Seller Financing, Dodd Frank & SAFE – What You Need To Know!
What Are Dodd Frank and SAFE?
If you are looking online for information on Seller Financing (also known as Owner Financing) you will eventually find articles about Dodd Frank and SAFE. Due to some of the banking and mortgage regulation issues and crisis’s of the last 10yrs, congress passed two sets of similar laws around a number of banking and mortgage practices. They have similar scopes, and in some cases, they appear to contradict each other.
These legislation’s have placed restrictions on selling residential, single family properties with Seller Financing.
In general, if you are just planning on selling your personal home or buying a personal home, these restrictions do not apply to you. If at all, these restrictions will apply to the seller. However, as long as the home is sold with fair and equitable terms, Dodd Frank and SAFE won’t apply to the seller either.
Read on if you want to learn more and be sure you are exempt to any of the restrictions put in place by this legislation.
The SAFE Act
The first set of new regulations is The SAFE Act which stands for Secure and Fair Enforcement for Mortgages Act which was passed in 2008. Among other things, SAFE was designed to protect consumers from misleading mortgage brokers who got paid extra to sell risky mortgages with variable rates and large balloons. To do this, the legislation creates a comprehensive regime to register or license all residential mortgage loan originators in the United States. SAFE requires that anyone who is in the business of writing mortgage loans be licensed. While the legislation was designed to regulate people who do multiple loan origination’s, in some limited scenarios, it could also affect people who would sell their personal properties with seller/owner financed loans.
There are also exceptions that vary state to state! One state might require anyone who writes a loan, including an individual selling just one property to only those who write 5 or more loans a year to be licensed as “mortgage or loan originators.”
The second set of new regulation is the Dodd Frank Act that went into effect January 2014. The main purpose of Dodd Frank was bank and securities regulation to avoid a repeat of the housing crisis that began in 2008. It created the Consumer Financial Protection Bureau and other laws. In addition, Dodd-Frank also has regulations around owner financing (seller financing) which included restrictions on seller-financing in residential real estate transactions where the dwelling is secured by a mortgage, unless the seller is entitled to certain exclusions.
As an individual seller – meaning you intend to just sell your personal property, you are largely exempt from both Dodd Frank and SAFE. However, if you keep hearing about these laws in relation to Owner Financing, here is what you need to know!
SAFE ACT EXEMPTIONS
- SAFE does not apply if the seller finance transaction is to an investor and the loan is not for personal, family, or household use.
- SAFE does not apply to an owner who finances the sale of a dwelling (or a vacant lot intended for construction of a dwelling) if the owner does not make more than five such transactions within any twelve month period.
- In otherwords, if you are only financing the sale of 1 property a year, SAFE does not apply to you!
DODD FRANK EXEMPTIONS
- The loan originator rule will not apply to a residential transaction where a “natural person, estate or trust” provides seller financing for only one property in any 12-month period, subject to reasonable financing terms (see below).
- The Three Property Exception: the loan originator rule will not apply to a seller who is financing three properties or less in any 12-month period if certain financing terms are met and the seller is not a contractor or builder.
Common Ground between Dodd Frank and SAFE.
The following sellers are exempt under both laws:
- A natural person, estate, or trust who provides seller financing for only one property in any 12 month period.
- Any type of seller financing entity that finances the sales of three or fewer properties in any 12 month period.
If you are not eligible for the above exemptions, the bulk of the Dodd Frank and SAFE regulations will be in effect. Even if you DO qualify for the above exemptions, there are additional regulations. Specifically, under #1 for Dodd Frank, if a seller financer is a natural person, estate, or trust, you still must follow some specific guidelines around the financing terms:
Key Financing Terms In Order to Maintain The Sellers Exemptions:
- If using a variable rate, the annual rate increase must be 2 percentage points or less.
- There are limits on the increase in annual percentage rates over the life of the loan
- No negative amortization.
- Balloon mortgages are acceptable, however, a 5-year balloon period is strongly recommended.
- Fixed rate or ARMs must reset after 5 years or more, with reasonable lifetime limits.
Additional Requirement That Are Always In Place In Seller Financing:
The seller must “qualify” the buyer. You must believe the buyer has the ability to repay the loan.
Qualifying means that the seller must ensure that the buyer can actually make the loan payments. The seller would do that by reviewing income statements, credit reports, debt-to-income, etc… Debt-to-gross-income, cannot exceed 43 percent.
The seller can’t write a “high-cost” loan. The loan terms need to be fair and reasonable.
A “high-cost” loan is any loan with an interest rate that exceeds 6.5 percent above the “average prime offer rate,” the rate people with excellent credit would pay for a first mortgage. If the loan is for less than $50,000, the rate goes up to 8.5 percent above the “average prime offer rate,” similarly, for a second mortgage. For loans of less than” $20,000, the points and fees can’t exceed 8 percent of the loan or $1,000; for loans over $20,000, the points and fees can’t exceed 5 percent of the loan.
No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. You cannot intentionally lie or deceive the buyer!
And there’s more! The new rules also ban:
- Fees for paying all or part of your loan early (refinancing a mortgage).
- Late fees larger than 4 percent of the regular payment.
- Most fees for getting a statement of how much is still owed on the mortgage (called a payoff statement).
- Limitations on fees for loan modifications, if someone has trouble and can’t pay the mortgage.
- Creditors or brokers from advising homeowners refinancing into high-cost mortgages not to make their payments on an existing loan.
Most of these laws apply only to when the seller is selling to residential owner-occupants. If the buyer is an investor, there are no restrictions. Similarly, if the property for sale is a commercial property or vacant land, the seller does not have to follow most of those rules.
No matter how you decide to sell, though, run everything by an attorney and/or title company who knows real estate law and both these laws.
Dodd Frank and SAFE look really complicated! The good news is that if you are just planning to sell your own home (or buy a home from the current homeowner) and you will not execute more than one Seller Finance sale per year, it places you firmly within the various exemptions of both Dodd Frank and SAFE as long as the seller provides reasonable terms and conditions for the loan and is completely honest and transparent in their dealings with the buyer.
We are not attorneys and nothing in this document should be construed as legal advice. If you have concerns, we recommend you consult with an experienced real estate attorney to ensure compliance with Dodd Frank and SAFE as there continue to be nuances state to state and the interpretation of the laws are continuously changing.
PLEASE DO NOT:
Rely on this document as your sole reference on this topic.
Rely on your real estate agent to give you legal advice regarding Dodd Frank and SAFE compliance.
Assume that Dodd Frank and SAFE or other pertinent laws have not been amended or updated since this or any other article was posted.
Think if you are a real estate agent arranging credit or setting up a loan you are exempt from the loan originator rule.
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