Earlier this year, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) implemented new rules and penalties relating to seller-financed real estate sales transactions as well as other private loans made on residential properties. These rules are part of Dodd-Frank’s general mission to “promote financial stability” and “protect consumers” in the United States.
Specifically, the new rules concern, among other things, the proper licensing, regulation, screening, compensation, and training of mortgage loan originators who are offering services to consumers. Because of updated definitions in the law, mortgage loan originators under Dodd-Frank now include not only typical loan originators such as mortgage brokers and bank loan officers, but also essentially any person arranging a loan secured by a property that the borrower will live in. Therefore, the definition extends Dodd-Frank’s reach to all parties offering seller-financing to buyers. What was once done as an accommodation for buyers, who otherwise would not qualify for a loan from a bank or other commercial lender, may now trigger additional compliance concerns for the seller. Dodd-Frank requires anyone meeting its definition of a mortgage originator to have a mortgage originator license and to abide by all additional rules and regulations Dodd-Frank imposes unto mortgage originators.
However, many sellers wishing to offer seller financing may find that they are entitled to one of two special exclusions from the mortgage originator rule:
- The “one-property” exclusion, for natural persons, estates, or trusts providing seller-financing for only one property during any 12-month period; and
- The “three-property” exclusion, for any type or party or legal entity offering seller-financing for the sale of 3 or less properties during any 12-month period.
In addition to the sales limits listed above, in order to qualify for either exclusion, the property serving as security for each loan must have been owned by the seller, and the seller must not have constructed or served as a contractor (in the seller’s ordinary course of business) during the construction of the property serving as security for the loan.
There are a number of additional requirements that must be met in order to qualify for the exclusions, however, many of which are different for each exclusion. The above is just a general summary of the main parameters to be met and the requirements which are common to both exclusions. If you are considering a seller-financed real estate transaction, and want to confirm whether you may qualify for either of these exclusions, contact a real estate attorney.
Also, as Dodd-Frank is a consumer-based law, these rules do not apply to loans made for business or commercial purposes, or to any loan made to anyone other than a natural person.