DODD FRANK AND SELLER FINANCING
CONSULT WITH:
JAMES ROBERT DEAL, J.D.
425-774-6611 x 1
James@JamesDeal.com
MATTHEW PARKER, J.D.
MatthewParker@JamesDeal.com
425-774-6611 x
The law office of James Robert Deal does escrow closings and escrow setup for wrap-around, due-on-sale, seller-financed, and other creative financing transactions.
Our office also does escrow setup and escrow closings for commercial real estate transactions.
In some cases our office can do escrow setup in all 50 states.
Our office closes for-sale-by-owner transactions in Washington.
Read an overview of wrap-around, seller-financed deed of trust.
Read an overview of lease-options.
Read an overview of Dodd Frank.
Read attorney William Bronchick’s overview of How to Beat the Due-on-Sale Clause.
If you sell your property on seller financing, you may be required to comply with Dodd Frank restrictions on seller financing.
The issue centers around whether a licensed loan officer working for a licensed loan company must be consulted. In some cases seller financed sellers are classified as loan officers when they make private loans or sell on seller financing. There are exemptions available in some cases. If there is an applicable exemption, the parties will not have to hire a loan officer and qualify the buyer as if the buyer were obtaining a bank loan.
Most small transactions are exempt, and if they are there will be no need to consult with a loan officer. If the transaction is not exempt, that means that the seller is acting as an unlicensed loan officer.
These restrictions apply if the deal is a recorded, seller-financed, wrap-around deal. Some experts say that a lease option is not a sale, perhaps because it is not recorded, and that Dodd Frank does not apply. Some loan officers say it does apply, maybe so they can charge a fee to approve the financing.
If a transaction is not exempt, the parties should hire a loan officer and qualify the buyer as if the buyer were obtaining a bank loan. Loan officers will charge a reasonable fee, sometimes around $400 per transaction.
If the lender is a third party making a loan to a buyer who borrows money from a non-licensed lender other than the seller, the transaction is apparently exempt exempt from Dodd Frank, and there is apparently no requirement that the seller to hire a loan officer to bless the transaction.
Even if a transaction is exempt, there are limits. Let’s start with the one-property exemption.
One Property Exclusion: Only sellers who are individuals, trusts, or estates can take advantage of the one property exclusion. Corporations, LLC’s, and partnerships must use the three-property exclusion. Most seller-financed transactions fall under this exemption. If a seller sells a home that the seller has lived in to a buyer who will live in the home, the seller can sell one such home per year and not be required to qualify through a loan officer. The transaction is said to be exempt. However, the interest rate for the first five years must be fixed, although Dodd Frank does not set rates. After five years, the rate and payment may increase. The law probably allows a five year balloon payment cash out, although the law does not state this explicitly. I presume that a five-year balloon would be allowed under the one-property exclusion because the three-property exclusion prohibits a five-year cash out and requires a full 30-year amortization, while the one-property exclusion says noting one way or the other about whether balloon payoffs are allowed or not. It is clear that the rate can go up after five years to a level which will give the buyer incentive to refinance. After five years, the rate can be increased up to 2.0 points per year, based on a margin based on a recognized index, up to 6.0 points over the life of the loan.
Three Property Exclusion: Sellers who are individuals, trusts, estates, corporations, LLCs, and partnerships must use the three-property exclusion. If a seller sells a home, not necessarily one the seller lived in, and the seller sells no more than three properties per year, the transaction is exempt. No loan officer need be consulted. The interest rate for the first five years again must be fixed. No negative amortization loans are allowed. It is clear under the three-property rule that for the transaction to be exempt, the seller must give the buyer a 30-year mortgage. The rate must be fixed for the first five years. The rate can go up after five years to a level which would compel the buyer to refinance. After five years, rate increases of up to 2.0 points per year, based on a margin plus a recognized index, up to 6.0 points over the life of the loan.
