Seller-Financing Restrictions
Under The Dodd-Frank Act
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The Dodd-Frank Wall Street Reform and Consumer Protection Act created the Consumer Financial Protection Bureau (“CFPB”), and with other laws, has expanded previous regulations concerning the licensing, training, screening, and compensation practices of loan originators, mortgage brokers, bank officers, and lenders in general, in consumer loan transactions.
On January 10, 2014, the Loan Originator Rule came into effect to implement the new Dodd-Frank requirements. This Rule was expanded to include certain restrictions on seller-financing in residential real estate transactions where the dwelling is secured by a mortgage, unless the seller is entitled to certain exclusions.
This Article is an attempt to explain these confusing (and conflicting) requirements of the laws—namely, the Dodd-Frank Act. This is a general outline, and because the laws are so new and untested, we will keep you informed as to changes and/or inconsistencies with this Article.
If you do not think this will impact your practice, think twice. For example, if you have a son or daughter who has a good paying job but no credit, who wants to buy a home, and you wanted to lend them money, you cannot lend money to that son or daughter to buy a residential property to use as their home and secure it with a mortgage without first obtaining a mortgage broker license. This is how impactful the new laws are.
What is a loan originator under the Dodd-Frank Act?
In very general terms, if the loan will be secured by a property that the borrower will use for residential purposes, then the person who arranges the loan is defined as a “loan originator,” and must have a mortgage originator license. Seller-financers must be licensed mortgage originators unless they qualify for one of the two exceptions, which will be discussed below.
The Dodd-Frank Act defines mortgage originators as “any person who for direct or indirect compensation or gain or in the expectation of direct or indirect compensation or gain takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan.” Please note there are different definitions and rules under various Federal and State laws that apply to mortgage loan originators, and they are very difficult to comprehend and reconcile with each other. The loan originator rules under the Dodd-Frank Act, however, require that said persons be licensed, are subject to certain restrictions on compensation, and must comply with vague guidelines on proving the borrower’s ability to repay.
Under the Dodd-Frank Act, any person who offers and negotiates terms of a residential mortgage loan is deemed to be a “mortgage loan originator” and must be a licensed mortgage broker in compliance with all laws, unless one of the seller-financing exceptions described below apply. There is no exemption for a person who is not a seller who wishes to make a loan secured by a residential mortgage. Lenders must be licensed mortgage brokers, or use the services of a licensed mortgage broker in connection with the loan. This applies only to mortgages that secure loans on residential dwellings containing one to four units, and includes houses, apartments, townhouses, condominium units, cooperative units, mobile homes, trailers and boats used as residences. The rules apply whether the individual is purchasing a primary residence, second home or vacation residence.
NON-APPLICABILITY
As indicated above, the Dodd-Frank Act applies only to residential mortgage loans.
1. Therefore, Dodd-Frank does not apply to loans secured by vacant land, commercial properties, rental properties or properties used for investment purposes. The rules also do not apply to residential properties on which the buyer does not intend to reside.
2. Further, Dodd-Frank does not apply to non-consumer buyers, even if the property being purchased is a residential property. Examples of non-consumer buyers are: corporations, limited liability companies, partnerships, etc.
Thus, if Dodd-Frank does not apply as set forth above, you do not have to analyze whether the transaction meets one of the two exceptions discussed below.
EXCEPTIONS
Even if the transaction involves property being purchased by a consumer for their residence, the Dodd-Frank Act provides certain exceptions for sellers who wish to sell their property and take back a mortgage. Under these exceptions, the seller-financer will not fall under the definition of a “loan originator” if the seller and the financing terms meet certain criteria.
The two exceptions are as follows:
1. First, there is a one property exception. Under the first exception, a seller-financer who extends credit to a buyer as defined above, secured by a mortgage encumbering a residential dwelling, is not considered a “loan originator” if:
(a) they are a natural person, estate, or trust;
(b) they provide financing for only one property in a twelve month period;
(c) they own the property securing the financing;
(d) they did not construct or act as the contractor for the construction of a residence on the property;
(e) the financing must have a repayment schedule that does not result in a negative amortization;
(f) balloon payments are allowed (not less than 5 years recommended to be conservative; however, there is apparently a two-year window, and after two years this allowance may terminate);
(g) the financing must have a fixed rate or an adjustable rate that resets after five or more years, and there are restrictions, limitations, and caps on rate changes and lifetime caps of rates; and lastly,
(h) the seller does not have to vet the borrowers or determine the borrower’s ability to repay.
