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Discovering Opportunities with International Homebuyers

Monica Wittrock, Senior Vice President Executive Regional Manager for Oklahoma, Kansas, Missouri, Nebraska, Wisconsin & Minnesota First American Title Insurance Company 133 N.W. 8th Street Oklahoma City, Oklahoma 73102 (405) 552-7740 [email protected] www.okfirstam.com www.firstam.com

1 Discovering Opportunities with International Homebuyers

Compiled by Monica Wittrock OUTLINE

I. Introduction II. Opportunities Created by International Homebuyers III. Barriers to Multicultural Homeownership IV. Definitions V. Can an Alien Buy Property in Oklahoma? VI. How Do Fair Housing Laws Affect Foreign Ownership? VII. Dealing with Language and Cultural Barriers and International Homebuyers VIII. Am I Required to Provide an Interpreter for a Person Who Does not Understand or Speak English? IX. What Do I Do if I have Concerns About the Intentions of My Client About Their Real Estate Transaction a/k/a Do I know My Client? X. What Impact Does FinCEN and the USA Patriot Act Have on Real Estate Transactions? XI. Foreign Sellers and FIRPTA XII. The Challenge of Establishing Identity XIII. Alternative Loan Products XIV. Homebuyers Who Have No Banking Relationship XV. Foreign Deposits and Cyber-Crime XVI. Conclusion

I. Introduction

During the last decade, homeownership in America was at an all-time high. Records were set for single-family permits, single-family starts, single-family completions, new home sales, existing home sales, mortgage interest rates, and the home-ownership rate – records not seen in the past 40 years.

REALTORS® sold 5,250,000 existing single family homes in 2015. There were 510,000 newly constructed homes that were sold, resulting in a 62-65% of American families owning a primary residence, according to the Federal Reserve. Interest rates were at their lowest level ever, with the average 30-year fixed conventional mortgage as of June 2016 at 3.88%, and 3.15% for a 15-year fixed conventional mortgage. The National Association of REALTORS® (NAR) reported that the average price for existing homes was $247,700. Unemployment figures are down for 2016 over 2014 at 4.9% over 6.1% according to the U.S. Bureau of Labor Statistics.

All of these figures point to the opportunities in our industry for homeownership. The U.S. Census Bureau reported that although there was a small dip in homeownership in 2016, overall, a higher proportion of Americans owned their own homes than a decade ago.

2 According to NAR, in 2015 “Generation Y comprises the largest share of home buyers at 32%, which is larger than all Baby Boomers combined. Younger Boomers comprise 16% and Older Boomers comprise 15% of recent home buyers. Generation X made up 27% of recent buyers and the Silent Generation has the smallest share at 10%”.

When compared with other recent homebuyers and other homeowners, first-time homebuyers are younger, are often foreign-born, and likely to be minorities. They live less frequently as traditional families and in terms of location, they are slightly more likely to live in the West or in the central cities of metropolitan areas. The homes they purchase are more likely to be townhomes, mobile homes, and condominiums, smaller, or of more modest value.

For the remainder of this presentation, we are going to focus on the opportunities and issues concerning these homebuyers who are either classified as minority or foreign born and the challenges that they and the title industry may face together.

II. Opportunities Created By International Homebuyers

The Research Division of NAR last conducted a survey of its members, publishing the results in June 2016. NAR categorizes “international or foreign” clients into two categories:

 Non-resident foreigners (Type A): Non-U.S. citizens with permanent residences outside the United States. These clients typically purchase property as an investment, for vacations, or other visits of less than six months to the US.

 Resident foreigners (Type B): Non-U.S. citizens who are recent immigrants (in the country less than two years at the time of the transaction) or temporary visa holders residing for more than six months un the U.S. for professional, educational or other reasons.

According to NAR, properties purchased by international clients is down in 2016. Foreign buyers purchased $102.6 billion of residential property from April 2015 to March 2016, a decrease from $103.9 billion in the previous 12-month period. Foreign buyers purchased 214,855 residential properties, a three percent increase from the previous 12 month period. What does this mean? The number of purchases increased even though the dollar volume decreased because there were more foreign buyers purchasing less expensive properties than in the previous year.

Non-resident foreigners (Type A) accounted for about 41% of foreign buyers, while resident foreigners (Type B) accounted for about 59%. Type A buyers tend to purchase more expensive properties for vacation or investment and come from China, Canada, India, the United Kingdom and Mexico.

3 Fifty percent of the transactions covered in NAR’s report were all-cash sales. Type A buyers made up 73% of the all-cash transactions, while Type B made up only 33%. NAR also reported that previous client contacts and referrals accounted for 47% of leads for realtors responding to the survey.

