DODD / FRANK Has Seriously Altered The Seller Finance Landscape

This is how I see it.

Any Seller can have an exemption to Dodd Frank.

Any seller can sell on terms, whether it be a Lease w Option, Contract for Deed, Wrap, Private 1st Mortgage, etc.

Here is a handout from Papersource.
----------------------------------------------
Setting the stage

First of what follows affects anyone today. They'll applies to transactions on or after January 10, 2014. Further, none of that applies to any seller carry back transactions where the buyer will not use the property as their personal residence.

When Dodd Frank or the Dodd Frank Wall Street Reform and consumer protection act, was enacted into law on July 21, 2010, and said that you could only do three seller carry back transactions in year, and those transactions had to meet certain requirements: one) the note could not have a balloon. Two) it had to have a fixed interest rate for five years, then it could adjust. Thr) you had to prove and document the buyer's ability to repay in accordance with the qualified mortgage rule, QM.

The consumer financial protection Bureau or CFPB, which was writing the regulations to implement Dodd Frank, asked for public comments. Many note brokers submitted their comments. Also members of the NAR submitted their comments to the national register. Because any people wrote comments to the CFPB---the Bureau relax the seller financing restrictions. They came out with something those a lot more relaxed than the Dodd Frank law was originally.

The CFPB subsequently issued the following regulations. They apply to seller carry back notes created on or after January 10, 2014.

A) the one per year category. The CFPB broke seller financing instituted categories. One category is for those individuals, trusts or estates who do just one seller carry back transaction a year on a property that has a dwelling that the buyer will use as your primary residence. Let me repeat that because there's been so much misinformation circulated about it: this category is for those individuals, trust or states who do just one seller carry back transaction year on a property that has a dwelling that the buyer will use as their primary residence. For these folks: one) you can have a balloon in your note the buyer. Two) you do not have to prove or document their ability to repay. Three) the note must have a fixed interest rate for five years, and at the end of five years, the interest rate can increase no more than two points per year with a cap of six points above whatever you started at. You have to tie it to an index like a cheetah or the prime rate in the beginning. That's probably going to affect all but 3 to 5% of individuals who carry back notes. Remember these restrictions only apply to seller carry back transactions on properties that have a dwelling that the buyer will use as their primary residence. A transaction on a lot or vacant land is exempt, even if the buyers plan to build a primary residence. If the property has a dwelling, but the buyer is not going to use it as their primary residence---say they're going to rent it or use it as a second home---then none of this applies, and you can offer seller financing with no restrictions. Commercial property and multifamily that are five units are larger is also exempt from the restrictions.

Again the one seller carry back transaction per year category applies to individuals, trusts and estates. It does not apply to corporations, LLCs, partnerships or other legal entities. In that case the second category applies (see below). Again, these rules only apply to what the CFPB refers to as a residential mortgage loan where the note secured by a dwelling or residential real property that includes a dwelling.

Most people only carry back the note once in their lifetime, when they sell the big house, retire and move somewhere else. Some might do it a few more times. Even many real estate investors only do it once a year. These regulations are not a huge change for most people.

The more than one year category

The second category applies to individuals, trusts and estates that do more than one seller carry back transaction per year when the buyers will use a dwelling as their primary residence. It also applies to any seller carry back situation---even one--where the seller is a Corporation, LLC, partnership or other legal entity and when the buyers will use a dwelling as their primary residence.

These other restrictions:
one) the note cannot have a balloon.
Two) the note must have a fixed interest rate for five years, that the end of five years interest rate can increase no more than two points per year after the fifth year with the Six points above whatever you started at. You have to tie it to an index like a T Bill or the prime rate it in the beginning. This is the same restriction as the first category.
Three) you must determine the buyer's ability to repay.
Four) if you do no more than three seller finance transactions per year you do not have to become a mortgage loan originator (MLO).
Five) if you do more than three you must become an MLO--or find an MLO who is willing to be the go-between.

Just as in the one per year category, these requirements only apply to seller carry back transactions on properties that have dwelling that the buyer will use as their primary residence.

If you have a rental house in the renters want to buy the house to use as their primary residence, and you want to carry back of note with a balloon (and you don't do more than one seller carry back transaction per year), and that rental property is in a Corporation, LLC, partnership, or other legal entity, you going to have to move the property into a trust or into your personal name. Otherwise you going to fall into the second category which says you cannot have a balloon unless you're an individual, trust or estate.

If you think about it, not having a balloon but being able to do an adjustable rate is almost services same purpose. But say you start out with the interest rate of 6% on the note and then after five years against 8%, and then it goes to 10%, that is 12%. That's a huge incentive for the buyer to refinance out of the property and pay off. If they don't, then you rewarded for your risk gearing the paper; nothing 12% for holding the paper, and there is no balloon.

