Commission Cracks Down on Firms Offering Illegal Leases, Credit Repair

The Commission recently investigated and disciplined two licensed real estate firms following receipt of complaints from consumers entering into certain residential leases.

The disciplined licensees all engaged in a business model that focused on an option to purchase agreement executed at the time of the lease. In both cases, tenant/buyers would make a significant down payment to obtain an opportunity to purchase the property within a certain time and for a set price.

As a rule, the tenant/buyers were unqualified for traditional financing, and were promised credit repair programs that would enable them to obtain financing when the time came to buy their home at the end of the lease term.

Problems arose for the formerly licensed firms when many tenant/buyers realized that their rental units were being foreclosed upon in the middle of their tenancy, making their option to purchase worthless.

Others discovered that promises made by the real estate firms regarding their credit repair services were untrue. After many months of following the advice of credit counsellors, these consumers found themselves just as unqualified to purchase their home as they were when they first began their tenancy.

These firms and their brokers are no longer licensed because they were ignorant of, or simply did not adhere to, the regulations and statutes governing option contracts and credit repair services.

As a caution to anyone participating in a real estate transaction involving option contracts or promises of credit repair, this article will touch on the uses, regulations, and pitfalls that arise when the lease with option to purchase scenario is utilized.

We’ll also consider the credit repair services these firms offered and things to know if approached with questions from one of your real estate clients.

The Lease with an Option to Purchase

The tightening of residential mortgage lending following the recent economic downturn forced many homeowners to rent their homes when qualified buyers became scarce. Some builders and homeowners found tenants willing to pay an upfront, nonrefundable down payment to secure the right or option to purchase the property at a set price in the future. Such arrangements could legitimately provide the seller immediate cash and security in knowing that they had a good tenant in their home along with the expectation of a future closing.

Similarly, tenants who may have lost  a job or gone through bankruptcy or a prior foreclosure were sometimes able to negotiate a competitive purchase price for a future closing, allowing them time to qualify for a mortgage.

In a typical, legitimate lease with option to purchase transaction, both the potential tenant-buyer and the seller risk losses in exchange for the promise of a future gain should the deal close. The tenant risks the non-refundable option fee, and the seller risks the possibility of a sale at a later date.

In the transactions investigated by the Commission, alleged “investors” offered to secure the tenant for the homeowner, and charged an upfront fee to the tenant for a future right to purchase the seller’s home. In such cases, the “investor” risked nothing and had no motivation to ensure the success of the transaction or compliance with state laws.  In fact, when a prospective purchaser defaulted under the option to purchase or lease, the “investors” kept the option fee, a new tenant was found and charged a new option fee also retained by the “investor.” Therefore, failed transactions actually provided better opportunities for these “investors” to realize greater gains.

North Carolina General Statutes, Chapter 47G, govern every option contract executed along with a lease agreement. The law dictates that every such option contract contain at least nine (9) specific disclosures and details of the transaction. State law also provides every purchaser a three-day right to cancel such an option contract, and guarantees the right to a refund of any property exchanged or payments made by the purchasers if cancelled timely.

The seller is also required to record the option contract, or a memorandum of the same, in the office of the register of deeds in the county where the property is located.  These are a few of the many statutory requirements in our State with which the disciplined real estate firms failed to comply.

Credit Repair Providers

With very few exceptions, anyone offering credit repair programs must complete the promised programs prior to collecting or charging a fee. The firms that recently lost their licenses with the Commission charged upfront or monthly enrollment fees to participate in their advertised credit repair program.

The firms also falsely promised they could remove legitimate debts from consumer credit reports and gave deceptive advice on how to improve credit. While these guarantees were hollow, the promise of better credit was the hook for prospective purchasers who wanted to own a home now, but did not qualify for traditional financing.

There are two acts governing credit repair services in North Carolina. The first is the Federal Credit Repair Organizations Act, 15 U.S.C. 41, and the second is the North Carolina Credit Repair Services Act, N.C.G.S. § 66-220.

Both of these laws prohibit credit repair providers from making any statement or giving any advice that is untrue or misleading.  They also require that credit repair companies make certain disclosures and give the opportunity to cancel a credit repair contract. Most importantly, the laws provide for civil liability for violations and protect consumers by making noncompliant contracts void.

When the Commission investigated the licensees offering credit repair, it found that not only were their services noncompliant with state and federal laws, but that the individuals were unaware of the strict regulation of their activities.

The Federal Trade Commission advises consumers that when they see the common claims and advertisements guaranteeing perfect credit in very little time, consumers should do themselves a favor, save the money, and avoid what’s likely a scam. The only way to improve consumer credit is with time, effort, and a personal debt repayment plan.

Legitimate credit counselling providers are available through military bases, credit unions, non-profit groups, housing authorities, or consumer protection agencies.

There is also a list of government-approved organizations available at that work with folks prior to filing bankruptcy. As a broker, if you have a client who requests help repairing credit, be sure to caution them about potential scams and suggest they contact their financial institution or consult the above government-approved list of providers.

This article came from the February 2014-Vol44-3 edition of the bulletin.