The Dodd Frank Wall Street Reform and Consumer Protection Act was initially passed in 2010 in response to the mortgage crisis and the late-2000s recession. This Act has brought significant changes to financial regulations, and with new regulations taking effect after January 10, 2014, will continue to bring significant changes to many aspects of the mortgage industry. One of the major complaints about the Dodd Frank regulations is the lack of clarity, especially regarding private seller financing and mortgages.
The new regulations appear under the Loan Originator Compensation Requirements under the Truth in Lending act that was issued in January 2013. These new rules pertain to ability-to-repay and qualified mortgage standards. For further references, the complete Truth-in-Lending act can be read here.
Mortgages are complex financial transactions with lasting effects. Whether consumers are using a bank, mortgage broker, or an individual, they should be aware of all the complexities surrounding their mortgage.
To briefly review the concept of private seller home financing, it is when a private seller transfers the title to their property and accepts a mortgage from another individual for a substantial part of the sale price rather than receiving all cash on the sale.
Private seller financing has long been thought to be beneficial because buyers who cannot qualify for traditional or institutional mortgages are still able to acquire title using seller financing. While owner-financed homes only make up a small portion of real estate transactions, they do play a large role in hard-hit areas, like Ohio, Florida, and Michigan. They are used often by people with low credit scores who cannot get loans from banks or mortgage lenders.
Private seller financers will be affected under the new Dodd-Frank regulations, as exclusions or exemptions will apply to some seller-financers under the new regulations. For example, a natural person selling only one residential property a year will not be categorized as a loan originator, which means that person is exempt from the new rules. However, additional requirements must be met in order for the exemptions to apply: The seller financer must have previously owned the property he/she is financing; he/she must not have constructed the property or acted as a contractor for the property; the financing cannot include a repayment schedule that results in a negative amortization (graduated payments); and the financing must have a fixed or adjustable rate that resets after five or more years. As most people will probably only use seller financing but a few times during their lifetime, the new regulations will hopefully not impact the majority of sellers financing their properties. The full set of consequences on seller financed homes, however, remains to be seen.
A second type of exemption will also apply to transactions of this type. Under this exemption, a seller financer does not have to be a natural person, estate, or trust, and can provide financing for up to three properties in one year. In order to qualify for this exclusion, the requirements listed above must be met, the financing must be fully amortizing, and the financer must in good faith determine that the homebuyer can repay the loan with reasonable ability.
It is important to note that these new rules will also only apply to dwelling places in which the buyer is going to reside. The new rules will not affect seller financed purchases for vacant land, commercial property, and multi- and single-family residences where the buyer does not plan to occupy the premises. A seller financer is not considered a loan originator. A private seller financer cannot sell more than three homes per year without becoming a licensed mortgage loan originator. Different licensing requirements, as set by the Nationwide Mortgage Licensing System & Registry, are in place for each state in order for a person to become a licensed mortgage loan originator.
A private seller financer also cannot offer loan terms of less than 30 years under the new regulations. A seller financer is considered a creditor if he/she extends credit secured by a dwelling six or more times in one year, or extends more than one high-cost mortgage in one year. Although there is some definite confusion over the rules regarding private seller financing, the Consumer Financial Protection Bureau director hopes the process will be smooth and trouble-free: “Our plan is to work with the mortgage industry to ensure that the CFPB’s new rules are implemented accurately and expeditiously,” said CFPB director Richard Cordray. “Both consumers and industry will win when the new rules are understood, applied, and carried out evenly and effectively. Mortgage borrowers, who have dealt with much heartache since the financial crisis, deserve this level of attentiveness.”