Compass Newsletter - Articles

New Law Creates Many New Requirements for Sale-Leaseback and Sale-Repurchase Agreements

By Daniel J. Rice
(Winter 2008-2009)

In passing the Mortgage Rescue Fraud Protection Act, the 2008 Oregon legislature highlighted the need to crack down on con artists and unscrupulous foreclosure consultants. But even though you or your client is probably not a con artist, the new law creates many new requirements to consider before entering into fairly common real estate transactions called “equity conveyances.”

The new law, which went into effect on March 11, 2008, defines an equity conveyance as a transaction in which a purchaser obtains title to a residential property and allows the seller to possess the property during or after foreclosure. This type of transaction is known in more common terms as a sale-leaseback or sale-repurchase agreement. In the transaction, the seller transfers title to the home but either rents it back or buys it back from the purchaser.

To help prevent fraud in equity conveyances, the Mortgage Rescue Fraud Protection Act, passed as House Bill 3630, creates many substantive and procedural protections for homeowners. Anyone considering entering an equity conveyance contract should pay close attention to the new requirements; violations are a misdemeanor punishable by up to a year in jail, a fine of as much as $10,000, or both. The list of new requirements is lengthy, but some of the main ones include:

Written Contract Terms and Right to Cancel The new law requires that all equity conveyance contracts be in writing and that the homeowner receive a copy of the contract at least 24 hours before signing. The homeowner is entitled to cancel the contract by the earlier of either midnight of the third business day after signing the document purporting to transfer title to the residence or a foreclosure sale.

An equity conveyance contract must provide notice of this cancellation right, as well as instructions on how to cancel, using language and a format provided for in the new law. Further, the written contract must set forth in full all terms, including those that allow the homeowner to remain in the home after conveying away title. Finally, when a purchaser records an equity contract, the purchaser must also record a memorandum of agreement in a format provided for in the new law.

Verification of Ability to Repurchase or Leaseback One of the most burdensome duties of the new law is the requirement to verify that the homeowner can reasonably afford to repurchase or leaseback the home. This requirement appears to respond to the concern that struggling homeowners are enticed into sale-repurchase or sale-leaseback arrangements with terms that make the resale or leaseback virtually impossible.

The new law creates a rebuttable presumption that the homeowner can reasonably afford to pay for the reconveyance if the homeowner’s “primary housing expenses” under the contract and monthly payments on personal debt do not exceed 60 percent of the homeowner’s monthly gross income.

Equity Recapture Homeowners who sell their property in an equity conveyance are also entitled to a portion of the proceeds if the equity purchaser resells the property within 24 months. In such case, the homeowner is entitled to 82 percent of the equity “recaptured” by the sale.

Other Prohibited Conduct The new law also prohibits the equity purchaser from making several types of misrepresentations, including stating that the purchaser is assisting the homeowner in avoiding foreclosure unless the terms of the contract provide for the complete redemption of title by the homeowner.

Potential parties to an equity conveyance contract can contact a lawyer in our office for advice on complying with these and other requirements contained in HB 3630. Careful attention to the new requirements could spare you or your client a hefty fine—or even a jail sentence.