The Dodd-Frank Wall Street Reform and Consumer Protection Act (or simply “Dodd-Frank”) was passed in 2010. The passage of this Act was in effort to prevent the recurrence of the events that caused the 2008 financial crisis. The act also implements regulations that ultimately seek to create a greater certainty that borrowers can repay their home loans.
The new Consumer Financial Protection Bureau (“CFPB”) was established to implement and enforce the Dodd-Frank rules in the mortgage industry. The CFPB regulations implementing Dodd-Frank went into effect on January 10, 2014 and have raised a number of compliance issues for those in the lending industry. Although most of the 900 pages of Dodd-Frank is geared towards regulating the ways that banks must do business, a small fraction of Dodd-Frank changes the landscape of the average home buyer and seller-financer in significant ways.
Sellers that are Financing Buyers may Now be Breaking the Law
Traditionally, about 10% of sellers of residential property have offered buyers the option of seller-financing. This option works well for both parties. When sellers act as financers, it allows them to move a home faster and receive a larger return on investment. Buyers benefit because they can bypass the more stringent requirements of institutional lenders and have more leeway in negotiating the terms of the private loan.
This freedom to contract between buyer and seller is now greatly hindered due to Dodd-Frank. Under the rules, before taking the exceptions into consideration, a seller of a residential property may not act as financer to the buyer if the seller is not a licensed mortgage originator. However, there are a couple of exceptions that a seller-financier may fall under and thereby bypass this general rule. The following is only a brief summary of the exceptions.
The One Property Exclusion Continue reading