New Down-payment Funding Idea Draws Regulators' Attention
Take one recent home sale that nearly derailed when the potential buyer discovered a lien barred access of funds for the mortgage down payment. The sale did successfully close thanks to a program, known as "DpFunder."
DpFunder works this way: The potential home buyer signs on as an independent contractor with Global Direct Sales LLC, Gaithersburg, Md., a marketing company.
The person who wants to buy the home sells a membership in "Owners Alliance Inc." to the homeowner. Owners Alliance Inc. is a for-profit company, with a Washington address, likened by salespersons to AARP.
A homeowner advocacy organization, Owners Alliance says it provides a host of services and discounts, such as access to home repair contractors, tax advice and savings on eyewear, dining and legal services. Its co-founder and president, Christopher Russell, was co-founder and former CEO of AmeriDream Inc., Gaithersburg.
Under the DpFunder arrangement, the property seller signs a property enrollment form, agreeing to purchase an Owners Alliance membership for a term ranging from three years to 20 years. The term is based on the agreement between home buyer and home seller.
The home seller also agrees to assignment of funds, which allows payment for the membership to be deferred until settlement.
The home buyer signs a document allowing Global Direct Sales to pay him or her as an independent contractor, a W-9 form for the IRS and an authorization form allowing Global Direct Sales to deposit money from the commission in an FDIC-insured account it sets up in the home buyer's name.
The home buyer, at settlement, gets a commission, ranging from 3% to 10% of the home contract sales price, direct-deposited into an FDIC-insured bank account. The commission is based on the membership term.
Global Direct Sales earns its commission from Owners Alliance. The home buyer's commission must be reported on IRS Form 1099 and is taxable. But it may provide the buyer with funds for the down payment.
An example posted online, confirmed by John D. Wyatt, president of Global Direct Sales LLC, indicates that the home's sale price may be higher in the transaction than it might otherwise be. This, even though the seller gets a similar amount at settlement.
That's what has regulators concerned.
Beware 'exotic arrangements'
Kevin Petrasic, managing director of external affairs for the Office of Thrift Supervision, warns that savings institutions had better make sure such arrangements are consistent with sound underwriting practices.
"If it's making the property more expensive," he adds, "I don't think that's a good deal for the consumer."
Petrasic says that on completed transactions, there probably would be no repercussions for those involved. But a savings institution participating in such a deal may be criticized in an examination for its loan underwriting.
"Home buyers should be wary of any exotic arrangements relating to obtaining a mortgage," says Lemar C. Wooley, spokesman for the U.S. Department of Housing and Urban Development.
The Maryland Attorney General's office reports no complaints about the program.
But Raquel Gillory, its public information officer, says the practice could raise the question of a possible illegal pyramid scheme. With pyramid schemes, fraudsters typically use money from new recruits to pay off early stage investors. Funds eventually dry up, stiffing future participants.
Global Direct Sales' Wyatt counters that even if his company went out of business, the Owners Alliance benefits, paid at settlement, would be accessible to the homeowner. Also, he says, if somebody cancels or the real estate deal dissolves, there is no penalty.
"It's very similar to a buyer going to a seller and saying, `I'm interested in the house, but need you to buy me a home warranty,'" he said. A home warranty is a private insurance program that protects home purchasers.
As for the higher sales price on the property than the buyer might otherwise pay: "The listing price has not changed," Wyatt stresses. "The buyer, instead of beating up the seller on price, pays the full list price, but asks the seller to participate." Most commonly, he adds, this arrangement is negotiated as part of a home sale and is noted on the sales contract.
"They're buying a membership to increase the value of the house because the buyer has requested that they do it and because the buyer wants access to the membership...We recognize people buying a home are in a great position to sell a membership to the seller."
Since Wyatt's company began selling memberships in February 2006, it has sold close to 1,300, he says.
There are other companies with similar programs, Wyatt acknowledges. But others may be hiding seller concessions to the buyer under the guise of a consulting fee. Forgiveness of a loan at settlement also can be problematic, he says.