What will be the effect of “Brexit” (the referendum decision by the United Kingdom to leave the European Union) be on the international housing market? According to some economists, the United States may be more attractive for some investors. On the other hand, if uncertain global economic growth persists, demand for U.S. real estate could fall, especially from foreigners in countries who would be affected by a stronger U.S. dollar in comparison to their own currencies (such as Canada).

Where are our international clients coming from? According to NAR, Asia/Oceania accounted for about 34% of foreign buyers of residential properties, followed by Latin America at 21%, Europe at 17%, Canada at 12% and Africa at 3%. These clients tend to settle in communities where there is a presence of relatives, friends, jobs and educational opportunities. Most of these clients will flock to Florida, Arizona, California, New York and Texas.

III. Barriers to Multicultural Homeownership

Foreign buyers are more likely to pay cash than the average American homebuyer. With that said, mortgage financing tends to be a major problem for both non-resident and resident foreign homebuyers, due to lack of U.S. based credit history, lack of social security number, or ability to verify credit required by U.S. lenders. Transferring funds between the foreign buyer’s home country and the U.S. is difficult and increasingly complicated. Fluctuation in exchange rates between currencies, ignorance about U.S. tax laws, closing costs, language differences, cultural conflicts or misunderstanding all adversely affect this opportunities to purchase property in the United States.

Working with the international client requires an understanding of their needs and cultures, knowledge of U.S. tax laws, and other federal and state restrictions. The remainder of this presentation will be dedicated to some of the most common issues.

Many new initiatives were developed during the George W. Bush era in the early of his administration starting in 2000. However, with the financial crisis of the later part of his administration and the early part of President Obama’s Administration, many of those programs were discontinued and the focus shifted to solving the debt crisis, predatory lending prevention, and the creation of the Consumer Financial Protection Bureau (CFPB). Credit opportunities were tightened for all borrowers and many of the incentives, such as down payment assistance programs, were eliminated.

One of the most common sources of downpayments for homeowners is the proceeds of the sale of their previous home. First-time homebuyers, of course, do not have access to this source. So where does this downpayment come from for these first

4 time homebuyers? The majority, 70% use savings or cash on hand. About 10-12% do not make downpayments. About 2% reported sale of other investments as the source of downpayments. About 6% reported other borrowings, while another 3% reported inheritance or gift.

The second barrier to homeownership is the lack of access to credit and poor credit history. Many potential low-income homebuyers have not established credit or maintained a good credit history. Families with poor credit history are either rejected for mortgage credit or given loans with higher interest rates.

The third barrier is the lack of understanding and information about the homebuying process. We must remember that a real estate transaction is probably very different in the countries of origin of these folks. For most of these families, the concepts and basic vocabulary are not even present in their country. These families are particularly subject to predatory lending practices by those who charge exorbitant fees and make loans with a high likelihood of foreclosure. Lack of clarity at closing time is a significant barrier to homeownership and the new rules regarding mortgage disclosures implemented by the CFPB were designed to help this situation. Many lenders and consumers are still struggling with these changes and there are still instances where many families discover unexpected fees that can add hundreds or even thousands of dollars to the cost of their loans.

The fourth and fifth barriers to homeownership by minorities, according to HUD, are regulatory burdens and continued housing discrimination. The “Not in My Back Yard” (“NIMBY”) syndrome is still present through exclusive zoning regulations and other Fair Housing challenges.

IV. Definitions

While we explore issues involved when we deal with international homebuyers, who may not yet have obtained citizenship, temporary residency, or permanent residency in the United States, it is important to start with a few definitions:

Citizen: One who, under the constitution and laws of the United States, or of a particular state, is a member of the political community, owning allegiance and being entitled to the enjoyment of full civil rights.

Naturalized Citizen: One who, being an alien by birth, has received citizenship under the laws of the United States.

Alien: One born abroad; a person who owes allegiance to a foreign government.

Resident Alien: An Alien who has legally established residency in the United States.

5 Non-Resident Alien: An Alien who has not legally established his residence in the United States.

V. Can an Alien Buy Property in Oklahoma?

Aliens have only such rights to take and hold real property as is permitted by state and federal law. Subject to the provisions of the United States Constitution and U.S. Treaties, the rights of aliens with respect to real property are primarily matters of state regulation.

Can an alien buy property in Oklahoma? This is a common misconception among real estate professionals. The basic concept of foreign ownership has been a part of Oklahoma’s Constitution since the Constitutional Convention in 1907, with very little revision since that time. Oklahoma law does not specifically prohibit all aliens from purchasing property in Oklahoma, but there are certain restrictions upon their ability to hold the property for any length of time. Their ability to “hold” property depends directly upon their intent to establish and continue residency in the United States.

