Dodd Frank and Seller Financing

If you sell your property on seller financing, you must comply with Dodd Frank restrictions on seller financing. These restrictions apply if the deal is a recorded wrap-around deal. Some experts say that a lease option is not a sale and that Dodd Frank does not apply. Other experts say it does.

If you sell to a buyer who is not going live in the property, Dodd Frank does not apply. This means 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.

However, if you sell to a buyer who will live in the property, Dodd Frank does apply. Seller financed sales come under three exclusions.

One Property Exclusion: If you sell only one property per year, and if the buyer will live in the property, the buyer is not required to qualify through a mortgage broker. But the interest rate for the first five years must be fixed. Thereafter the rate and payment may increase. No negative amortization loans are allowed. The law probably allows a five year balloon payment cash out, although the law does not state this explicitly. It is clear that the rate can go up after five years to a level which will compel the buyer to refinance. Only sellers who are individuals, trusts, or estates can take advantage of the one property exclusion. Corporations, LLC’s, and partnerships cannot rely on the one-property exclusion.

Three Property Exclusion: If you sell to a buyer who will live in the property, and if you sell up to three properties per year, the buyer must qualify through a mortgage broker. 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 the seller must give the buyer a 30 year mortgage, but it is also clear that the rate can go up after five years to a level which would compel the buyer to refinance. Sellers who are individuals, trusts, estates, corporations, LLCs, and partnerships can use the three property exclusion.

Dodd Frank treats the seller who is not an individual but is a builder differently. But the law does not make it clear what extra requirement falls on the builder who engages in seller financing. Dodd Frank says neither the one-property, nor the three-property exclusions may be used, although the law does not make it clear what additional limitations there are and under what terms a seller can offer seller financing. Presumably, the same restrictions used under the three-party rule would apply where the seller is a builder and not an individual. Or perhaps builders are forbidden to engage in seller financing. The Dodd Frank statute does not make this clear one way or the other.

Dodd Frank treats the seller who sells more than three properties in a year differently. But the law does not make it clear what extra requirement falls on the seller who sells more than three properties per year. Neither the one-property, nor the three-property exclusions may be used, although the law does not make it clear what additional limitations there are and under what terms a seller can offer seller financing. Perhaps sellers who sell more than three properties in a year are forbidden to engage in seller financing. The Dodd Frank statute does not make this clear one way or the other.

To complicate matters further, there is the SAFE Act, which may overlap with with Dodd Frank. Read the Washington DFI explanation here. And you should also read this article by the DFI.

I repeat: Dodd Frank and the SAFE Act as they pertain to seller financing are poorly written. Consult an attorney and a mortgage broker if you are selling on seller financing and if the buyer is going to occupy the home. You should not rely on this overview for legal guidance since I have not completely figured out this conglomeration of semi-indecipherable provisions.

Read the Dodd Frank rules on seller financing:

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

Read the Washington regulations on seller financing:

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

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.

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

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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