Ensuring Regulatory Compliance in Your RE Operations

April 14, 2018 by Allen Shayanfekr
regulatory compliance

If you want your business to continue without any hindrance from local and federal government agencies, it’s best to keep any eye on regulatory compliance issues and your operations to maintain adherence to administrative policy. Penalties for non-compliance can range from fines to injunctions that have the potential to put your business on hold, or worse. Here are some of the most common concerns that our investment partners ask us when considering the legal and regulatory status of their own investment holdings and businesses.

Consumer Financial Protection Bureau & Dodd-Frank

What is the CFPB and how does it affect my investments?

The Real Estate Settlement Procedures Act (RESPA), passed by Congress in 1974, is intended to protect consumers from unscrupulous financial practices. The Act applies to residential properties with 1 to 4 units and created new disclosures to help borrowers fully understand the terms and true cost of financing. The legislation also imposed restrictions on referral fees, kickbacks and any other compensation that is not earned. RESPA’s regulations are now superseded by Dodd-Frank and the Consumer Financial Protection Bureau (CFPB). The authority of the Federal Reserve to create regulations was transferred to the CFPB in 2011 by the Dodd-Frank Act. Truth in Lending Act of 1968 (TILA) regulations were also replaced by CFPB rules.

What is the law regarding land contracts and making private/seller loans?

The regulations are complicated, but the key purpose is to protect borrowers. In recent years, the CFPB began investigating investors that were using the land contract and seller financing models. The investigation was prompted by complaints that investment organizations were using these financing models to sell overpriced properties to homeowners that would most likely default. The new regulations restrict the terms under which these forms of financing can be employed. Regulations consider loan to value, loan to income, and other potentially predatory tactics. Before proceeding with seller financing or writing a land contract, consult with a real estate attorney.

Zoning and Code

How does zoning affect my investments?

Zoning is a police power that is afforded to local governments under common law. Zoning is a tool used to control the usage of land within a subdivision. The primary intention of most zoning regulations is to create favorable economic and environmental conditions. Zoning helps eliminate nuisances that disrupt the quiet enjoyment and use of a property. It also supports the economic benefits of grouping similar types of usages and business together.

Will re-zoning force me to sell the property or change the current usage?

In most cases, new zoning will have limited impact on current usages under the concept of ‘grand fathering,’ a practice recognized in most jurisdictions. In the event that zoning changes threaten the current usage, appeals can be filed with the zoning board to request an exemption or repeal. This is important to consider and investigate during the due-diligence phase of pre-investment research. It is unlikely to prevail against changes in zoning, and over the long-term, obsolete usages will lose value. In these cases, it can be best to pursue an early exit strategy to avoid further losses.

How do green/sustainability/safety codes affect investments?

When you’re acquiring, renovating, and reselling income properties, numerous water, energy, fire, and disaster safety codes will apply to your project. These regulations protect the environment and human health by ensuring the safety of the structure, both in terms of construction to withstand natural disasters, and in the use of low VOC and sustainable materials. A particularly important regulation for residential investors is the Lead Based Paint Act that requires the disclosure of the potential presence of lead paint in properties built before 1978.

Equal Housing and Credit

What equal/fair housing and credit laws apply to residential investment properties?

The Fair Housing Act of 1968 passed anti-discrimination laws that applied to the sale and rental of residential properties. It includes protections for homeowners and renters on the basis of ethnicity, nationality, religion, gender, and familial status. It provides severe civil penalties for violators and had a tremendous positive effect on discriminatory housing practices. To maintain compliance, it’s vital to provide proper training to all employees and third-party property managers. A lack of proper training can result in a claim of negligence that can potentially support civil proceedings.

What are the penalties for discrimination?

When discrimination occurs, the injured party can file a claim with the Department of Housing and Urban Development (HUD). After HUD approves the claim, an investigator is assigned to collect information and review the facts of the case. If cause is found, civil charges can be brought in the U.S. District Court. If the court rules in favor of the plaintiff, fines can range from 20k to 100k depending on the number of previous offenses. The best way to avoid claims is through discrimination awareness training and policies instituted at all levels in the organization.

More Regulatory Compliance Questions?

This is a deep topic that can raise many questions. For direct assistance with your most urgent questions, reach out to our team of experienced real estate investment and finance professionals that can provide answers or direct you to the guidance of the appropriate professionals. With the high-dollar and operational ramifications of regulatory violations, research and pre-planning for proper education and organizational policies is critical.

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