fbpx

Dodd-Frank And Seller Financing

by | Apr 10, 2020 | Real Estate Broker, Seller Financing | 0 comments

Seller-Financing Restrictions
Under The Dodd-Frank Act

Hire the Barnes Walker Law Firm

https://barneswalker.com/seller-financing-restrictions-under-the-dodd-frank-act/

https://barneswalker.com/wp-content/uploads/2015/04/Stephanie-Edited-Financing-Restrictions-2014.pdf

https://barneswalker.com/wp-content/uploads/2015/04/Dodd-Frank-Decision-Tree.pdf

Download Full Article Here

Read about seller financing as done by James Robert Deal

Read the Dodd Frank text.

Read An Abbreviated History of Seller Financing

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.

 

Video-Introduction To Reverse Mortgages

Video-Introduction To Reverse Mortgages

The FHA reverse mortgage is a powerful retirement tool. If you are 62 years or older, and if your mortgage is less than half of the home’s value, you can take out an FHA mortgage that has no mandatory payments. The spouse younger than 62 is protected.

read more
Are there non-FHA reverse mortgages?

Are there non-FHA reverse mortgages?

There are non-FHA jumbo reverse mortgages that go up to $4 million, meaning jumbo borrowers can borrow up to around 50% of the value of the home, around $2 million. Borrowers can qualify at age 60 instead of 62. However, the spouse under 60 will not be able to inherit the mortgage.

read more
JR-Deal-NewZ-1-18-2021

JR-Deal-NewZ-1-18-2021

The James Robert Deal NewZ January 18, 2021 www.JamesRobertDeal.org/JR-Deal-NewZ-1-18-2021   SMART METERS   TESTIMONY TO SNOHOMISH PUD...

read more
JR Deal NewZ 9-14-2020

JR Deal NewZ 9-14-2020

James Robert Deal, real estate attorney and real estate broker. Flat fee payable at closing. Helping buyers, sellers, and brokers. 425-774-6611.

read more
Buy Real Estate In Partnership

Buy Real Estate In Partnership

If you do not have enough income to qualify to buy a home, join together with several others. But a larger home, big enough for several families. With multiple incomes you can qualify. If you want privacy you can jointly buy a tri-plex or a four-plex. These can be bought with an FHA loan with only 3.5% down.

read more
Flat Fee Payable At Closing

Flat Fee Payable At Closing

I am a real estate transactional attorney. There is no charge for inquiries by phone or email. I can often quote a flat fee payable at closing. 

read more

Voltage Can Vary

Electricity can't be stored, so when I turn on a light, the power station must immediately produce some extra electricity. How is this possible?...

read more

Where Does Petroleum Come From?

Is anybody contending that oil is being replenished within the earth? Keith Hisey, Geologist, Researcher, Senior Manager, Historian at Consulting...

read more
Become An Attorney Broker

Become An Attorney Broker

James Robert Deal is both an attorney and a broker. Attorneys can become real estate agents and make more money and deliver better service as attorney brokers. Join The Deal Team with Keller Williams.

read more

4017 Colby Everett

JAMES ROBERT DEALREAL ESTATE ATTORNEY REAL ESTATE MANAGING BROKERCOMMERCIAL MORTGAGE BROKERKW EVERETT    425-774-6611James@JamesDeal.com I am...

read more
Helping Other Brokers

Helping Other Brokers

I am a real estate broker and a real estate attorney. I help buyers, sellers, and other brokers throughout Washington. Call me at 425-774-6611 when your purchase or sale involves legal issues. I can often quote a flat fee payable at closing.

read more

Sign In

CLICK HERE TOSIGN UP FOR A BETTER PROPERTY SEARCH TOOLYou will be asked for your email address and your telephone number.You do not have...

read more

Home Renovation Can Cost A Lot

Reality check: Don’t fall for these TV home renovation fibs Kitchen and bathroom remodels can cost more and take longer than HGTV shows lead you to...

read more

Home Inspection Questions

What Buyers Should Ask After a Home Inspection October 9, 2018 After an inspector has finished a home report, buyers may feel overwhelmed by any...

