Just Say No
In today’s market as a lender you may risk losing some of the value of your home as a result of default, but there can be something that can be even worse. A risk that a lender takes when making a loan is losing their asset because of drug activity on the property. If a property is found to have drug activity on the premises the government can legally take the property without any compensation going to the mortgagee or mortgagor. This may seem very harsh but Congress passed this law in order to respond to a growing drug problem in this country.
The United States Congress passed the Comprehensive Drug Abuse Prevention and Control Act in 1970. This act authorized the federal government to confiscate property used to manufacture transport, store, and dispense illicit drugs. Originally, the act was supposed to cover things like cars and boats bought with illegal drug money, but the act was later amended to include real estate in 1984. This amendment changed the riskiness for real estate properties used for drug activity because of how Congress created the punishments for being caught for drug activity. First, the seizure of the property is a civil proceeding and not a criminal one. This means that the government has the power to take one’s property even if the owner or lender of the property was not charged with a drug offense; the property is charged with the offense, not the person. Next, the government claims a right to the property as soon as the property is used for illegal drug transactions. For example, if a lender obtains a property through foreclosure that used to be a drug house they still risk losing the property if the government decides to confiscate it. Another point to the amendment is that one’s whole property is put at risk even though only a portion of the property is used for drug activity. Fourth, property of great value can be seized even if the illegal activity was minor. Fifth, the property may be seized even if the owner or mortgagee of a property is completely innocent. If you lease a property to someone and that person conducts illegal activity they expose the property to forfeiture. Lastly, the amendment states that the owner or mortgagee of a property does not have any rights to the income of the property once the property has been seized. These measures may seem harsh, but they were meant to deter individuals from making bad decisions and coming down hard on those who they catch. Now what are ways to alleviate yourself from becoming a potentially responsible party and losing your investment?
As a lender you may just decide that you will not lend to individuals trying to move into certain areas, but this may get you into further trouble. This practice goes against the Home Mortgage Disclosure Act (1975) and the Community Reinvestment Act (1978). This is considered discrimination and may add to your headaches if you pursue this tactic to prevent losing investments due to drug activity. So what will save you from losing your property in the event that drug activity is found on the premises? The way one may save their property from forfeiture is called a due diligence defense. To establish this defense the owner/lender must prove that all reasonable measures to investigate the use of the property were taken. This may be difficult to prove though especially for lenders who make loans in different geographic areas; simple ignorance to the illegal activity is not enough to prove your innocence.
As a lender for real estate losing your asset because of illegal drug activity is a risk that one has to make if they wish to participate in the real estate loan market. The United States has decided that it wants to make an example of those who have anything to do with illegal drug activity, it matters not if you knew or were ignorant to what was going on in the property. As a lender/owner of a property you must take due diligence in trying to monitor the activity on your property as well as making deals with individuals who you feel are of high moral character (this may be easier said than done). Every career has its risks and in the world of real estate this is a real issue that needs to be considered whenever you make a transaction.
Clauretie, Terrence; Real Estate Finance: Theory & Practice, Cengage Learning; 2010
; “Drugs & Real Estate Forfeiture”, www.realestateabc.com; 2010
Congratulations Olivia! - Congratulations to real estate student Olivia Thomas. Olivia won the "Outstanding Real Estate Student Award" sponsored by the Gazarian Real Estate Center...
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