William C. Robinson, Jr., Real Estate and Land Use Attorney
On July 21, 2010, the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) became law. Dodd Frank was passed in response to the Great Recession and introduced a series of new regulations aimed at reforming the financial industry. One of the lesser known components of this massive nearly 900 page legislation was to impose greater burdens and disclosure requirements on a Seller who finances the conveyance of real property. Pursuant to Dodd-Frank, the Consumer Financial Protection Bureau was established and created what is known as the Loan Originator Rule. This Rule potentially brings mortgages originated by a Seller under certain truth-in-lending disclosures. The purpose of this Article is to outline the exceptions to the Loan Originator Rule and provide Sellers with guidance in making the determination whether to offer financing for the sale of their property.
There are two instances where Dodd-Frank compliance does not apply and therefore the Seller would not be deemed to be a loan originator. First, Dodd-Frank does not apply to mortgages that secure vacant land, commercial, investment, rental properties or properties containing five or more units. Second, Dodd-Frank does not apply to “non-consumer” Buyers (for example, limited liability companies, partnerships, corporations), even if that Buyer is intending to reside on the real estate.
In the event the conveyance does not fall into one of these two exceptions, there are two further exclusions from the requirements of the Loan Originator Rule under Dodd-Frank:
THE ONE PROPERTY EXCLUSION
The Seller will not been deemed a “loan originator” if:
1. The Seller is an individual, trust or estate;
2. That Seller provides financing for only one property during any twelve month period;
3. The Seller is not the contractor or builder for the construction of the house on the property being financed;
4. The note does not negatively amortize (balloon mortgages are permitted at this time); and
5. The note has fixed or adjustable rates that reset in no less than five years and are subject to reasonable annual and lifetime limits.
THE THREE PROPERTIES EXCLUSION
The Three Properties Exclusion allows an individual, trust or estate and also business entities to be seller-financers for up to three properties in any 12-month period. In this situation, while you are allotted more properties to offer seller-financing, Dodd-Frank imposes additional burdens, which include the inability to utilize negative amortization in the loan and require a good faith determination by the Seller regarding the Buyer’s/Borrower’s ability to repay the loan.
The Seller will not been deemed a “loan originator” if:
1. The Seller is an individual, trust or estate or business entity;
2. That Seller provides financing for no more than three properties during any twelve month period;
3. The Seller is not the contractor or builder for the construction of the house on the property being financed;
4. The note does not negatively amortize (balloon mortgages are NOT PERMITTED);
5. The note has fixed or adjustable rates that reset in no less than five years and are subject to reasonable annual and lifetime limits; AND
6. The Seller in good faith determines that the Buyer has the reasonable ability to repay the loan (the criteria for making such a determination are found in Regulation Z § 1026.43(c)).
The remedies for failure to comply with Dodd-Frank regulations concerning seller-financing are quite severe and can be potentially devastating to a Seller. Such remedies include rescission of the sale and demand for payment of the previous payments made by the borrower to the lender, reimbursement of fees and costs, significant fines and penalties, and forfeiture of down payments or finance charges. Further, non-compliance adds a very strong borrower defense to the lender’s (former Seller’s) foreclosure action.
The effect of Dodd Frank on the residential real estate industry has not been fully realized, as the legislation is complex and the various rules are still being drafted and implemented. Further, this legislation will presumably be subject to judicial review and interpretation. However, the penalties for non-compliance are severe. Therefore, any Buyer intending to sell their property and also finance the transaction should seek the advice of a qualified real estate attorney who has a clear understanding of Dodd Frank and its potential impact on seller-financing.
To learn more, contact Will Robinson at 941.748.0100 or wrobinson@blalockwalters.com.