The Oklahoma Constitution, Article XXII Sec. 1, provides:

No alien or person who is not a citizen of the United States, shall acquire title to or own land in this state, and the Legislature shall enact laws whereby all persons not citizens of the United States, and their heirs, who may hereafter acquire real estate in this state by devise, descent, or otherwise, shall dispose of the same within five years upon condition of escheat or forfeiture to the State: Provided, this shall not apply to Indians born within the United States, nor to aliens or persons not citizens of the United States who may become bona fide residents of this State.

The Oklahoma Legislature enacted the following laws to carry into effect the above provisions of the Oklahoma Constitution. Title 60 Okla. Stat. Sec. 121 provides:

No alien or any person who is not a citizen of the United States shall acquire title to or own land in the State of Oklahoma, except as hereafter provided, but he shall have and enjoy in the State of Oklahoma such rights as to personal property as are, or shall be accorded a citizen of the United States under the laws of the nation to which such alien belongs, or by the treaties of such nation with the United States, except as the same may be affected by the provisions of this act or the Constitution of this State.

Title 60 Okla. Stat. Sec. 122 provides:

This article shall not apply to lands now owned in this state by aliens so long as they are held by the present owners, nor to any alien who is or shall take up bona fide residence in this state; and any alien who is or

6 shall become a bona fide resident of the State of Oklahoma shall have the right to acquire and hold lands in this state upon the same terms as citizens of the State of Oklahoma during the continuance of such bona fide residence of such alien in this state; Provided, that if any such resident alien shall cease to be a bona fide inhabitant of this state, such alien shall have five (5) years from the time he ceased to be such bona fide resident in which to alienate such lands.

And further, 60 Okla. Stat. Sec. 123 provides:

All non-resident aliens who may hereinafter acquire real estate in Oklahoma by devise, descent, or by purchase, where such purchase is made under any legal proceeding foreclosing liens in favor of such alien, may hold the same for five (5) years from the date of so acquiring such title.

When an alien acquires title to land in the State of Oklahoma, he may dispose of the same at any time prior to the institution of escheat proceedings by the state; aliens who acquire land under the conditions enumerated in 60 Okla. Stat. Sec. 122 and 123 have a five (5) year period in which to alienate such land before the State of Oklahoma may institute escheat proceedings. Op. Atty. Gen. No. 76-253 (Aug. 4, 1976).

An alien may not hold title to fee simple absolute, but may hold title subject to the conditions of 60 Okla. Stat. Sec. 121. Op. Atty. Gen. No. 74-214 (Jan. 30 1975).

An alien who can be shown to have taken up bona fide residence in Oklahoma may acquire and hold lands during the continuance of such bona fide residence; provided, that if such resident alien shall cease to be a bona fide inhabitant of this state, the said alien shall within five (5) years from the cessation of such bona fide residency alienate the lands so held. Op. Atty. Gen. No. 79-286 (Sept. 12 1979).

A nonresident alien may hold land in Oklahoma only if the nonresident alien acquired it by devise, decent or by purchase, where such purchase was made under a legal proceeding foreclosing a lien in favor of the alien. Land acquired by such means may be held only 5 years. Op. Atty. Gen. No. 79-286 (Sept. 12, 1979).

There has been only one Oklahoma Supreme Court case decided under these statutes: State of Oklahoma ex rel. Cartwright v. Hillcrest Investments, Ltd., 630 P.2d 1253 (Okla. 1981). This case addressed the issue of a foreign corporation as an “alien”. Hillcrest Investments was a corporation formed under the laws of Alberta, Canada. Hillcrest also filed Articles of Incorporation with the Oklahoma Secretary of State and domesticated under the laws of the State of Oklahoma. The Supreme Court held that Hillcrest was considered an “alien” under the constitution and statutes, but because it domesticated in Oklahoma, it was considered a “resident” and no longer subject to the constitutional and statutory restrictions. There have been no decisions regarding other types of entities such as limited liability companies or limited partnerships.

7 If an alien does not meet any of the exceptions listed above, the alien may not own land in Oklahoma. In the event a nonresident alien does not meet any of the statutory exceptions, either the Oklahoma attorney general or the district attorney in the county where the property is located may bring suit on behalf of the State of Oklahoma asking that the property be escheated to the state. When a title insurance company is dealing with a buyer or borrower who is known to be a non-resident alien, there may be an exception placed in the title insurance policy:

Any adverse matters created by violation of Title 60, Oklahoma Statutes, §121, et seq., or based on Article XXII, Section I of the Oklahoma Constitution, or any other similar statutory or constitutional provisions, which restrict alien ownership of real property in Oklahoma.