2. Second, there is a three property exception. Under this exception, the seller-financer is not considered a “loan originator” if:
(a) they are a natural person, estate, or trust, or an entity;
(b) they provide financing for three properties or less in any twelve month period;
(c) they own the property securing the financing;
(d) they did not construct or act as the contractor for the construction of a residence on the property;
(e) the financing must be fully amortizing and there must be no balloon payments or structures allowed;
(f) the financing must have a fixed rate or an adjustable rate that resets after five or more years, and must have caps on rate changes, and also lifetime caps.
(g) the seller must determine, in good faith, that the consumer has a reasonable ability to repay, and while the sellers are not required to formally document how they made their good faith determination that the buyer had the ability to repay, a prudent seller should keep records in case the analysis is ever called into question. This could include current or reasonably expected income or assets, income tax returns, employment, monthly payments, debt obligations, debt to income ratios, credit history, etc.
For both exceptions, adjustable interest rates must have reasonable annual and lifetime limits on rate increases and provide for the rate to be determined by the addition of a margin to an index rate based on a widely available index such as indices for U.S. Treasury securities or LIBOR. CFPB’s Official Interpretations note that an annual rate increase of up to 2 percentage points is reasonable. A lifetime rate cap or ceiling of 6 percentage points, up to any applicable usury limit, subject to a minimum floor, is reasonable. These “safe harbors” are not mandatory, but sellers would be wise to adopt them.
It is important to note that a corporation, partnership, or LLC can never avail itself of the one property exception, and may only use the three property exception. A potential loophole would allow for a corporation to convey the property in question to its individual members/owners, who could in turn provide seller-financing under the terms of the one property exception. However, taking advantage of such a loophole under the new laws is very risky, and not recommended at this point.
Additionally, no matter what, under either exception there can be no mandatory arbitration, and the parties cannot waive any of the Dodd-Frank requirements or restrictions.
3. There is an additional exception for lenders or sellers who finance less than six dwellings in a twelve-month period. Under this exception, these lenders are not considered “creditors,” and are exempt from the ability-to-repay provisions under 12 CFR §1026.43. However, they are still considered “loan originators” for purposes of the licensing and compensation requirements, and must still comply with other relevant provisions under Dodd-Frank. Therefore, seller-financers should rely only on the first two exceptions described above. As mentioned, the laws and definitions are very confusing and unclear.
4. Lastly, there are other exceptions for qualified mortgages, but they are very complicated and allow only for a presumption that the ability-to-repay requirements have been met. As a practical matter, these exceptions do not assist local seller-financers.
LEASE OPTIONS
A lease option contract where an owner rents out residential property to a tenant and gives the tenant an option to purchase the property after a specified period may also be subject to the new Dodd-Frank Act, if any of the rental payments are used as a credit toward the purchase price or create ownership equity in the property.
FIX TO FLIPS
There may be some restrictions on a person who purchases a property, fixes it up, flips it quickly, and takes back financing from the buyer, in that the seller may be considered a contractor. Such a seller should still adhere to one of the above exceptions, particularly if the renovations required the seller to obtain building permits. The rules do not apply, however, to a seller who extends financing to an investor-buyer who does not intend to reside on the property.
DOUBLE CLOSING
One way to possibly make closings happen with an individual owner/lender is to have two closings in which the seller-financer first buys the property, so then he or she can immediately sell it to, and finance it for, the borrower, subject to the limitations contained in the exceptions. However, you have to deal with two closing costs and other risks. The contract would have to be assignable as well.
This potential loophole carries a risk, however. There is a general rule of law that one cannot do indirectly what is prohibited directly, especially if one acts repeatedly in the same way, creating a pattern.
A GOOD SOLUTION
So, what if Dodd-Frank applies to a seller-financer or an individual lender, and that seller-financer, the individual lender, or the transaction does not meet the requirements of either the one-property exception or the three-property exception? Do you abandon the deal? No. It will cost the seller and/or the buyer some money, but the seller (or the individual lender, if not the seller) or buyer can contact a licensed, independent loan originator who we all know as a mortgage broker. Dodd-Frank allows a seller-financer or individual lender who does not otherwise comply with Dodd-Frank to still provide mortgage loans if they provide the loans through a mortgage broker, provided further that the mortgage broker complies with all of the various lending laws and regulations, including but not limited to, the Dodd-Frank Act, the SAFE Act, RESPA, the Truth In Lending Act, and Regulation Z. Since the mortgage broker will be lending the seller-financer’s or individual lender’s money, the broker may be considered the agent of the seller-financer or individual lender, in which case, the latter will be potentially liable if the former fails to comply with all of the lending laws and regulations. Therefore, the seller-financer or individual lender should use only a competent and knowledgeable mortgage broker.
