Seller Financing of Residences Affected By Dodd-Frank

May 11, 2017 - Blog by

The Dodd-Frank Wall Street Reform Act and Consumer Protection Act (“Dodd-Frank Act” or “Act”) has specific impact on individuals or entities that engage in the practice of financing the sale of residential dwellings. 

 

This rule expands on existing federal regulations concerning licensing, training, screening and compensation practices of loan originators.  This portion of the Dodd-Frank Act, known as the Loan Originator Rule, went into effect Jan. 1, 2014.

Particularly, sellers are now considered loan originators if they finance the purchase of residential dwellings to consumers secured by a mortgage on the dwelling, but there are certain exclusions I will discuss.  

This rule is important for a number of reasons — not least of which is the fact that mortgage loan originators must obtain a mortgage broker license before originating mortgages. 

As mentioned, any individual or entity that intends to finance the purchase of a residential dwelling to a consumer secured by a mortgage on the dwelling will be classified as a loan originator under the act.     Residential dwellings are dwellings with one to four units such as houses, condominium units, townhomes, apartments, mobile homes, trailers and boats that may be used as residences. The residential dwelling classification remains regardless of whether the buyer intends on using the dwelling as a primary or secondary residence or as a vacation home.

Two exclusions

The act contains two often-used exclusions from the requirements of the Loan Originator Rule. Both exclusions include additional conditions that must be met in order for the exclusion to apply. 

Here is a summary of the specific conditions for each of the exclusions:

  1. The one-property exclusion applies when the seller-financer:
  • is a natural person, estate, or trust;
  • will provide financing for only one (1) property in any twelve-month period;
  • owns the property securing the financing;
  • was not the contractor or builder of the property; and
  • extends financing that does not result in negative amortization; does not contain a balloon payment due within the first five (5) years, and contains only a fixed rate or an adjustable rate that resets after five (5) years or more subject to reasonable annual and lifetime limits.
  1. The three-property exclusion applies when the seller-financer:
  • is a natural person, entity, estate, or trust;
  • will provide financing for three (3) or fewer properties in any twelve-month period;

  • owns the property securing the financing;
  • was not the contractor or builder of the property;
  • extends financing that does not result in negative amortization; does not contain a balloon payment due within the first five (5) years, and contains only a fixed rate or an adjustable rate that resets after five (5) years or more subject to reasonable annual and lifetime limits; and
  • determines in good faith that the consumer has a reasonable ability to repay the loan.

 

This is not intended to be legal advice for any specific situation and the reader should consult their attorney regarding their situation.