VI. How Do Fair Housing Laws Affect Foreign Ownership?

The Fair Housing Act was passed in 1968, amended in 1988 and in 1973, to deal with fair treatment in housing by lenders and others as a part of the 1968 Civil Rights Act. The Fair Housing Act prohibits discrimination in housing because of

1. Race 2. Color 3. Religion 4. Sex 5. Familial Status (including children under the age of 18 living with parents or legal custodians; pregnant women and people securing custody of children under 18) 6. National Origin 7. Disability

Notice that citizenship is not on the list as a protected class. The Fair Housing Act covers most housing, however there are some exemptions. In some circumstances, the Act exempts owner-occupied buildings with no more than four units, single-family housing sold or rented without the use of a broker; housing operated by an organization, and private clubs that limit occupancy to members.

Title VIII of the Fair Housing Act provides that in the sale and rental of housing, no one may take any of the following actions based on the above protected classes:

1. Refuse to rent or sell housing; 2. Refuse to negotiate for housing; 3. Make housing unavailable; 4. Deny a dwelling; 5. Set different terms, conditions or privileges for sale or rental of a dwelling; 6. Provide for different housing services or facilities;

8 7. Falsely deny that housing is available for inspection, sale or rental; 8. For profit, persuade owners to sell or rent (blockbusting); 9. Deny any access to or membership in a facility or service (such as a multiple listing service) related to the sale or rental of housing.

Other Fair Housing protections relating to cultural differences are also found in the Civil Rights Act of 1964, Rehabilitation Act of 1973, Housing and Community Development Act of 1974, and several Presidential Executive Orders.

In mortgage lending, no one may take any of the following actions based on the above protected classes:

1. Refuse to make a mortgage loan; 2. Refuse to provide information regarding loans; 3. Impose different terms or conditions on a loan, such as different interest rates, points or fees; 4. Discriminate in appraising property; 5. Refuse to purchase a loan; or 6. Set different terms or conditions for purchasing a loan.

In addition, it is illegal for anyone to threaten, coerce, intimidate or interfere with anyone exercising a fair housing right or assisting others who exercise that right, or to advertise or make any statement that indicates a limitation or preference based on race, color, national origin, religion, sex, familial status, or handicap. This prohibition against discriminatory advertising applies to single-family and owner-occupied housing that is otherwise exempt from the Fair Housing Act.

The bottom line concern for Fair Housing for the real estate professional is that if an individual intends to take up residency in the United States, although there may be no present intent to obtain citizenship, there is probably a Fair Housing issue involved, and it is wise to be mindful of any actions which may impact the individual’s ability to obtain homeownership or financing for same.

VII. Dealing with Language and Cultural Barriers and International Homebuyers

Homebuyers who do not understand the homebuyer process, or for whom English is a second language, are less likely to be successful in their search for a home of their own. These homebuyers are particularly subject to predatory lending practices, including exorbitant fees and interest rates. The paperwork when purchasing a home is challenging even for the most sophisticated borrower, much less a consumer who is new to our housing market.

Many foreign homebuyers come from countries and cultures where the family unit relies on multiple earners, have multiple jobs, a reliance on a cash economy, or stressed national economies. On top of this, there are clear language barriers, where

9 American financial concepts do not translate word-for-word to the homebuyers first language. According to the National Housing Institute, nearly one in five households do not speak English at home. Language barriers and immigration status pose overlapping and distinct challenges in housing and mortgage access.

A growing number of mortgage lenders and title companies provide services in various languages. Some states have adopted legislation requiring the translation of mortgage loan documents in the borrower’s primary language, including Arizona, California, Oregon and Texas.

Many companies have launched comprehensive multilingual websites and video libraries to help multicultural consumers pursue home ownership and navigate the title and closing process in the United States. Realtors should take advantage of these resources which cover the most common non-English languages such as Spanish, Chinese, Japanese, Korean and Vietnamese. Topics include:

 Buying or selling a home  What is title insurance?  10 common title problems  Types of title insurance  Cost of title insurance  History of title insurance  What is escrow?  Understanding the Good Faith Estimate  Understanding the HUD-1 Settlement Statement  The title search process  Title insurance policy types  What is a 1031 exchange?

