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Seller Financing After Dodd-Frank

The provisions of Dodd-Frank have been in place just under a year and a half, having come into effect on January 10, 2014, and the provisions of the law that concern seller financing of real estate made significant changes as to how investors use seller financing in these transactions. Now that the rules have been in place for a while and the dust has settled, basic rules concerning private loans from sellers warrant a brief review. At the outset, it is worth noting that these regulations apply to sales only to owner occupants, not sales of commercial or investment properties. The new regulations treat anyone who performs the activities related to the origination of a residential mortgage loan as a “mortgage originator” by default. What this means is that sellers who finance their real estate transactions must be a licensed mortgage originator or include a licensed mortgage originator in the transaction. Financing sellers can be exempt from these rules, however, if certain criteria are met. First, the seller must provide financing for the sale of three or fewer properties in a 12-month period, and the property must have been owned by the seller and used as security for the loan. Second, the seller must not have constructed the residence or acted as a contractor in the construction as part of the ordinary course of their business. Finally, the loan must be fully paid off after a set duration (no balloon payments) and have a fixed interest rate or an adjustable rate that remains fixed for at least five years, and the seller must determine in good faith that the borrower will be able to pay the loan. If the rate does adjust, it must be tied to a widely-available index such as LIBOR or U.S. Treasury securities. Under these rules, a person, trust or business entity can act as a financing seller. Homeownership 2If the seller only finances one property in a year and is a natural person, an estate or a trust, the seller does not have to determine and document the borrower’s ability to pay, although the loan requirements remain the same. If the seller finances more than three properties, the mortgage originator provisions apply, as well as the specific limitations on the loan. Another important distinction to note is that, while the ability-to-pay provisions of Regulation Z[1] apply only to “creditors” as defined by that regulation – those who finance more than five “transactions secured by a dwelling”[2] in a year, Dodd-Frank applies the same provisions to those who finance three or more transactions to owner-occupants in a year. In other words, financing sellers who conduct only four transactions a year are exempt from the ability-to-pay portions of Regulation Z, but not from Dodd-Frank. Negotiating any seller-financing deal is tricky, but the provisions of Dodd-Frank add a new layer of complexity to the process. Let the attorneys of McBrayer, McGinnis, Leslie & Kirkland, PLLC make the process less difficult by providing guidance and assistance in the transaction. CRichardsonChristopher A. Richardson is an associate at McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Louisville, KY office. Mr. Richardson concentrates primarily in real estate, where he is experienced in residential and commercial closing transactions, landlord/tenant relations, and mortgage lien enforcement/foreclosure. Mr. Richardson has closed innumerable secondary market and portfolio residential real estate transactions and his commercial practice ranges from short-term collateralized financing and construction lending to development revolving lines of credit. He can be reached at 502-327-5400 or crichardson@mmlk.com. This article is intended as a summary of  federal and state law and does not constitute legal advice. [1] 12 C.F.R. § 1026.43 [2] 12 C.F.R. § 1026.2 (a)(17)(v)

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