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New Seller Carry-Back Financing Rules

As anticipated, some of the new Dodd-Frank rules will now apply to any financing provided on owner-occupied housing, including seller-carry backs. While the term “mortgage originator” is defined broadly under the Dodd-Frank Act (See 15 U.S.C. §1631), an exemption exists for property owners offering seller carry back financing wherein certain owner-financiers are excluded from having to obtain a loan originator’s license provided that certain qualifications are met.

On January 20th, the Consumer Financial Protection Bureau (“CFPB”) provided some much needed clarity on seller carry back financing under Regulation Z of the Truth In Lending Act (“TILA”). According to the new rules, a seller can finance a purchase and will not be considered a “loan originator” under the act as long as one of two provisions applies. Specifically, the two provisions that exempt seller financers from the requirements of TILA are 12 CFR §§ 1026.36(a)(4) and (a)(5).

The (a)(4) Exemption: This is an exemption for the sale of three or fewer properties in a 12 month period and provides that a person is not a loan originator if:

  1. The person provides seller financing for the sale of three or fewer properties in any 12 month period to purchasers of such properties, each of which is owned by the person and serves as security for the financing,
  2. The person has not constructed or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of the person,
  3. The person provides seller financing that meets the following requirements:
    1. The financing is fully amortizing,
    2. The financing is one that the person determines in good faith the consumer has a reasonable ability to repay, and
    3. The financing has a fixed rate or an adjustable rate that is adjustable after five or more years, subject to reasonable annual and lifetime    limitations on interest rate increased. If the financing agreement has an adjustable rate, the rate is determined by the addition of a margin to an index rate and is subject to reasonable rate adjustment limitations.

The (a)(5) Exemption: This is an exemption for only one property, but does not expressly prohibit a balloon payment. This provision states that a natural person, estate, or trust that meets all of the following criteria is not a loan originator if:

  1. The natural person, estate or trust provides seller financing for the sale of only one property in any 12-month period to purchasers of such property, which is owned by the natural person, estate or trust and serves as security for the financing,
  2. The natural person, estate, or trust has not constructed , or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of the person,
  3. The natural person, estate or trust provides seller financing that meets the following requirements:
    1. The financing has a repayment schedule that does not result in negative amortization,
    2. The financing has a fixed rate or an adjustable rate that is adjustable after five or more years, subject to reasonable annual and lifetime limitations on interest rate increases. If the financing agreement has an adjustable rate, the rate is determined by the addition of a margin to an index rate and is subject to reasonable rate adjustment limitations.

Although the rules above, and many others, such as repayment ability do not go into effect until January 10, 2014, Dodd-Frank has still had the effect of seizing up private financing for owner-occupied housing. Many are treading lightly in this area as warnings have been made that the provisions and penalties of the new law will be enforced. However, as long as the above rules and conditions are met, seller-carry backs on owner-occupied residences should still be possible.

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