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Alarmist Emails Regarding Seller Financing

Posted by 15789465 on

I've been seeing some emails about the Federal Reserve killing off seller financing through changes to the Dodd Frank Act. I don't think the sky is falling. Please let me know if I'm wrong, or you disagree. The proposed change is the Truth in Lending Act. It would require borrowers to meet certain underwriting requirements and be considered "credit-worthy" before a mortgage loan could be extended to them.  If the lender does not comply, the borrower could have three years to rescind—or "un-do"—the loan. The emails say this law will apply to seller financed transactions, and will effectively destroy seller financing. I admit, I might be wrong. BUT, according to my interpretation and that of many experts, Truth in Lending laws apply to people who finance six or more home mortgages during any twelve month period.  Most of the financing sellers don't fall into that category. Of the ones who do, they are truly in the business of extending credit, not just selling real estate. They should have to meet the same requirements as larger lenders, in my opinion. HERE is a link to the Federal Reserve Board press release. Truth in Lending applies when "the offering or extension of credit is done regularly."  12 CFR Part 226.1(c)(ii) A person "regularly extends credit" only if  "it extended credit ... more than 5 times for transactions secured by a dwelling ... in the preceding calendar year."  [with different rules if you use a mortgage broker] 12 CFR Part 226.2(a)(17)(v) I know what you are thinking. Really, I do!  You're thinking, "But, the SAFE Act requires me to use a licensed mortgage originator if I do seller financing for anything except my personal residence. So, does that take me out of the "more than 5 times" requirement for Truth in Lending?" I have two answers for you:
  1. Right now, Alabama has a temporary rule that allows you to do up to five seller financed transactions a year without needing a mortgage loan originator's license or hiring someone who does;
  2. A licensed mortgage loan originator for purposes of the SAFE Act is not the same thing as a mortgage broker under Truth in Lending.
I think you don't have anything to worry about.

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4 comments

  • Hi Lauri. Funny! I mean no disrespect to people who don’t understand these laws. They are incredibly complicated and STUPENDOUSLY poorly written. Often, you have to refer back and forth to 18 different laws to find out what one sentence means. Most laws have a “definitions” section. Whatever definition is given to a word within that law, that’s the definition that has to be used when reading the entire law. If, for example, a “definition” said “Tree shall be defined as trees, shrubs, grass and potted plants” then you’d have to remember that definition when reading later on that it is illegal to cut Trees on Thursdays. If you just read the “illegal on Thursdays” part, you’d think it would be okay to cut the grass, but you’d get arrested because grass is also a tree for purposes of that statute. So, that’s one hurdle. Another big one is the “Exceptions.” That’s when a law seems clear, but then about 20 pages later there is an exception. Then, about 15 pages after THAT, there’s an exception to the exception. Laws are rarely thought out rationally and then examined for internal consistency. No, they grow like beaver dams, with things just tacked on wherever there seems to be a place, and in the end you have a giant mess of stuff that seems to hold water but no one can truly figure out the engineering.

    Perhaps I could say, “Translation Services Offered: Government Speak, Lawyer Speak and Banker Speak translated into Plain English.”

    Denise L. Evans on
  • Thanks for this post.
    You always say that you speak plain English, apparently you read it, too.
    Maybe your tag line should be ‘read and write plain English’ .
    :)

    Lauri Pine on
  • David, I agree with your sentiments, but according to my interpretation, the new law would not apply to anyone who finances 5 or fewer “dwellings” a year. Dwelling is a property on which there is a home, or will be built a home, or will have a mobile home placed on it, or a mobile home itself. I realize, of course, that the “5 or fewer” exception in the law could be changed in the future, but all of the laws could be changed in the future. The “5 or fewer” exception for Truth in Lending has been around for a long time, and I see no reason it will change in the foreseeable future.

    That being said, I completely agree with you that this is a very important issue that should be discussed nation-wide, among a wide variety of interest groups. Seller financing has been the only route to home ownership for many people. Seller financing has been the only mechanism for some people to sell their properties. Credit has tightened up, and will only get more difficult in the near future. We, as a nation, either want a country that encourages home ownership, or we want a country of renters. Those are two completely different countries. I’m not saying one is better or worse than the other. A nation of renters is more willing and able to move when jobs move. Rather than a “home” as an investment, renters have other, more diverse, investments that might be more resilient in tough economic times. A nation of homeowners provides more stability to communities and a willingness to make current sacrifices for the future well being of the community as a whole. As one example, homeowners will vote to raise school taxes. Landlords will not.

    I think this needs to be part of the national discussion. Where are we headed? Were do we want to go? THEN we can start talking about details of the route.

    Denise L. Evans on
  • Dear Board Members

    I am a Real Estate Broker (30yrs) investor and financier. I own residential, vacant land and commercial properties in Florida and Missouri. Historically I have financed properties that I owned to families and investors. I have utilized the role as lender on an occasional or rare instance.
    It has been my experience that vacant lots are financed to allow buyers to obtain the “American Dream” when an institutional lender would not! It has been my experience that lenders/banks loan money to people that don’t ‘need’ money but rarely lend money to those who actually ‘need’ money. ‘Constructively ’Outlawing’ seller financing is taking my Right to trust whom I choose to trust.
    If this rule/legislation is to proposed to protect the public from predatory lenders then subject the rule to a quantifying rationale. i.e. – allow seller and private lenders to act as the conduit for ownership that exists today but quantify that lending to 3-6 loans per year. Limitation would keep true seller lending a personal relationship (RIGHT) & still protect consumers from lenders from setting up of an unregulated business.
    Why should the buyer be required to divulge their income and assets to the very person with whom they are negotiating the terms of a sale?
    The restriction of no balloon doesn’t affect just seniors, it has financial consequences for anyone using seller financing. Under the Dodd-Frank Act community banks are allowed to originate fully amortizing loans with a five year balloon.
    This 3-5 year rescind provision is “insane” for any businessman.
    The Consumer Financial Protection Bureau has spent a lot of energy developing a new, easy to read, two page mortgage disclosure form. It is unreasonable to expect sellers and buyers to fully understand and apply this 169 page rule. If buyer’s and seller’s negotiations deviate in the least the buyer has up to three years to rescind the sale and demand back all money paid to the seller, or anyone that the seller might have assigned rights and interest to, or any bank that takes the note as a collateral assignment.
    Voting for this provision means you have no real concern for the public and only vote to protect the banking industry from what they deem competition (how can you promote such obvious greed?).
    I do not mean to be personal but when each of you Board members started and needed that first break remember that seller/private lending is that break for millions of your fellow human beings. It is the method that got me my start. I bought lots with owner financing because the low up front costs gave me ‘opportunity’. I took risks and so do all who borrow – because not even the wisest can see all ends.
    Please, do not take ‘opportunity’ from millions of Americans under the guise of ‘protection’. Enacting the proposed rule is stealing Rights for the sake of the banking industry. It is plain for any reasonable person to see.
    Please vote to keep this (seller/private lending) American right a reality and vote against implementation of the Frank-Dodd rule ([Regulation Z; Docket No. R–1417]) provisions to seller/private lending or at least, quantify the proposed language to still allow seller/private (non-institution) lenders to give some reasonable opportunity to Mom & Pop.

    Thanks for your time and consideration,

    David Kramer, Broker/Pres.
    Isle of View Realty, Inc.
    6725 West C-30A
    Santa Rosa Beach, FL 32459
    888-256-8380/Toll-Free
    850-585-8337/Cell
    850-267-3464/Office
    850-278-6365/Fax
    Email: irealty@aol.com
    Website: www.isleofviewrealty.com

    david kramer on

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