The next subject is the ability to repay.

The second category requires you to determine the buyer's ability to repay, but the rules in the ranks don't specify any standards for doing it (such as the qualified mortgage standard, a 43% debt to income ratio, etc.). You have to do any of that; you can just ask them if they have a job, can you see a pay stub, DC their tax return, which they may or may not gives you. All you are required to do is to make some good faith determination that there able to afford that payment, and you do not have to document it.

It would be prudent to have some documentation in case this is all, and the buyers attorney says "where's the documentation?" And the attorney tries to create a legal defense against paying. But there is no requirement that you have to document. All it says you should determine the buyer's ability to repay.

An attorney at the CFPB was asked about how one should determine the buyer's ability to repay. He said that if you fall under the category two, you have to determine the ability to repay, but he admitted that there were no set guidelines. You just have to show that you use good faith determining, for example, the buyer has a job, his rent was $1000 per month, but the payment on the note was $900 a month, and you think in good faith he can afford this property because he could afford the rental house that he was in before.

What if you're buying the note created on or after January 10, 2014?

You going to be able to tell from the note if the mortgagee is a private individual or an entity. There's a private individual, trusts, Florida State, asked him to sign an affidavit saying that they have not done more than three these deals in a 12 month period, and how many of them had balloon payments.

If it's an entity, and LLC, or corporation, etc. Ask for an affidavit saying how many deals has it done and how many of them had balloons.

If there is a balloon in that note that you buying from an LLC, corporation or partnership, etc., you know there's not supposed to be able (again, if that note was created on a after January 10, 2014).

US have no modified to remove the balloon before you buy it. Otherwise at some point the mortgage or could use the fact that the note was not in compliance when it was written as a defense against paying the debt or a foreclosure.

----------------------------------------
So if you want to do a Lease Option Assignment,
you lease option from Seller (not a sale)
you assign to a tenant buyer
you may want to get a RMLO to look at a 1003 app and write an opinion as to their probability in getting a mortgage in the next 12 - 24 months.

I hope you find this useful.

Best Wishes,

Brian Gibbons
REISkills.com

Thank you Brian! I will print this out and read it very carefully later tonight. I may have a question or two, and certainly a comment as well!

Thanks for your input. If you have additional info or directions to point me so I can continue to learn, I do appreciate it!

Thanks!

Jake

See, as far as my knowledge is concerned the seller can eventually had an exemption to Dodd Frank, plus there is nothing any bounds on seller, he have his entire authority to sell on terms irrespective of whether its be a Lease w Option.

The way I understand Dodd Frank and the SAFE Act is an investor can purchase any number of properties where the seller finances the sale. When the investor is selling property, they can not create more then three loans within a 12 month period.

Many investors I speak with are now going to create multiple LLCs and each LLC will only create 1 to 3 notes in a 12 month period.

Is this the best way to continue?

This post may turn into a series of posts on this subject, but I wanted to post something on the implementation date for Dodd/Frank. Please note my editorial comments included in the post:

Overview—(Note: The following information is a summary of the Dodd/Frank Act, (Reference: http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf ), a U.S. Regulation that is in initial implementation as of this writing. Note that there is no case law precedent to reference, so investors are encouraged to be cautious and thorough in dealing with the tenets of these regulations.
Passed in 2008 as the impact of the U.S. Financial collapse was affecting the entire world, this bill was well-intentioned in attempting to prevent a recurrence, but probably deals more with some symptoms than the actual causes. Nevertheless, it is designed as a consumer protection in the issuance of mortgages (by institutions or private lending) that tightens qualifications for borrowers and gives power of enforcement to borrowers who were not carefully screened regarding their ability to repay the loan.
The Dodd Frank legislation will affect investors in two areas: 1) The ability of consumer buyers to obtain qualified conventional mortgages will be more difficult, and this can make it more challenging to find an end buyer (owner-occupant) for properties; 2) Investors engaging in private lending (including offering properties using any seller finance method) will need to require more buyer qualification procedures, and add specific disclosures to their owner-occupant buyers or borrowers.
Penalties for not complying with Dodd Frank regulations will primarily not be enforced by government, but instead will result in lawsuits initiated by unhappy buyers and borrowers, who will claim that their lender did not properly screen their ability to repay the loan, and the court can award three years of previous payments on the loan plus down payments back to the borrower. It is very likely that predatory attorneys will exploit this opportunity.
Like many things in life, we can bemoan the inconvenience of these new statutes, or look for opportunity. There are potential huge opportunities to be found in learning how to work with these new standards as an investor, solving problems for buyers and sellers.