PUNISHMENT FOR VIOLATIONS
What happens if there is a violation of the Dodd-Frank Act and other related laws? The penalties are very harsh if there is a violation of the various federal requirements, including the Dodd-Frank Act, the SAFE Act, RESPA, and the Truth In Lending Act, in that there could be a private right to sue for violations and to be reimbursed attorneys’ fees and costs, penalties of up to $4,000.00 to $5,000.00 per day at a minimum, $25,000.00 for reckless violations, and $1,000,000.00 per day for knowing violations. There could also be actions against the violator such as rescission or reformation of contract, refund of borrower costs, return of interest paid, return of real property, restitution, disgorgement or compensation for unjust enrichment, private damages, other monetary relief, and other relief currently undefined.
You have to be very careful in that the Act targets not just owner/lenders and seller-financers, but it is also a danger to real estate agents who arrange for credit and set up a loan, particularly if the agents receive compensation. In such cases, these agents might also be considered loan originators and have to be licensed under the new laws. This risk changes Realtors’® normal and historic business model, as they often help borrowers locate and find different forms of financing for properties. Providing clients with uncompensated general information about mortgages or lists of reputable lenders, though, does not appear to bring a real estate agent or broker under the definition of a loan originator. However, if an agent’s or broker’s efforts exceed these acts, there could be some liability.
QUICK-REFERENCE GUIDES
At this point, are you wondering if there is some simple way of deciding whether a seller-financer needs to be licensed as a loan originator? Yes, there is: Attached, please find the Barnes Walker Seller-Financing Guide Under Dodd-Frank.
Do you need a chart that compares side-by side the requirements of the one-property exception and the three-property exception? If so, see the Barnes Walker Dodd-Frank Seller-Financing Exception Comparison Chart attached hereto.
UNCERTAINTY
Dodd-Frank, the CFPB’s implementing rules, and the related laws are very new and untested, and therefore, there is a lot of uncertainty as to how they may be applied. In addition, their wording is very broad, complicated, and vague, and, in a lot of areas, inconsistent with other definitions and provisions of various federal regulations. These laws and rules have also yet to be tested in the courts, and governmental agencies have not provided clarity on some of the inconsistencies and vague requirements. Therefore, you want to be very careful and stay within the “black letter” areas of the laws and rules, utilizing their “safe harbors” as much as you can and not pushing the edge of the envelope. There is talk about ways to take advantage of possible loopholes in the laws and the rules, such as using different land trusts and creating multiple LLC’s, but they are untested, and you do not want to be a “test case” against the federal government.
Important Note:
The information contained in the preceding article is summary in nature and is given for educational purposes only. This article should not be considered as legal advice for your situation, if any, nor is it intended as specific or detailed advice, as we do not have any information specific to your situation. Further, the preceding article is not intended to be an all-inclusive discussion of the provisions of the Dodd-Frank Act, but a guide to the same, and there may be other matters not described in the article which may impact your particular situation. Therefore, always seek legal advice regarding your own, unique situation. Finally, this article is intended as a public service and is not a solicitation seeking legal employment of our firm by you or your clients.
Sincerely,
James Robert Deal
Real Estate Attorney & Real Estate Managing Broker
James@JamesDeal.com
PO Box 2276 Lynnwood WA 98036
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HAMP continues aiding borrowers Three firms still fall short in meeting servicing goals. Thanks to Housing Wire. Kerri Ann Panchuk December 9, 2013...
Rental Property Modification
This is a rental property modification. Ocwen was the servicer, and the investor was Washington Mutual and now Chase. The owner quit paying for 20...
$157,105 Wells Fargo Principal Reduction
JS is a hard working taxi driver. He came to us after a financial hardship, including a divorce. Ocwen is his servicer, however, the important fact...
Wells Fargo – 3 Year Modification
It is a long story, which I will tell later. For now I will just share the link with you and tell you that this modification took three years to...
Principal Reduction Modification
We just negotiated this excellent modification with Bank of America. The interest rate was reduced to 2.0%. The principal balance was reduced by...
Deceptive Practices in Foreclosures
Deceptive Practices in Foreclosures Thanks to the New York Times September 13, 2013 In early 2012 when five big banks settled with state and...
Low Modification Approval Rate
This post comes from Martin Andelman. The low approval rate on modifications Martin discusses is the main reason why you should hire an attorney to...