VIII. Am I Required to Provide an Interpreter for a Person Who Does Not Understand or Speak English?

One of the classic court cases involving language barriers was a case in Salt Lake City involving the purchase of a commercial tract. After the transaction was closed, the purchaser brought suit to rescind the transaction on the grounds of breach of fiduciary duty and fraud, based upon the purchaser’s claimed lack of proficiency in the English language. The trial court granted the seller’s summary judgment motion, holding that the purchaser had sufficient knowledge of the English language and sufficient sophistication to understand the transaction. However, the case was overturned by the Utah Supreme Court. The plaintiff was a Russian immigrant who contracted to buy a restaurant. He alleged that when he showed up for closing, he was presented with a twenty-page purchase agreement that he’d never seen before – and he lacked the “ability and time” to read it before signing. In part, the agreement disclosed that the restaurant was operating at a loss. The Plaintiff claimed that the seller (who was also the listing agent) hurried him into signing, and had previously

10 misrepresented the restaurant’s profitability. The contract was declared to be void. Semenov v. Hill, 371 Utah Adv. Rep. 22, filed June 11, 1999.

As real estate professionals, we are confronted with this issue more and more frequently. The real issue is not the ability to speak and read English, but competency and capacity of the party, fraud, undue influence, duress, negligent misrepresentation, or plain old mistake.

Real estate professionals should be sensitive to parties’ apparent ability to understand a transaction at hand. If a party does not seem able to communicate that they have either read or had explained to them the terms of the transaction, that they understand the terms, and that they consent to the terms, then a closing may need to stop and the parties determine how best to proceed.

This situation can arise not only when a party speaks a foreign language (and does not appear to be able to understand spoken and written English), but also where a party appears to be illiterate, where a party is under a physical disability such as blindness or deafness, or where a party seems mentally incompetent (which may mean they are incoherent, confused, or so mentally weak from physical sickness or fatigue that they aren’t able to communicate understanding of the transaction and consent to its terms).

In the case of one who speaks only foreign language or is illiterate or disabled, a translator is recommended. The translator should give a written statement that he speaks and reads the English language; that he speaks the language of the party to the transaction; that he has explained the terms to the party, and that the party has acknowledged that he understands and consents to the terms. The translator’s statement should also recite that it is given to the title company and lender in order to facilitate the closing of the real estate transaction, and the translator understands and acknowledges that the title company and lender may rely on the statement for that purpose. The translator should not be a party to be benefited by the transaction (such as a realtor). In any case, the translator’s statement should be maintained as a permanent record in the client’s file.

IX.What Do I Do if I Have Concerns About the Intentions of my Client about their Real Estate Transaction a/k/a Do I Know My Client?

The Office of Foreign Assets Control (OFAC) of the U.S. Department of Treasury administers and enforces economic and trade sanctions based on U.S. foreign policy and security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass description, and other threats to the national security, foreign policy or economy of the United States. While the concept dates back to the War of 1812, the current model was established during World War II following the German invasion of

11 Norway in 1949 and formally became known as OFAC during the Korean War to block all Chinese and North Korean assets subject to U.S. jurisdiction.

After the September 11 terrorist attacks, Congress enacted the USA Patriot Act (“United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001”) which became effective January 1, 2002. The USA Patriot Act imposes many requirements on our industry including the obligation to report certain cash transactions to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). Also Executive Order 13224 blocks property and prohibits transactions with persons or entities on the list of “Specifically Designated Nationals and Blocked Persons” (SDN List) published by the Office of Foreign Assets Control (OFAC) which is a division of the U.S. Treasury Department.

The new environment brought significant changes in the way we serve our international customers. Increased security concerns and tightened immigration procedures are making it more difficult for foreigners who want to invest in a home to qualify for permanent or extended residence, or ultimately to become naturalized citizens.

New regulations were added in 2003 by the Treasury Department that required certain financial institutions to establish procedures to verify the identity of its customers. These regulations were part of the “USA Patriot Act” and are designed to prevent money launderings, terrorist financing, identity theft, and other forms of fraud. The title industry must comply with these regulations.

U.S. persons, including real estate settlement agents and title insurers are prohibited from engaging in any transactions with Specially Designated Nationals (SDN) and are required to freeze SDN assets. OFAC publishes lists of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries or regimes, including designated terrorist and narcotics traffickers. The list is commonly referred to as the Specially Designated Nationals List.

To ensure compliance with the regulations, title and settlement agents must scan customers against the SDN list. Many title companies have software that automatically looks for same or similar names against the SDN list. The OFAC “SDN” List can be found at: https://www.treasury.gov/about/organizational-structure/offices/Pages/Office- of-Foreign-Assets-Control.aspx and questions or issues arising thereunder should be addressed to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN): www.fincen.gov. The penalty for non-compliance, under federal law, is a civil penalty of $50,000 or twice the amount which should have been blocked, whichever is greater.

