Know Before You Owe

In our last issue we mentioned the Dodd Frank Act and the resulting Consumer Financial Protection Bureau (CFPB).  In the CFPB’s efforts to provide easier-to-use mortgage disclosure forms, improve consumer’s understanding  and ability to shop for mortgages, and to prevent surprises at the closing table, the CFPB has created its Know Before You Owe program, and will be combining the elements of the Real Estate Settlement Protection Act (RESPA) and the Truth-in-Lending Act (TILA) into a new Loan Estimate (replacing the GFE) and a Closing Disclosure, which will replace the HUD-1 in August, 2015.  The CFPB also created the Qualified Mortgage (QM) rules for lenders, which we discussed in our last issue, focused on the consumers’ ability-to-repay.

But, real estate investors and individual sellers, considering seller financing as part of their transaction, should know that the QM rules may also apply to them!  The CFPB has issued rules regarding seller financing, which includes carry-back mortgages and land contracts.  Investors and Realtors should be aware of these rules, as they may impact the sellers’ options and obligations.

Essentially, there are two different rules applying to seller financing, which may allow a seller to avoid being characterized as a “loan originator” under the CFPB regulations.  A lender/seller may qualify under the 3-Propety Exclusion (within a 12 month period) or the One-Property Exclusion (1 property in 12 months).  In the 3-Propety Exclusion, the seller financed mortgage (or land contract) must fully amortize (no balloon payment or negative amortization), have a fixed rate of interest or a rate that adjusts no sooner than 5 years, and the lender/seller must determine that the consumer/buyer has a reasonable ability to repay.  The lender/seller may be a natural person or an organization, but must be the owner of the property.  The lender/seller may not be a builder.

In the One-Property Exclusion, only natural persons, their estates or trusts may be the lender/seller (again, they must be the owner).  The repayment schedule may have a balloon payment, but may not have negative amortization.  There is no obligation relative to the buyer’s ability to repay.  It may be a fixed rate financing or adjustable rate with reasonable annual and lifetime limits on rate increases.  The National Association of Realtors issued a bulletin entitled Impact of Loan Originator Final Rule on Seller Financing, which includes more detail on this subject.  Seller (and Realtor) beware.