Renters’ Rights in Foreclosure`
Renters in Foreclosure: What Are Their Rights? Federal law gives important rights to tenants whose landlords have lost their properties through...
Eminent Domain To Modify Loans
A City Invokes Seizure Laws to Save Homes Peter DaSilva for The New York Times Thanks to New York Times. Robert and Patricia Castillo paid $420,000...
Fannie and Freddie Loosen Modification Guidelines
FHFA expands suite of loan mod tools By Kerri Ann Panchuk • March 27, 2013 • 9:00am Servicers dealing with loans guaranteed or owned by Fannie...
Lenders Lie to Modification Applicants
We have found that Lenders often take advantage of those who apply for modification on their own. Lenders tell them they have not received certain...
Bank of America – Fannie Modification
HMH came to me following a financial hardship. He faced high payments on his Bank of America serviced loan, with a rate of 5.625. The investor is...
Banks Forgive Mostly Worthless Seconds
The Second-Mortgage Shell Game By ELIZABETH M. LYNCH Thanks to the New York Times IN January, federal regulators announced an $8.5 billion...
More Foreclosures Coming
Where is the housing market going in 2013? Thanks to CBS News (MoneyWatch) The housing market in 2013 stands on a precipice. While there is...
Zombie Titles
The latest foreclosure horror: the zombie title By Michelle Conlin Thanks to Reuters. COLUMBUS, Ohio | Thu Jan 10, 2013 1:58pm EST (Reuters) -...
Consumer Financial Protection Bureau Guidelines
U.S. Consumer Watchdog to Issue Mortgage Rules By EDWARD WYATT Thanks to New York Times Published: January 10, 2013 WASHINGTON — Banks and other...
Aurora, Bank of America, Citibank, Chase, MetLife, PNC, Sovereign, SunTrust, U.S. Bank, Wells Fargo –
Independent Foreclosure Review to Provide $3.3 Billion in Payments, $5.2 Billion in Mortgage Assistance WASHINGTON--Ten mortgage servicing companies...
Calibur – Formerly Vericrest
Mortgage modification is the practice of law. Dealing with Caliber Home loans is not easy. Get legal representation.
Debt Forgiviness Will Be Imputed Income Unless Congress Acts
Beware of IRS Tax Whammy With Short Sales and Mortgage Modifications in 2013 Posted on Wednesday (December 26, 2012) at 6:00 pm to Mortgages &...
Obama to Replace DeMarco – Stingy Leader of Fannie and Freddie
BYE-BYE DEMARCO! Obama to Replace Director of FHFA 3 You know, I was having kind of a crummy day… nothing serious, just dragging my feet a bit and...
California Puts Attorneys Out of the Modification Practice
California State Bar RECENT Decision to Cause More Harm to Homeowners in Foreclosure Thanks to Martin Andelman It’s hard to imagine anything...
Stratigic Default
Giving Up and Getting Out Foreclosures are no longer a last resort, and a growing percentage of americans think it’s ok to strategically default...
Jumbo Modification
A residential property where the first loan was more than around $729,000 at the time of the default is not eligible for modification under the...
What Caused the 2007 Crash
The Trillion Dollar Mistake That Triggered the Economic Meltdown Thanks to Martin Andelman It was summer, 2006, and Fed Chair Alan Greenspan had...
Strategic Defaulters – To Jail With You
FHFA Looking to Jail Strategic Defaulters by my friend Martin Andelman The Federal Housing Finance Administration (“FHFA”), which is the...
Still No Justice for Mortgage Abuses
Still No Justice for Mortgage Abuses September 1, 2012 Thanks to New York Times It has been six months since the big banks settled with state and...
Modifying Loans on Rental and Commercial Property
Under HAMP Tier 2, the Making Home Affordable program was extended to cover one to four unit residential rental properties. HAMP Tier 2 went into...
Successful Citi Modification
On this modification with Citi there was no principal reduction because the property was not underwater. However, the interest rate was reduced from...
Midland Mortgage Modification
We negotiated a good deal for Dennis and his wife. They went from a 9.5% rate to 2.0% for five years, then 3.0% for a year, and 3.875% for the...
OCWEN – Principal Reductions – 2% Rate
OCWEN Principal Reduction: We negotiated a $93,000 principal reduction for this couple, provided they remain current on their payments for three...
Misconceptions About Modifications
Read Richard Fonfrias on Seven Costly Misconceptions About Mortgage Loan Modifications:...
Who is Liable on Business Credit Cards?
Business credit cards and the individual bankruptcy case by Cathy Moran, California Bankruptcy Lawyer Small corporations may have their names on the...