X. What Impact Does FinCEN and the USA Patriot Act Have on Real Estate Transactions?

12 FinCEN Cash Reporting Requirements: Fortunately, the new FinCEN cash reporting requirements are virtually identical to the existing IRS cash reporting requirements. To simplify this dual reporting requirement for businesses, IRS Form 8300 has been revised and is now a joint IRS/FinCEN Form 8300. The joint IRS/FinCEN Form 8300 must be filed within 15 days of a reportable event but only with the IRS.

The law extends beyond the simple receipt of actual cash. Failure to comply with the cash reporting requirements may result in civil and criminal penalties not just to the company, but also the actual recipient (i.e. the employee).

The legal obligation to compare names of transaction participants against the names of known terrorist and terrorist organization on the SDN List and to report same to via a “Suspicious Activity Report” (SAR) has existed for some time. (SARs should be filed with the same manner as the Form 8300). OFAC regularly updates the SDN List. Executive Order 13224 issued September 21, 2001, is applicable to all businesses and any transactions involving any persons on the SDN List. Executive Order 13224 is not just a reporting obligation. If someone on the SDA List is involved in a transaction and that information becomes known prior to accepting the transaction, the transaction must be rejected. Once commenced and the information becomes known, any assets in the transaction must be blocked - the transaction cannot be completed. Once rejected or blocked, a “Report of Blocked Transaction” or a “Report of Rejected Transaction” must be filed with OFAC.

If a title or settlement agent comes across a name that is a “match” with the SDN list, that name must be “cleared” before it can move forward with the transaction. Title companies must verify whether the names match in full, or whether they simply entail a partial match of very common names. Addresses and biographical information such as date of birth, identification numbers, etc., must be obtained and a Realtor might expect to be contacted by the title company about their particular client for information needed to clear a client and to move forward with the transaction.

XI. Foreign Sellers – FIRPTA

Foreign investors continue to invest in American properties since the economy is quite stable by work standards, tax rates are generally low, and historically, return on investments have been relatively high. There have been special reporting requirements on real estate investment under the Foreign Investment in Real Property Tax Act since 1980. But now enforcement has become more onerous, and the biggest change is in greater stringency in the withholding requirement upon sale.

The Foreign Investment in Real Property Tax Act (FIRPTA) requires the withholding of 10%-15% of the seller’s gain (gross amount realized) in most foreign- related transactions and applies to foreign corporations, partnerships, trusts, and non- resident aliens.

13 On December 18, 2015, President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”). As a part of the PATH Act, certain provisions concerning withholding under FIRPTA were amended and went into effect on February 16, 2016:

1. Increase to 15%: Unless an exemption or reduced rate applies, the withholding amount has been increased from 10% to 15% of the sales price. 2. Personal Residence Exemption: If both of the following conditions are met: a. the buyer is acquiring property that will be used as the buyer’s residence, and b. the sales price is $300,000 or less, then the buyer may elect to waive withholding under Section 1445(b)(5) of the Tax Code. This exemption and the requirements for same are unchanged from the current law. 3. Reduced Rate of Withholding: If both of the following conditions are met: a. the buyer is acquiring property that will be used as the buyer’s residence, and b. the sales price is greater than $300,000, but not more than $1,000,000, then the buyer may elect to withhold a reduced withholding amount equal to ten percent (10%) of the sales price rather than the unreduced rate of fifteen percent (15%).

The following chart may help settlement agents and parties determine whether the Personal Residence Exemption or Reduced Rate of Withholding is available.

Does Buyer intend to Yes (and Buyer has No (or Buyer has not so use property as buyer’s elected to Waive or elected) residence? Reduce Withholding) Sales Price is $300,000 or $0 15% less 10% 15%

Sales Price is $300,001 ‐

$1,000,000 Sales Price is greater 15% 15% than $1,000,000

It is important to remember that the responsibility and liability to the IRS with respect to FIRPTA withholding rest with the buyer – not the settlement agent or the seller. As such, the buyer is not required to make this election, even if the facts may support an exemption or reduced rate. Accordingly, the settlement agent should

14 advise the buyer that neither the exemption nor the reduced rate automatically applies. Instead, if the buyer opts to invoke the exemption or reduced rate, the buyer must make an affirmative election to do so.

In order to qualify for the exemption or the reduced rate, the buyer or a member of the buyer’s family must reside at the property for at least 50% of the number of days the property is occupied by any person during each of the two 12‐month periods following the date of closing. For this exception, the buyer must be an individual.

If the buyer fails to meet the occupancy requirements, the buyer may become liable to the IRS for the difference between the amount that was actually withheld, if any, and the amount that should have been withheld, plus interest and penalties.

