Is The Federal Government Phasing Out Seller Financing As We Know It?

Effective January of 2014, Title XIV of the Dodd-Frank Act (the “DFA”) will impact real estate transactions in more ways than most people recognize. For example, DFA will regulate mortgages and mortgage originators by imposing licensing requirements and compensation, steering, qualification and indemnification provisions on mortgage originators. In doing so, the DFA will unexpectedly venture into the realm of seller financing, inasmuch as Sellers who provide financing could be considered mortgage originators under DFA. However, the DFA did establish special exclusions from these provisions of the DFA for certain seller financers. The exclusions are broken down into two types of seller financers:

1. A seller financer that is a natural person, estate, or trust is not a mortgage originator if:

a. The seller financer provides seller financing for no more than one property in any 12-month period;
b. The seller financer owned the property securing financing;
c. The seller financer did not construct, or act as a contractor for the construction of, a residence on the property in their ordinary course of business, and;
d. The financing meets the following requirements:
i. Must have a repayment schedule that does not result in negative amortization, and
ii. Must have a fixed rate or an adjustable rate that resets after five or more years (the rates may be subject to annual and lifetime limits).

2. For all other seller financers, the mortgage originator definition does not apply where:

a. The seller financer provides seller financing for no more than three (3) properties in   any 12 month period;
b. The seller financer owned the property securing financing;
c. The seller cannot have constructed the home (i.e., homebuilders do not qualify for the exemption);
d. The financing meets the following requirements:
i. The loan must be FULLY AMORTIZING (i.e., no more balloon notes);
ii. Has a fixed rate or adjustable rate that resets after five or more years (the rates may be subject to annual and lifetime limits);

Further, the seller must determine in good faith and document that the buyer has the ability to repay the loan (there is no clear guidance in DFA to satisfy this requirement);

As you can see, some of these requirements are not terribly objective, and some will create limitations that will make most traditional seller financing terms illegal. Since the penalties for violating DFA will be severe, some lawyers are now considering whether or not to refuse to close transactions in which seller financing is contemplated in 2014.

The purpose of this blog is to provide very brief advance notice of these very important requirements, and to urge anyone who is associated with a transaction in which seller financing is involved in 2014 to consult with a real estate attorney to insure that the requirements of DFA are met. To become better informed with respect to the requirements of the DFA and how it will impact seller financing or other types of financing in 2014, please contact your real estate attorney.

Sincerely,

Berlin-Patten, PLLC

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

http://www.berlinpatten.com

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100 W. Venice Avenue, Suite A, Venice, FL 34285 P (941) 955-9991 F (941) 953-9992

LAKEWOOD RANCH
8130 Main Street, Suite 206, Lakewood Ranch, FL 34202 P (941) 907-9022 F (941) 907-9024

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