Shari'ah Loans

Guidance Residential Islamic Loans

The following information is an Article written by Joe Tschida while at Fidelity National Title.

Under the Islamic faith, Muslims are prohibited from paying interest i.e. riba. Accordingly, it is difficult for Muslims to purchase a house and be faithful to their religion unless they pay cash. Therefore, the banking industry and the Muslim community have created various lending programs whereby a Muslim may obtain a loan to finance the purchase of a house without paying interest. This Section discusses a lease-to-purchase concept of Islamic lending established by Guidance Residential, LLC, a Virginia company.

The Guidance Residential, LLC lease-to-purchase lending program is set up as follows. A limited liability company is formed usually in Delaware with a number such as “2004-0000555, LLC” (“LLC”). The LLC is created not only to be the lender for the transaction but also to purchase the property as a co-owner with the buyer (“Buyer”). The LLC provides the bulk or all of the money to purchase the property, and the Buyer and the LLC take title as tenants in common. The LLC and the Buyer have different ownership interests based upon the down payment of the Buyer and the investment of the LLC. Their initial ownership interests may be for example 28% for the Buyer and 72% for the LLC. The monthly payments made by the Buyer represent a lease payment because the LLC is the majority owner, and an acquisition payment because the Buyer is purchasing a portion of the LLC’s ownership interest each month.

The Buyer and the LLC sign a Co-Ownership Agreement (“COA”) which, while it gives the Buyer the right to occupy the property, provides the LLC with most of the other rights of ownership as a co-owner. The COA gives the Buyer the right to purchase the LLC’s interest in the property for a “Buyout Amount” established in the COA. The COA also establishes the percentage of ownership between the Buyer and the LLC. The COA prohibits the Buyer from selling or mortgaging the property without the LLC’s consent. The Buyer also signs an Obligation to Pay (“OTP”) which is basically a promissory note in favor of the LLC. Naturally, the Buyer executes a mortgage in favor of the LLC, which secures the OTP and the COA. The LLC then assigns the COA, the OTP, and the mortgage to Guidance Residential, LLC, which is the real lender in these transactions.

The problem from a title insurance standpoint is that the LLC, as a co-owner of the property, does not sign the mortgage to be insured. Since a co-owner does not sign the mortgage to be insured, the insured mortgage is only a lien on the Buyer’s initial ownership interest. Therefore, to insure these transactions under this particular lending concept, the commitment and both the owner’s and lender’s policies must have the following exceptions: (1) the policy only insures the Buyer’s initial undivided ownership interest in the property; (2) the policy only insures a mortgage on the Buyer’s initial undivided ownership interest in the property; (3) Any loss or damage arising from the fact that the Co-owner did not sign the insured mortgage; (4) the terms and conditions of the following documents: the COA between the Buyer and the LLC; the OTP between the Buyer and the LLC; the Mortgage between the Buyer and the LLC; and the Assignment of Mortgage to Guidance Residential, LLC.

With the forgoing exceptions, WFG may insure these transactions:

1. All rights and interest of (Co-Owner LLC, to be created). 2. This policy insures only ______________ undivided ownership interest in the subject property. 3. This policy only insures a Mortgage on _____________________ initial undivided ownership interest in the subject property. 4. Any loss or damage arising from the fact that (Co-Owner LLC, to be created) did not sign the insured Mortgage. 5. Terms and conditions of the contract between __________________________ and (Co-Owner LLC, to be created). 6. Terms and conditions of the Co-Ownership Agreement between _______________________ and (Co-Owner LLC, to be created). 7. Terms and conditions of the Obligation to Pay between _________________ and (Co-Owner LLC, to be created). 8. Terms and conditions of Assignment of Mortgage, Property and Contract Rights and Amendment of Security Instrument.

Articles and Documents consulted for this article: Undated article by American Finance House L.A.R.I.B.A. Faith & Economics What Happens When Religious Law Prevents People From Living The American Dream? by Steve Veldheer Bank Offers Muslims Interest-Free Loans by Mandy Morgan Loan documentation from Guidance Residential LLC