The law requires that the seller obtain a Federal Identification Number, which is a social security number (SSN), employer identification number (EIN), or IRS individual identification number (ITIN). While the buyer has the ultimate liability to the IRS, the collection and disbursement of funds to the IRS as part of the closing process creates a responsibility and potential liability for the settlement agent if the matter is not properly handled and documented. Accordingly, it is important that your file reflect specific written direction from the buyer to waive the withholding or withhold the reduced rate. Settlement agents should consider obtaining an affidavit from the buyer setting forth the buyer’s decision and, if applicable, the facts that entitle the buyer to the exemption or reduced rate along with an acknowledgement that the buyer has been given the opportunity to obtain independent tax or legal advice outside the company.

The buyer is not required to withhold if the seller provides a “Certificate of Non- Foreign Status”. If a Seller’s Certificate is provided, either the Seller’s Certificate itself or a Qualified Substitute statement must be provided to the buyer. The Certificate must state that the transferor is not a foreign person and set forth the transferor’s name, identifying number and home address, and the transferee must sign the Certificate under penalties of perjury. The transferee must retain the Certificate until the end of the fifth taxable year following the taxable year in which the transfer took place.

The Oklahoma Uniform Contract of Sale of Residential Real Estate adopted by the Oklahoma Real Estate Commission provides the following provision in Paragraph 18:

18. NON-FOREIGN SELLER. Seller represents that at the time of acceptance of this contract and at the time of Closing, Seller is not a “foreign person” as such term is defined in the Foreign Investments in Real Property Tax Act of 1980 (26 USC Section 1445(f) et. Sec) (“FIRPTA”). If either the sales price of the property exceeds $300,000.00 or the buyer does not intend to use the property as a primary residence

15 then, at the Closing, and as a condition thereto, Seller shall furnish to Buyer an affidavit, in a form and substance acceptable to Buyer, signed under penalty of perjury containing Seller’s United States Social Security and/or taxpayer identification numbers and a declaration to the effect that Seller is not a foreign person within the meaning of Section “FIRPTA.”

A recommendation by real estate professionals to their customers to keep good records and follow good accounting procedures can often lessen the pain to the buyer or substantially reduce it. Most title companies do not get involved as being the “withholding agent” for the tax, but will provide a statement to be signed by the seller, that advises them of the requirements to comply with FIRPTA and an affirmative statement that the closing agent will not be responsible for the withholding and that it will be the seller’s responsibility to so comply.

It is important to note that this overview does not include an exhaustive list of all available exclusions or reduced rates under FIRPTA.

XII. The Challenge of Establishing Identity

When a homebuyer does not have a driver’s license or passport, real estate professionals can find themselves in a quandary of how to establish identity. Fannie Mae and Freddie Mac, as well as most national lenders have no special underwriting and documentation requirements or restricted loan-to-value ratios on mortgage loans to permanent and non-permanent resident aliens. All borrowers who have lawful residency in the United States – both permanent resident aliens and nonpermanent resident alien immigrants – are eligible to take advantage of the same mortgage products, underwriting requirements, and LTV ratios as U.S. Citizens.

Historically, one of Fannie Mae’s programs to promote homeownership by new Americans allows borrowers to qualify for loans without evidence of permanent resident alien cards or green cards. On the other hand, The USA Patriot Act and the International Money Laundering Act of 2001 requires additional due diligence and reporting requirements for real estate professionals with international customers.

So where does this put us in trying to establish just who we are dealing with as customers? Perhaps the following proposed regulations supporting the USA Patriot Act provide some guidelines to establish identity:

1. Name; 2. For individuals, date of birth; 3. For individuals, residence and, if different, mailing address; or 4. For corporations, partnerships and trusts, principal place of business and, if different, mailing address; 5. For U.S. persons, documents containing a U.S. taxpayer identification number (e.g. social security number, individual taxpayer identification

16 number, or employee identification number) and bearing a photograph or similar safeguard, such as a driver’s license or passport or military ID; or 6. For non-U.S. persons, a U.S. taxpayer identification number, passport number and country of issuance; alien identification card number; or number and country of issuance of any other government-issued document evidencing nationality or residence and bearing a photograph or similar safeguard.

Many government agencies, including the U.S. Treasury, recognize that some customers legitimately may be unable to present those customary forms of identification. For example, an elderly person may not have a valid driver’s license or passport. Under these circumstances, it is recommended that customers verify their identities through other methods, which may include an affidavit by a third person who is not interested in the transaction, but who is personally familiar with the individual, and who can present proper identification himself. All forms of alternative identification to be used for the closing of a transaction must be approved the lender.

