Dodd-Frank Seller Financing

DODD FRANK AND SELLER FINANCING

JAMES ROBERT DEAL, J.D.

425-774-6611 x 1

James@JamesDeal.com

MATTHEW PARKER

MatthewParker@JamesDeal.com

425-774-6611 x 2

If you sell your property on seller financing, you may be required to comply with Dodd Frank restrictions on seller financing.

The issue centers around whether a licensed loan officer working for a licensed loan company must be consulted.

Most transactions are exempt, and that means that there is no need to consult with a loan officer. If the transaction is not exempt, that means that the seller is acting as an unlicensed  loan officer.

These restrictions apply if the deal is a recorded, seller-financed, wrap-around deal. Some experts say that a lease option is not a sale, perhaps because it is not recorded, and that Dodd Frank does not apply. Some loan officers say it does, maybe so they can charge a fee to approve the financing.

Dodd Frank can limit the right of buyers and sellers to do seller-financing. However, many transactions are exempt from these limitations.

To be exempt means that the parties will not have to hire a loan officer and qualify the buyer as if the buyer were obtaining a bank loan.

If a transaction is not exempt, the parties should hire a loan officer and qualify the buyer as if the buyer were obtaining a bank loan.

If the lender is a third party making a loan to a buyer who does seller financing with a seller, the transaction is exempt from Dodd Frank, and there is apparently no requirement that the seller to hire a loan officer to bless the transaction.

Even if the transaction is exempt, there are limits. Let’s start with the one-property exemption.

One Property Exclusion: Only sellers who are individuals, trusts, or estates can take advantage of the one property exclusion. Corporations, LLC’s, and partnerships must use the three-property exclusion. Most seller-financed transactions fall into this exemption. If a seller sells a home that the seller has lived in to a buyer who will live in the home, the seller can sell one such home and not be required to qualify through a mortgage broker. The transaction is said to be exempt. However, the interest rate for the first five years must be fixed. Thereafter, the rate and payment may increase. The law probably allows a five year balloon payment cash out, although the law does not state this explicitly. I presume that a five-year balloon would be allowed under the one-property exclusion because the three-property exclusion prohibits a five year cash out and requires a full 30-year amortization, while the one-property exclusion says noting one way or the other. It is clear that the rate can go up after five years to a level which will give the buyer incentive to refinance. After five years, rate increases of 2.0% per year, based on a margin plus a recognized index, up to 6.0% over the life of the loan are allowed.

Three Property Exclusion: Sellers who are individuals, trusts, estates, corporations, LLCs, and partnerships must luse the three-property exclusion. If a seller sells a home, not necessarily one the seller lived in, and the seller sells no more than three properties per year, the transaction is exempt. No loan officer need be consulted. The interest rate for the first five years again must be fixed. Thereafter the rate and payment again may increase. No negative amortization loans are allowed. It is clear under the three-property rule that for the transaction to be exempt, the seller must give the buyer a 30-year mortgage. The rate must be fixed for the first five years. The rate can go up after five years to a level which would compel the buyer to refinance. After five years, rate increases of up to 2.0% per year, based on a margin plus a recognized index, up to 6.0% over the life of the loan are allowed.

Dodd-Frank only applies to residential properties. This includes one-to-four unit housing, raw land, and vacant lots sold for residential purposes.

If a seller sells to a buyer who is going to do a fix and flip as a contractor and not live in the property, the transaction is exempt.

If the terms of the seller-financed transaction are negotiated by an attorney who is not earning a mortgage fee, the transaction is exempt. No loan officer need be consulted.

If a seller sells to a buyer who is not going live in the property, Dodd Frank does not apply. This means the parties will not have to hire a loan officer and that the seller can require full payoff in fewer than five years and that the interest rate may be variable from the start. It means that the buyer need not consult with a mortgage broker and qualify financially.

If the interest rate is above the usury limit of 12.0% in Washington, the transaction is not exempt from Dodd Frank.

Negative amortization loans are not exempt.

Dodd Frank treats the seller who is not an individual but is a builder differently and presumably such transactions are not exempt. Presumably, that means that buyers must qualify through a loan officer.

The best advice to give to those sellers who are not exempt is for them to spend $400 and pay a loan officer to qualify buyers by customary credit standards.

The Department of Financial Institutions is not going to track down common violators of these rules. The impact of the rules is that when the seller files foreclosure against the buyer who is not paying, the buyer is going to have a counterclaim and a defense. A fee of $400 is a small amount to pay to circumvent this thicket of regulations.

Quoting from the Barnes-Walker firm:

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.

Compare the SAFE Act, a Washington’s law that elaborates on Dodd Frank. Read the Washington DFI explanation here.

And you should also read this article pertaining to Washington law entitled Residential Seller Financing under the Consumer Loan Act.

Read the following items for more information. You will see there is quite a bit of divergent opinion as to how it applies to seller financing.

Read the Dodd Frank rules on seller financing:

http://www.consumerfinance.gov/eregulations/1026-36/2013-30108_20140118

Read the Washington regulations regarding the Washington SAFE act and seller financing:

http://www.dfi.wa.gov/documents/seller-financing/residential-seller-financing.pdf

http://www.realtor.org/topics/seller-financing/the-safe-act

http://frascona.com/dodd-frank-consumer-financial-protection-owner-financing/

http://www.ksefocus.com/billdatabase/clientfiles/172/4/1720.pdf

https://www.biggerpockets.com/renewsblog/2014/01/17/dodd-frank-law-changes-seller-financing-investors/

http://www.legalwiz.com/owner-financing-dodd-frank-safe-act/

https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/ability-repay-and-qualified-mortgage-standards-under-truth-lending-act-regulation-z/

http://files.consumerfinance.gov/f/201301_cfpb_final-rule_ability-to-repay-interpretations.pdf

https://scholarship.richmond.edu/cgi/viewcontent.cgi?article=1037&context=law-faculty-publications

https://www.washingtonattorneybroker.com/dodd-frank-and-seller-financing-2/

This article is my best attempt at interpreting this thicket of unclearly written regulations. Do not rely on my interpretation without consulting with me, some other attorney, or a licensed loan office.

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James Robert Deal, Broker and Attorney
Broker with Agency One Realty LLC
WSBA # 8103, DOL # 39666
425-774-6611, 888-999-2022
James at James Deal dot com

James Robert Deal, Attorney & Broker