Seller Financing Restrictions Imposed by Dodd-Frank

Seller Financing Restrictions Imposed by Dodd-Frank

In January 2014, a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act went into effect that has had an impact on real estate investors and others who use seller financing.

Dodd-Frank includes the Truth in Lending Act (“TILA”), and section 129C of TILA requires that creditors cannot make a mortgage loan without making a determination that the buyer has the ability to repay. As defined by the statute, a creditor is anyone who extends consumer credit more than five times in a calendar year. In addition, the ability-to-pay determination must be based on eight statutory criteria.

Dodd-Frank not only places some restrictions on the number of deals you can do every year, it also restricts those deals to owner occupants. However, the Dodd-Frank definition of mortgage originator exempts individuals that provide seller financing for up to three properties in a 12-month period from having to make the statutory ability-to-pay determination if:

• The seller didn’t construct the home that is being financed;
• The loan is fully amortizing (balloon mortgages are not allowed);
• The seller determines in good faith that the buyer has the ability to repay the loan;
• The loan is either at a fixed rate or is adjustable after five years or more and includes reasonable annual and lifetime caps;
• The loan meets other criteria as established by the Federal Reserve Board.

Under Dodd-Frank, sellers are also placed into the following three categories with specific rules for each:

Individuals or Trusts/1 sale per year

• Balloon mortgages allowed
• Seller does not have to prove borrower’s ability to pay
• Loan interest rate must be based on index and fixed for first five years. Following that, rate can only adjust two point/year up to a maximum of six points above the original interest rate.

Individuals or Trusts/ 1-3 sales per year and Businesses/less than 3 sales per year

• Balloon mortgages not allowed
• Seller has to prove borrower’s ability to pay
• Loan interest rate must be based on index and fixed for first five years. Following that, rate can only adjust two point/year up to a maximum of six points above the original interest rate.

All entities/3 or more sales per year

• Mortgage Loan Originator must be involved to complete transaction.
• Balloon mortgages not allowed
• Seller has to prove borrower’s ability to pay
• Loan interest rate must be based on index and fixed for first five years. Following that, rate can only adjust two point/year up to a maximum of six points above the original interest rate.

To ensure you comply with these Dodd-Frank provisions, you should consult with an experienced real estate attorney if you provide seller financing.

The real estate attorneys at Jurado & Farshchian, P.L. are skilled in seller financing, and combine their knowledge and experience in the South Florida real estate market with a commitment to personalized, detail-oriented legal services. Contact one of our experienced Florida attorneys at (305) 921-0440, or email us at info@jflawfirm.com.

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