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Seller Financing More Restrictive After January 10, 2014

Posted by 15789465 on

Effective January 10, 2014, all seller financing must include the services of a licensed mortgage loan originator. The licensed originator can be the seller, or a 3rd party hired for that purpose.  The rules apply to regular sales and mortgages, plus bond for title, land sale contract, vendor's lien deed, lease/options where part of the lease payment is credited to the purchase price, and similar transactions. All require licensing, unless you come under one of the "safe harbor" exceptions described below. There are only two exceptions to the rule. One is called the Three-Property Exclusion, and the other is called the One-Property Exclusion. The Three-Property Exclusion is available to individuals, partnerships, corporations, LLCs, estates, trusts, and similar entities. If the financed sale is a residence, then developers and contractors who built the residences being sold cannot take advantage of this exclusion. Sellers can finance up to three properties in any 12-month period. The financing must be fully amortizing, with no balloons or negative amortization. The interest rate must be fixed, or adjusted only after five years.  There are no requirements for how much to adjust, but the safest course is suggested to be annual caps of 2% and a lifetime cap of 6%. Also, the seller must determine in good faith the borrower can make the mortgage payments. The One-Property Exclusion is available ONLY for individuals. It is like the Three-Property Exclusion, except that balloon mortgages are allowed, and the interest rate can adjust from the very beginning, without having to wait five years. These rules take the place of the Alabama State Banking Department Interim Rule, and its Five Property Exclusion. After January 10, 2014, there will no longer be a Five Property Exclusion. Be aware, also, that if you make 2 or 3 high-cost loans as described in the Homeownership and Equity Protection Act (HOEPA) you are considered a loan originator and cannot use the safe harbors described above, and are also subject to the Truth in Lending Act.   See more guidance on that issue HERE

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14 comments

  • Denise, I understood if you used an attorney to generate loan paperwork and close the loan then you comply with the SAFE act. However, I don’t know where I heard that. Do you have any insight on that?

    Patrick on
  • Howie who?

    Denise L. Evans on
  • does this mean i need to change my name to an alias

    howie on
  • Thanks, Bob, for sharing the name and contact information for your mortgage loan originator. I am sure the price you negotiated was because of your long relationship, the volume of business you provide, and the quality of the information you give Dr. Aytch, making his job somewhat easier. Not everyone reading this post, and your comment, can expect to receive the same rate, don’t you think?

    Denise L. Evans on
  • No, Howard, the loan agreements are fully enforceable even if you don’t comply with the S.A.F.E. Act. But, the borrower can turn you in to the banking department, who can impose a $25,000 fine per transaction against you. Also, you might be in violation of other laws, because of the lack of due diligence regarding ability to make payments, and the lack of disclosures. Do you really want to be on the radar of another government agency? Given your “popularity” in some circles (I’m not being snide, we both know this is true) you are going to be one of the first people turned in to the Banking Department as being suspected of violating the law, if you do violate it. Which I’m sure you won’t, because this is a public post and comment, and it’s hard to claim ignorance of the law when you’ve been publishing comments on the subject.

    Denise L. Evans on

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