Lawmakers passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) in 2010 in response to the mortgage crisis. In January 2013, the Consumer Financial Protection Bureau (“CFPB”) issued regulations as part of implementing the Dodd-Frank Act. These new regulations took effect January 10, 2014 and they appear under the Loan Originator Compensation Requirements in the Truth in Lending Act (“TILA”).
The Dodd-Frank Act placed new requirements on loan originators. A loan originator is defined as anyone who, for compensation, performs any activities related to the origination of mortgage loans, including but not limited to taking an application or offering, arranging, or assisting a consumer in obtaining or applying for credit. Lumped into the Dodd-Frank Act was language that in effect included some (but not all) seller-financed transactions. A seller financer will be categorized as a loan originator and subject to the new rules unless the seller financer qualifies for an exclusion.
There are two categories of seller financers that are exempt from the definition of loan originator: those that sell three or fewer properties in any 12 month period (“Three Property Exclusion”) and those that sell only one property in any 12 month period (“One Property Exclusion”). In either case, a seller financer must meet other very specific criteria in order for the exclusion to apply.
The One Property Exclusion is the more flexible of the two exclusions. Therefore, the safest course for a person who sells a property using the less restrictive one property exclusion who then wants to sell a second property may be to wait for the expiration of 12 months after consummation of the first sale before selling the second property. That way, they avoid the Three Property Exclusion coming into play.
This article provides a very basic overview of some aspects of the new requirements and is not considered to be comprehensive. Because the new requirements are extremely complex, it is recommended that any seller considering a seller-financed transaction consult an attorney. The attorney will be able to determine the applicability of these new regulations on the potential seller-financed transaction and assist with establishing the best course of action.
By Deb Newel, General Counsel, RE/MAX Results