XIII. Alternative Loan Products

One issue affecting multi-cultural clients is offering vehicles that are acceptable in their cultures that help them reach their goal of owning a home, while being true to their belief systems. For example, Islamic Mortgages is an area about which real estate professionals should be informed.

Islamic religious law prohibits the payment of interest on mortgages and other types of debt; so observant American-Muslim families require a special housing contract. Many American-Muslim families have stayed out of the housing market because they are not allowed by Islamic law to pay, receive, or be charged interest.

Through an agreement with an Islamic financial institution, American Finance House – LARIBA, Freddie Mac invests in home financing contracts that are acceptable under both Islamic and American law, thereby increasing affordable homeownership opportunities for Muslim families in America. The Islamic housing finance model uses standard real estate financing documents in accordance with state and local law and is serviced like a conventional Freddie Mac mortgage. The key to the model is an agreement between American Finance House – LARIBA and the prospective homeowner that establishes jointly negotiated monthly payments based on the property’s sale price and fair rental value of the property on the market. American Finance House – LARIBA is the Whittier, California-based institution that developed the home finance model for the American-Muslim community. You can find out more about Islamic Mortgages by visiting their web-site at www.LARIBA.com.

XIV. Homebuyers Who Have No Banking Relationship

Many borrowers who are not “Americanized” prefer to use cash instead of personal checks, credit cards, or savings accounts. In there culture, there is a real

17 distrust of banking institutions. This can sometime cause real estate professionals and lenders some concern, especially if the customer deals in large sums of cash. The issue of cash transactions in excess of $10,000 under the rules of the Internal Revenue Service will not be dealt with in this paper. Most closing companies do not handle large sums of cash.

Generally, cash-on-hand is not an acceptable source of funds for the down payment or closing costs. However, for a community lending mortgage company, cash- on-hand may be an acceptable source of funds, if the borrower customarily uses cash for expenses and that usage is consistent with the borrower’s credit profile and financial status. In such instances, the credit report or other verifications must reflect limited or no use of credit and cannot identify any depository relationship between the borrower and any financial institution. The loan products for these types of borrowers may be very limited. Undocumented funds is one of the biggest challenges facing these types of borrowers.

XV. Foreign Deposits and Cyber-Crime

Recent incidents of cyber-crime have dramatically increased in the past few years. In 2014, 47% of American adults had their personal information stolen by hackers – primarily through data breaches at large companies – adding up to a staggering $18 billion in cred card fraud for the year. According to the FBI, everyone online is potentially at risk of cyber-crime and suggest that one is more likely to have their e-mail account hacked than their home broken into. As much as 70% of cyber- crime crosses national borders, which can make solving cyber-crimes a big challenge.

Most financial institutions and title companies are placing strong restrictions on funds being wired from non-U.S. banks because of this higher threat of cyber-crime, identity theft and money-laundering. If funds are being sent via wire from a non-U.S. bank, Realtors should advice their title companies at the earliest possible opportunity, so that the source of the funds can be verified and properly accepted as “good funds” for closing the transaction.

It is also important to remember that currency exchange rates between countries change on a daily basis. The parties to the transaction should elect to receive funds in U.S. Dollars. Adjustments for proper funding must be made, especially if the funds are going to be held in escrow for any period of time. Very often additional bank fees will apply.

XVI. Conclusion

As real estate professionals we must exercise a tenuous balance between the open arms of welcoming new families to the American dream of homeownership, while participating in the protection of our investments when those that wish to do harm take advantage of our open economies.

18 With this said, however, in order to serve this segment of our society, our companies must employ capable representatives who are personable, friendly, patient, bilingual and bicultural. Most of the minority communities have a deep-seated mistrust of large corporations, banks, and financial services companies. They place their loyalties on personal relationships.

We need to establish internal training programs and attitudinal changes within our organizations. For example, raising our voice doesn’t make them understand any better, but may intimidate the customer. Don’t use idioms, acronyms, or slang – use simple, straightforward language. Be careful with numbers, times and dates – always confirm these in writing. We have to be careful not to equate limited English with limited intelligence. And pay very close attention to non-verbal cues, facial expressions, body postures and tone of voice.

While this is a big challenge for our industry, it also represents positive opportunities. We need to move forward with these initiatives, with the understanding that a good partnership between Realtors, lenders and title insurance companies can help reach the goals of our shared customers to own or invest in American real estate.

General References: ALTA Website MBA Website National Association of Realtors Website Internal Revenue Website First American Corporation Website – Multicultural Resources Housing and Urban Development Website CFPB Website FFIEC Website FBI Website Real Estate Today Mortgage Lending News Black’s Law Dictionary Oklahoma Statutes U.S. Code

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