a deed in lieu at the time that they closed, they go, “Sorry. Tear that up.”

Especially if the person has created equity in the property and made a lot of payments. They’ll make you foreclose anyway on stuff.

It’s predatory. It’s not good.

There’s been a safe way to do it. I’ve even had an attorney okay it in the past. It’s not common practice. It’s like a contract for deeds. A lot of people will do these things on contract for deeds where the lender is on the title to the property. They have the legal title, not the equitable title. I tell everybody, “Still understand that you might have to foreclose.”

Everybody thinks, “It’s an eviction.” It could if the state has a state specific law that says that it should be that way. A judge could overrule that, or it’s in a state that doesn’t recognize those kinds of arrangements, or the judge can go either way. Most judges in states that are in question about contract for deed law are going to side in favor of the consumer. Give the consumer at least a chance during the foreclosure process to somehow come up with the money, or have you guys work out some kind of arrangement there. 

A lot of states are down on contract for deeds. Some people have used them for bad behavior. Harbor was one. I see a lot of people creating them as part of subject-to deals. They want to do a land contract and not record it to try to avoid triggering, “Do you want a sale?”

There is some leeway in this business, but it goes back to what I first started with. If you do stuff legally, morally, and ethically in this business, and that includes the compliance issues, you’re never going to run into problems. It’s when you start to skirt too many corners. I’ve seen people make mistakes when they buy a note. That’s when it’s made. I’ve seen people do this all the time and go, “I did it like this.” I say, “It’s fine as long as everybody’s paying. It’s when they don’t pay and you go to foreclose that they go way back here and now, you’re in trouble. You could’ve prevented it.”

It’s a numbers game. If you’re doing a one-off, you’re probably not going to see a lot of these problems. If you do 100 of them, you’re going to see all kinds of weird one-off things. Back when I worked in aerospace, a friend of mine was doing this contract with Boeing. We were a smaller player. They didn’t like part of this one design. The guy was like, “We’ve flown six of these in space. We’ve never had an issue.” The Boeing guy was like, “We’ve flown 350 and we have.” Hopefully, you’re scaling this stuff up. If you do enough of these, those little corner cases eventually get you.

Seller financing is a numbers game. If you are doing a one-off, you will probably not see a lot of the usual problems if you do a hundred of them. Click To Tweet

Episode Wrap-up And Closing Words

100% agreed. Time flew. I could go on with it. It’s a great, interesting topic. We’ll have to have you back on and talk about regular notes and such as well.

Anytime.

Thanks, everybody, for tuning in. If you’re looking for me, go ahead and shoot me an email, Kevin@KevinShortle.com. I can send you a link for a 30-minute phone call, no charge, to talk about the business if you’re interested and see if I’m a good fit for you. I’ve trained more people in this industry than anyone and work directly with people one-on-one.

It’s a great program where there is a true mentorship. If you’re interested in that and follow up, let me know. If you have some guests you’d like me to have on the show, please let me know that as well. Any other comments that you have, please send my way. Dan, thank you once again for being on. CallTheUnderwriter.com is the website. I appreciate you being on. It was great to see you.

Thanks for having me on. I appreciate it. I’ll do it again soon.

Are you going to Nashville?

I will be in Nashville for DME.

I’ve committed to Nathan to do that. I’ll be out there for that conference as well. It was good to see you.

It was good to see you, too.

Thanks, everybody.

 

Important Links

• Dan Deppen
• Fusion Notes
• Fusion Notes on YouTube
• Kevin@KevinShortle.com

 

About Dan Deppen

Dan Deppen is the owner of both Call The Underwriter and Fusion Notes, companies that helps investors originate seller finance loans and make mortgage note investing accessible to individual investors.

As a former aerospace engineer and product manager, Dan transitioned to full-time note investing in 2018, leveraging his expertise in product strategy, marketing, sales enablement, and business development.

With a background that spans cross-functional team leadership, creating comprehensive product roadmaps, training global sales teams, and forging strategic partnerships, Dan brings a unique perspective to the world of real estate investing.

 

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