Seller Financing and Private Third-Party Financing Under the Dodd-Frank Act

Seller Financing And Private Third-Party Financing Under The Dodd-Frank Act

By: Scott Umstead

• The seller is a natural person, estate or trust (notice “corporation/LLC/partnership” automatically do not fit within this one-property exception);

• The seller provides financing for only one property in any 12-month period;

• The seller owns the property;

• The seller did not construct or act as contractor for the construction of the residence in the ordinary course of the seller’s business;

• The financing must have a repayment schedule that does not result in a negative amortization (i.e. the payments must at least cover accrued interest); and

Note: i. balloon payments are allowed; and

ii. the seller does not have to evaluate the borrower’s ability to repay

A seller-financer who extends credit to a buyer (in the circumstances described above) is not considered a mortgage loan originator if:

• The seller is a natural person, estate, trust or entity (notice “corporation/LLC/partnership” do fit within this three-property exception);

• The seller provides financing for no more than 3 properties in any 12-month period;

• The seller owns the property;

• The seller did not construct or act as contractor for the construction of the residence in the ordinary course of the seller’s business;

• The financing must be fully amortizing (no balloon payments);

• The financing has a fixed rate or a rate that is adjustable after 5 or more years. If the rate is adjustable, the adjustments should be reasonable and should be tied to an accepted index (e.g. Wall Street prime or LIBOR) and there must be reasonable annual and lifetime limits on rate increases); and

• The seller determines in good faith the borrower has the ability to repay. C.F.R. §1026.43(c) provides the borrower’s ability to repay be at least based on current income/assets, current employment status, amount of the monthly on this loan, monthly payments associated with ownership of this property, all other monthly mortgage payments and debt obligations, debt-to-income ration and credit history. These things must be verified using reliable third-party records.

II NON-APPLICABILITY OF THE ACT

The Act does not apply to vacant land, commercial properties and pure rental investment properties. The Act also does not apply to residential dwellings if the buyer/borrower does not intend to reside in the property. Further, the Act does not apply if the buyer is a corporation, LLC or partnership.

A RECOMMENDED SOLUTION

Where the Act applies and the situation does not clearly fit within either the one-property or three-property exceptions, the financing can be submitted to a licensed independent mortgage loan originator. The Act does allow seller-financers (and private third-party lenders) who do not otherwise comply with the Act to provide mortgage loans if it is done through a mortgage broker who complies with all the various lending laws and regulations.

If our office is handling the transaction, we can refer you to an independent mortgage loan originator. That loan originator will undertake to ensure the buyer/borrower has the ability to repay the loan, will satisfy all legal lending requirements (e.g. disclosures, etc.) and typically charges less than $1,000. The resulting note and mortgage will then be prepared by one of the attorneys involved in the transaction.

An illustration on the following page may assist you in determining the applicability and effect of the Act with regard to seller-financing. Please note this article is educational in nature and is not to be construed as legal advice.