Happy Clients
I only post a quarter of the modifications we complete, and I have not posted any of them for some time.I will get caught up on that job when we get...
Forensic Audits Not Useful
Homeowners: Don’t Be Scammed by Forensic Audit of Mortgage Docs Posted: 19 Jun 2012 10:00 PM PDT Written by Craig D. Robins, Esq. Unfortunately,...
Should You Reaffirm a Mortgage in Bankruptcy?
Should You Reaffirm a Mortgage in Bankruptcy? 12 Jun 2012 05:00 PM PDT Written by Craig D. Robins, Esq. Reaffirming a debt in bankruptcy means that...
Martin Andelman on HAMP 2
HAMP 2 is HERE Some say it’s the best HAMP yet, and they’re probably right about that. by Martin Andelman This past year has been transformational...
When can you file bankruptcy again?
When Can I File Bankruptcy Again? by Bankruptcy Law Network There is no limit on the number of bankruptcy cases that one may file. In fact, there is...
Debt Settlement
Don’t File Bankruptcy! by Douglas Jacobs, California Bankruptcy Attorney That’s the cry of the “debt settlement” industry. They claim that they...
Bank of America Principal Reductions
Bank of America has started sending letters to thousands of homeowners in the United States, offering to forgive a portion of the principal balance...
Foreclosure and Income Tax Consequences
Foreclosure and Its Income Tax Consequences (TheNicheReport) — In a recent issue of The Niche Report I wrote an article on how to safely “walk away”...
Wells Fargo and Robo Signing
By Travis Waldron, Think Progress Posted on April 20, 2012, Printed on April 21, 2012...
Is consumer protection enough to fix housing?
Is consumer protection enough to fix housing? HW Magazine April 2012 by Christopher Whalen It is an election year and, no surprise, President Barack...
Washington Supreme Court Hears MERS Case
WA State Supreme Court Hears Arguments in Case Against MERS “May a party be a lawful ‘beneficiary’ under Washington’s Deed of Trust Act if it...
How Many Kids Have Fluorosis?
4-1-12 Thanks to Paul Lamoreaux of Port Angeles who tracked down the information I needed: I wanted to know how many kids there are in the US age 12...
Making Home Affordable Encourages Principal Reductions
Making Home Affordable Encourages But Does Not Require Principal Reductions HAMP has increased financial incentives to servicers for principal...
Principal Reductions May Be Coming
Freddie CEO signals GSE principal reduction could be soon By Jon Prior • March 23, 2012 • 11:14am Freddie Mac CEO Charles "Ed" Haldeman gave a...
No Free House
Filing Bankruptcy And Getting Your Free House by Jay Fleischman, New York Bankruptcy Lawyer I’ve been meaning to tell you something for awhile now....
Lauren Willis – Condemn mortgages and write them down
GUEST POST: Good for the Banks, Good for the Borrowers by Law Professor, Lauren E. Willis Good for the Banks, Good for the Borrowers By Lauren E....
FHA refinancing program means savings for those who can qualify
FHA refinancing program means savings for those who can qualify The Obama administration's new plan to stimulate refinancings of FHA mortgages is...
Raise the Minimum Wage
Ralph Nader: Minimum Wage Needs To Catch Up With 1968 – OpEd Written by: Ralph Nader March 1, 2012 How inert can the Democratic Party be? Do they...
CA Attorney General Asks Fannie & Freddie to Stop Foreclosing
Atty. Gen. Kamala Harris ASKS Fannie and Freddie to Stop Foreclosing Did you hear about this? California’s Attorney General, Kamala Harris has...
Pooling and Servicing Agreement Look Up
HOW TO FIND YOUR POOLING AND SERVICING AGREEMENT It may be very valuable to your case for you to have a certified copy of your Pooling and Servicing...
Arizona asserting right to write down mortgages
Arizona’s SB 1451 – Does Arizona Have the Right to Save Itself from Drowning in Underwater Loans? Drowning in the desert. The irony alone could...
40 Million McMansions
America has 40 million McMansions that no one wants By Christopher Mims 9 Feb 2012 11:12 AM Americans, especially generations X and Y, want...
Second Mortgage Time Bomb
Chapter 13 Bankruptcy Time Bomb: Mortgage Modification by Eugene S. Melchionne, Connecticut Bankruptcy Lawyer One of the major benefits of Chapter...
Ocwen Backs Principal Reductions
Ocwen Backs Principal Reductions, Mandatory Outsourcing to Improve HAMP By: Carrie Bay 03/03/2010 Ocwen Financial Corporation has one of the...