Council financing construction of five home ownership houses after lending misunderstanding

By Dean Rhodes

Publications coordinator

Tribal Council is poised to approve a $1.877 million supplemental budget during its Wednesday, Nov. 8, meeting to fund the construction of five houses in the home ownership development project east of Grand Ronde Road off McPherson Road after a lending misunderstanding affected five potential buyers.

Five Tribal member mortgage applicants who were interested in building in the Tribal project were incorrectly notified that a Housing & Urban Development Section 184-approved lender would not provide loans for new construction on Grand Ronde Tribal lands despite HUD guidelines stating that new construction is eligible for the federally-backed loans.

“With Section 184 financing, borrowers can get into a home with a low down payment and flexible underwriting,” HUD states on its website. “Loans can be used, both on and off Native lands, for new construction, rehabilitation, purchase of an existing home, or refinance.”

The financial institution – 1^st Tribal Lending – has offices in South Dakota, Arizona, California, Oklahoma and Wilsonville, Ore., and is a major player in the niche market of providing Section 184 loans to Native Americans.

The new supplemental budget, along with a $2.326 million supplemental budget approved in August, means the Tribe will own the first 20 homes being constructed by Scholten Construction.

Interim General Manager and Tribal Finance Officer Chris Leno said during the Wednesday, Oct. 11, Tribal Council meeting that 1^st Tribal Lending backed out of providing new construction loans, leaving the Tribal families without secure financing to start construction.

Leno added that the Tribe was working solely with 1^st Tribal Lending and the company “changed its position” several months ago regarding making loans for new construction.

Tribal Council member Denise Harvey said that 1^st Tribal Lending cited staffing issues as the reason it could no longer proceed with the Section 184 loans and that HUD was concerned that Native peoples could not obtain new construction loans.

In addition to being a Tribal Council member, Harvey is one of 15 Tribal leaders serving on the HUD Tribal Intergovernmental Advisory Committee.

“The lenders that are certified to do the (Section) 184 loans are required to follow through … it’s part of their requirements to provide these loans to (Section) 184 applicants,” Harvey said. “I do believe that the reason 1^st Tribal backed out or decided that they were not going to do new construction loans is due to a staffing issue with that company.

“It is a concern for HUD that people qualifying for (Section) 184 loans are not allowed to do a new construction loan because everybody else in the country can do new construction loans. … HUD was very concerned about how 1^st Tribal has handled the situation because they were working with these clients for over a year and all of a sudden say they don’t have the staff to follow through on five loans, which is not that extreme.”

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1^st Tribal Lending Managing Director Brett Robinson said the incident is a “big misunderstanding” that has been blown out of proportion.

He said a mortgage broker – Phil Gerstner of Lighthouse Financial Enterprises of Salem – who had been working the Tribal families had never submitted information to 1^st Tribal Lending regarding the new construction loans.

“These family members hadn’t actually applied directly with us,” Robinson said. “Apparently, they were working with a local mortgage lender. … He had been working with the Tribe and these five Tribal members for some time, but he had never transmitted anything to us.

“We did have back in late summer some unexpected turnover in our Construction Administration Department and for a few days we put things on hold because we had to get our arms around the issue. We told our brokers that we were temporarily putting new construction applications on hold until we got this issue sorted out and unfortunately he never called us and talked to us about it. We never completely shut down.”

Robinson said Gerstner informed the Tribe that 1^st Tribal was no longer doing new construction loans on Tribal land.

Robinson said the first he heard about the Grand Ronde issue was during a meeting with HUD’s Office of Native American Programs in Washington, D.C., and the director inquired about the situation at the behest of the Grand Ronde Tribe.

Gerstner agrees with the 1^st Tribal timeline of events, adding that 1^st Tribal is one of the few Section 184 lenders willing to provide new construction loans for Native American-owned housing on Tribal land. Most Section 184 lenders prefer to finance Native-owned housing on non-Tribal lands, he said.

“I’ve been working with the Tribe, the architects and Scholten Construction on the project since the fall of ’21,” Gerstner said. “We had a few delays, unforeseen delays. We were getting pretty close to getting everything going and got the last pre-qualifications from a number of the families and then back about two-thirds of the way through August, 1^st Tribal sent out a notification that said they’re temporarily suspending construction lending.”

Gerstner said he then contacted Scholten Construction and Tribal representatives and developed an alternative to pursuing new construction loans through a Section 184 lender.

Only after pursuing another financing option was Gerstner alerted that 1^st Tribal was willing to proceed with the Grand Ronde loans.

“We’re 100 percent in the construction business,” Robinson said. “We’re ready to work with these folks, and we’ve communicated that to the mortgage broker and I believe we’ve communicated that to the Tribe.”

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The Section 184 Indian Home Loan Guarantee Program is a mortgage program specifically designed for American Indian and Alaska Native families. It was established by Congress in 1992 to facilitate homeownership and increase access to capital in Native American communities.

The Office of Loan Guarantee within HUD’s Office of Native American Programs guarantees Section 184 home mortgage loans made to Native borrowers, assuring lenders that their investment will be repaid in full in the event of foreclosure.

Loans are limited to single-family housing and fixed-rate loans of 30 years or less.

According to the HUD website, there are 256 Native American Tribes approved for lending on trust land, including the Confederated Tribes of Grand Ronde.

In addition, the HUD site lists 172 financial institutions that are approved as Section 184 lenders with 81 of them approved to provide loans in Oregon. 1^st Tribal Lending is approved to make Section 184 loans in more than 38 states and processes about 50 percent – 1,500 to 2,000 annually – of the loans nationwide, Robinson said.

“It’s a pretty small niche in the world of mortgages,” Robinson said.

According to HUD, a borrower applies for a Section 184 loan with a participating lender, and works with the respective Tribe and Bureau of Indian Affairs if leasing Tribal land. The lender then evaluates the necessary loan documentation and submits the loan for approval to HUD’s Office of Loan Guarantee.

“By encouraging lenders to serve Native communities, Section 184 is increasing the marketability and value of the Native assets and strengthening the financial standing of Native communities,” HUD states on its website.

Leno said that when the Tribe eventually sells the homes, the proceeds will come back to the Tribe.

Harvey said that with the Tribe approving the supplemental budget, the five homes will not be classified as “new construction” and that will streamline the lending process with 1^st Tribal Lending or another approved Section 184 lender for the families seeking to own homes in the project.

“We’re going to complete those homes and then those homes will be financed with a non-construction loan,” Gerstner added. “There’s a couple of advantages to that. Construction loans have a 10 percent contingency and so the loan actually has to be a little bit bigger. Of course, the larger a loan, the higher the monthly payment. … In a weird sort of way, I think this is going to benefit the members because you’re going to get a smaller loan and probably a slightly better interest rate.”