Dodd-Frank Stalls Home Seller-Financing
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 ExclusionThe One Property Exception essentially allows a natural person, estate or trust to provide seller financing for up to one property in any 12-month period. To qualify under this exclusion, the seller-financer must:
- Have owned the property securing the loan;
- Not be the contractor or builder of the property;
- Not utilize negative amortization in the loan (balloon mortgages are permitted) and
- Have fixed or adjustable rates that reset in no less than five years and are subject to reasonable annual and lifetime limits.
The Three Properties Exclusion
The Three Property Exception allows a natural person, estate or trusts and also business entities to be seller-financers for up to three properties in any 12-month period. In this scenario you are allotted more properties to offer seller-financing, but Dodd-Frank imposes additional burdens on the financer. In addition to the four requirements to qualify for the One Property Exclusion, the natural person, estate, trust or entity must:
- Provide a fully amortized loan and
- Determine in good faith that the borrower has a reasonable ability to repay the loan. (The criteria for making that determination can be found in Regulation Z §1026.43(c))
As a whole, Dodd-Frank brings to the table the most comprehensive financial regulatory reform measures taken since The Great Depression. Failure to comply with Dodd-Frank regulations concerning seller-financing could result in borrowers being able to recover costs and damages from the lender, seller forfeiture of down payments or finance charges and borrowers having additional defenses to a lender’s foreclosure action.
All is not lost for the unlicensed seller-financer; keep in mind that the rules examined above concern lending to consumers. Commercial lending has so far been relatively untouched by Dodd-Frank. Thus, should you desire to engage in a seller-financing real-estate transaction, it is advisable to give the attorneys at Oppenheim Law a call at 954-384-6114.
Real estate and foreclosure defense attorney Roy Oppenheim passionately defends Florida homeowners and investors from foreclosure, arranging short-sales, loan modifications, mortgage advice, commercial litigation, and business related matters. Roy is also the original creator of the South Florida Law Blog, named the best business and technology blog by the Sun-Sentinel. Share your comments and thoughts on the Oppenheim Law digital media social networks; they’d love to hear from you.