Dodd Frank only applies to residential properties. This includes one-to-four unit housing, raw land, and vacant lots sold for residential purposes.
If a seller sells to a buyer who is going to do a fix and flip as a contractor and not live in the property, the transaction is exempt. No loan officer need be consulted.
If the terms of the seller-financed transaction are negotiated by an attorney who is not earning a mortgage fee, the transaction is exempt. No loan officer need be consulted.
If a seller sells to a buyer who is not going live in the property, Dodd Frank does not apply. This means the parties will not have to hire a loan officer. The seller can require full payoff in fewer than five years and that the interest rate may be variable from the start. No loan officer need be consulted.
If the interest rate is above the usury limit of 12.0% in Washington, the transaction is not exempt from Dodd Frank.
Negative amortization loans are not exempt.
Dodd Frank treats the seller who is not an individual but is a builder differently and presumably such transactions are not exempt. Presumably, that means that buyers must qualify through a loan officer.
The best advice to give to sellers who are not exempt is for them to spend a typical fee of around $400 to hire a loan officer to qualify buyers by customary credit standards.
The Department of Financial Institutions is probably not going to track down common violators of these rules. However, there impact of the rules may be felt when and if the seller files foreclosure against a buyer who is not paying. The buyer will have a defense and a counterclaim for attorney fees. A fee of $400 is a small amount to pay to circumvent this thicket of regulations.
Quoting from the Barnes-Walker firm:
What happens if there is a violation of the Dodd-Frank Act and other related laws? The penalties are very harsh if there is a violation of the various federal requirements, including the Dodd-Frank Act, the SAFE Act, RESPA, and the Truth In Lending Act, in that there could be a private right to sue for violations and to be reimbursed attorneys’ fees and costs, penalties of up to $4,000.00 to $5,000.00 per day at a minimum, $25,000.00 for reckless violations, and $1,000,000.00 per day for knowing violations. There could also be actions against the violator such as rescission or reformation of contract, refund of borrower costs, return of interest paid, return of real property, restitution, disgorgement or compensation for unjust enrichment, private damages, other monetary relief, and other relief currently undefined.
You have to be very careful in that the Act targets not just owner/lenders and seller-financers, but it is also a danger to real estate agents who arrange for credit and set up a loan, particularly if the agents receive compensation. In such cases, these agents might also be considered loan originators and have to be licensed under the new laws. This risk changes Realtors’® normal and historic business model, as they often help borrowers locate and find different forms of financing for properties. Providing clients with uncompensated general information about mortgages or lists of reputable lenders, though, does not appear to bring a real estate agent or broker under the definition of a loan originator. However, if an agent’s or broker’s efforts exceed these acts, there could be some liability.
Compare the SAFE Act, a Washington’s law that elaborates on Dodd Frank. Read the Washington DFI explanation here.
And you should also read this article pertaining to Washington law entitled Residential Seller Financing under the Consumer Loan Act.
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.
Read the Dodd Frank rules on seller financing:
http://www.consumerfinance.gov/eregulations/1026-36/2013-30108_20140118
Read the Washington regulations regarding the Washington SAFE act and seller financing:
http://www.dfi.wa.gov/documents/seller-financing/residential-seller-financing.pdf
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
http://www.legalwiz.com/owner-financing-dodd-frank-safe-act/
http://files.consumerfinance.gov/f/201301_cfpb_final-rule_ability-to-repay-interpretations.pdf
https://scholarship.richmond.edu/cgi/viewcontent.cgi?article=1037&context=law-faculty-publications
https://www.washingtonattorneybroker.com/dodd-frank-and-seller-financing-2/
This article is my best attempt at interpreting this thicket of regulations that are not clearly written. Do not rely on my interpretation without consulting with me, some other attorney, or a licensed loan officer.
2
Sincerely,
James Robert Deal
Real Estate Attorney & Real Estate Managing Broker
James@JamesDeal.com
PO Box 2276 Lynnwood WA 98036
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