Are there Lender Regulations for Seller Financing?

 

You decided to sell a property and provide the financing to the buyer. Are there regulations that apply to you?

Introduction

Providing a fixed rate loan only once in 12 months is typically exempt from strict regulations and not considered a loan originator.  But, what if you lend more often? There are regulations, commonly referred to as Dodd-Frank, to protect the consumers which were created due to the mortgage banking crisis in 2008. It is possible to seller finance up to 3 loans with less restrictions if the loans qualify.  Read more to get a glimpse into Dodd-Frank and the criteria defining a loan originator.

Background

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a U.S. federal law enacted in 2010 in response to the 2008 financial crisis. The 2008 financial collapse was a result of irresponsible lending practices allowing borrowers with poor credit and insufficient income to get loans they could not repay.  Risky loans were bundled into mortgage-backed securities triggering massive losses and failure of some major banks.  Dodd-Frank supports transparency, increases regulation and oversight of banks and other financial institutions, and imposes stricter rules on lending. 

The regulations are mainly targeted at banks and large lenders to prevent predatory lending practices but there are provisions that apply to individuals providing seller finance loans.  The good news for seller finance lenders that provide 3 loans or less within 12 months are likely exempt from the strict regulations. It is recommended to always use an RMLO (Residential Mortgage Loan Originator) which will ensure compliance and provide assessment of the borrower to ensure ability to repay the loan.

Overview

Below is a high-level overview for compliance but it is highly recommended to gain further knowledge if you are an active lender creating multiple loans.

If you meet certain exceptions, the regulations are much less restrictive. *

• Seller financer of one loan is not considered a loan originator if all below is true:
  • Provides seller financing for the sale of no more than one property in any 12-month period
  • Not the builder or contractor for the property
  • Borrower has reasonable ability to repay
  • Repayment schedule that does not result in negative amortization
  • Financing has a fixed rate or an adjustable rate that is adjustable after five or more years. If rate is adjustable, you should read the full regulation referenced below and consult an attorney for guidance.

• Seller Financer of no more than 3 loans:
  • Complies with all requirements above as for one loan and includes additional compliance:
    • The financing is fully amortizing
    • Verify and document borrower ability to repay

Best Practices

• Keep detailed records of the buyer’s ability to repay
• Avoid balloon payments
• Finance with a fixed rate fully amortized
• Clearly document all loan terms in a promissory note and deed of trust or mortgage
• Use an RMLO (Residential Mortgage Loan Originator) service is the better option
• Consult a real estate attorney

Summary

If you provide seller financing more often than once within a 12 month period, compliance to Dodd-Frank regulations will reduce risk to potential legal claims from the borrower. It is recommended to always consult an attorney to assist with contracts and closing agreements. Seeking services of a Residential Mortgage Loan Originator (RMLO) will ensure compliance and documents the borrower’s ability to pay. RMLO has more standardized documents which also contribute to higher quality documented loan which makes it more valuable and easily marketable when it is desired to sell to another lender.

Connect with Peak Notes Why not set up a meeting with a Peak Notes specialist to discuss how lender regulations can affect your Note investment!   Meetings are brief, cost nothing and can give you more insight into how you can maximize your investment potential! If your property is located in Florida, please click on this link and set up a meeting with John.          Meeting with John     If your property is located outside of Florida, please click on this link and set up a meeting with Karen.      Meeting with Karen