read more
15605 Cascadian Way Bothell WA

15605 Cascadian Way Bothell WA

15605 Cascadian Way Bothell Washington. $430,000. 3 bedrooms, 2 bathrooms. Buy on FHA Rehab Loan. Hold long term. Eventually sewers may be extended 400 feet, and then two homes, two duplexes or five townhouses can be built. James Robert Deal, Attorney and Broker, 425-774-6611.

read more
Co-Brokerage Listing Addendum

Co-Brokerage Listing Addendum

As both a real estate attorney and a real estate broker, I co-broker with other brokers, helping them to take more listings and service them better. This provides better service for sellers.

read more
The Foreclosure Train Rolls On

The Foreclosure Train Rolls On

Private corporations such as Loan Star and Caliber bought thousands of mortgages. The government pays them to modify mortgages, but they are quick to foreclose. They invest in high value instead of low value homes. They should be required to serve the interest of the local neighborhood as are banks. They should be regulated as banks.

read more
Final Walk Through on New Construction

Dodd Frank and Lease Options

There are seller financing restrictions when the buyer is going to live in the property.. No cash out less than five years. The rate must be fixed for the first five years.

read more
The Foreclosure Train Rolls On

Mortgage Modification Successes

Most of our clients are people who tried to modify their loans on their own and failed. Mortgage modifications are tricky. There are procedures...

read more
For Sale By Owner

For Sale By Owner

James Robert Deal, Attorney and Broker, assists for-sale-by-owner buyers and sellers. Call 425-774-6611 or 888-999-2022.

read more
Call A Real Estate Attorney BEFORE You Buy or Sell

Real Estate Attorney And Real Estate Broker

James Robert Deal is both a real estate agent and a real estate attorney practicing in Lynnwood Washington. If He is your broker, he does not charge extra for legal work related to your transaction.

read more
Author

Author

What To Serve A Goddess When She Comes For Dinner Welcome To My Book I highly recommend it. I had a lot of fun writing it. My book has 464 page...

read more
Buyers With a Good Down Payment But Poor Credit

Buyers With a Good Down Payment But Poor Credit

If you are a would-be buyer who has a good down payment and good income but poor credit, I am willing to help you buy property on a lease-option or contract basis. James Robert Deal, attorney and broker. 425-771-1110

read more
Services We Offer

Services We Offer

We have an open telephone line to brokers, buyers, sellers, and clients in general who may need help with buying or selling real estate or who may...

read more
Door-To-Door Transit

Door-To-Door Transit

Door-To-Door Transit: The Only Solution To Our Traffic Nightmare by James Robert Deal, Attorney Traffic is bad and getting worse, and there is no...

read more
Lease-Option Deals Open Doors

Lease-Option Deals Open Doors

LEASE-OPTION AND LEASE PURCHASE DEALS A lease-option or lease-purchase deal is a form of seller financing.  With the lease-option deal, title stays...

read more
Zombie Foreclosures

Zombie Foreclosures

CFPB: Zombie foreclosures hurt borrowers The Consumer Financial Protection Bureau is keeping an eye on “zombie” foreclosures, which it worries cause...

read more
Final Walk Through on New Construction

New Federal Rules on Foreclosure

New Federal Rules on Foreclosure —By Erika Eichelberger - Thanks to Mother Jones On Thursday, the Consumer Financial Protection Bureau, the federal...

read more

Washington MERS Suits Fail

Judges Dismiss MERS Suits By Evan Nemeroff Two borrower-initiated lawsuits alleging that the Mortgage Electronic Registration Systems role in the...

read more
Modification on Rental

Modification on Rental

It is harder to get a mortgage modification on a rental property than it is on an owner occupied property. The rules are not as clear. You need a...

read more
Making Home Affordable Continues

Making Home Affordable Continues

HAMP continues aiding borrowers Three firms still fall short in meeting servicing goals. Thanks to Housing Wire. Kerri Ann Panchuk December 9, 2013...

read more
Rental Property Modification

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...

read more
Low Modification Approval Rate

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...

read more
Eminent Domain To Modify Loans

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...

read more

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...

read more

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) -...

read more

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...

read more

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...

read more

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...

read more

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...

read more

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...

read more

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...

read more

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,...

read more

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...

read more

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...

read more

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...

read more

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....

read more

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...

read more

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...

read more

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...

read more

Subscribe To Our Newsletter

Join our mailing list to receive our latest news and updates.

You have Successfully Subscribed!

Pin It on Pinterest

Share This