This is very Important if you are considering any Owner Financing when Selling your home.
Quick Reference Guide for Dodd-Frank
Regulations Effecting
Seller and Private Financing (Effective 01/10/2014)
The
Dodd-Frank Wall Street Reform and Consumer Protection Act was initially passed
in 2010 in response to predatory lending practices and the global mortgage
crisis. The following regulations were
part of the 2013 Truth in Lending Act and were enacted effective January 10,
2014, in an effort to restrict unfair and predatory lending practices and to
promote loans where the Borrower has a qualified ability to re-pay the
loan. To that extent, all Creditor/Loan Originators
will be required to register as such with the appropriate banking authorities
and comply with all RESPA/TILA/DODD-FRANK requirements, unless they qualify for
one of the following exemptions:
1. Seller Financing:
a.
A Natural Person, Trust or Estate selling only
one residential property a year will not be categorized as a Creditor/Loan
Originator;
b.
However, for the exemption to apply the
following must be true:
i.
Seller-Financier must have owned the property
he/she is financing;
ii.
Seller-Financier must not have constructed the
property or acted as Contractor on the property;
iii.
The financing cannot include a negative
amortization;
iv.
The financing must have a FIXED RATE for the
first FIVE YEARS of any loan (they also recommend that the interest rate be “in
line” with prevailing rates) and it can switch to a variable rate after that,
but it too must be “in line” with prevailing variable rates. Variable Rate increases are capped at 2.00%
per year with a maximum of 6.00% over the life of the loan.
2. Non-Seller Private Financing:
a.
Any Private Financier (not limited to a Natural
Person, Trust or Estate) not lending more than THREE times in any one calendar
year will not be considered a CREDITOR/LOAN ORIGINATOR and will be exempt from
Dodd-Frank, however YOU MUST STILL ABIDE BY THE FOLOWING:
i.
No Balloon Financing (MUST be fully amortizing);
no Negative Amortizations; and, no
Pre-Payment Penalties;
ii.
Must use a FIXED RATE for the first FIVE YEARS
of any loan (they also recommend that the interest rate be “in line” with
prevailing rates) and it can switch to a variable rate after that, but it too
must be “in line” with prevailing Variable Rates. Variable Rate increases are capped at 2.00%
per year with a maximum of 6.00% over the life of the loan;
iii.
The Loan term must be for a term of 30 years or
less; and,
iv.
The Financier must, in good faith, determine
that the Homebuyer can repay the Loan with reasonable ability by verifying the
following:
1.
Income;
2.
Employment;
3.
Monthly obligation of the proposed loan;
4.
Monthly obligation of any simultaneous loans;
5.
Monthly obligations of any mortgage-related
expenses (MIP/HOI/RE Taxes);
6.
Monthly obligations for other current debt;
7.
Debt-to-Income ratio; and,
8.
Credit history.
3. Additional Exemptions:
The Dodd-Frank requirements do not
apply to:
a.
Non-owner occupied properties (i.e. not going to
be occupied by the Buyer/Borrower);
b.
Commercial transactions (defined as any property
not defined as residential); and,
c.
Transactions wherein both the Borrower AND
Lender are entities (i.e. corporation/limited liability companies, etc…). Please note that a Borrower entity would not
be afforded the homestead creditors protection.
4. Delinquencies: The Loan must be delinquent for AT LEAST 120 DAYS prior to instituting
a Foreclosure Action. They also stated
that you must “engage” in loss mitigation measures, if requested by the
Borrower (this, however, has not yet been defined).
5. Penalties for Non-Compliance:
a.
Any Borrower can bring a suit for non-compliance
within the first three years after the date of the loan; and,
b.
If successful, the Borrower is entitled to
EVERYTHING paid to Lender over the previous three years.
Disclaimer: The
information contained herein is based on independent research and is not to be relied on for any
transactions occurring anywhere without consulting your own attorney.
There is no guarantee that relying on this analysis will
prevent governmental or civil actions against any party and nothing in this
analysis should be construed as legal advice and relied upon, as each
transaction must be separately analyzed.
