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Actual Regulation Regarding Seller Financing

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The regulation about the mortgage licensing exceptions for seller financing of dwellings is at 12 CFR Part 1026.36.  There are two versions of the regulation--one effective before 1/10/14, and one effective on 1/10/14. Both are addressed below. The regulations refer to a "person," and then tell you that "person" is defined in another regulation. Here is that definition of person: "(22) Person means a natural person or an organization, including a corporation, partnership, proprietorship, association, cooperative, estate, trust, or government unit."  You'll  need to know this to fully understand the regulation regarding the exceptions. The regulation that is in effect right now does not mention any seller financing exceptions. That means the Alabama State Banking Department 5-property rule applies right now. Below is the regulation that will be effective on January 10, 2014. On that date, the Alabama State Banking Department 5-property rule will no longer be effective.  (4) Seller financers; three properties. A person (as defined in § 1026.2(a)(22)) that meets all of the following criteria is not a loan originator under paragraph (a)(1) of this section:  (i) The person provides seller financing for the sale of three or fewer properties in any 12-month period to purchasers of such properties, each of which is owned by the person and serves as security for the financing.  (ii) The person has not constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of the person.  (iii) The person provides seller financing that meets the following requirements:  (A) The financing is fully amortizing.  (B) The financing is one that the person determines in good faith the consumer has a reasonable ability to repay.  (C) The financing has a fixed rate or an adjustable rate that is adjustable after five or more years, subject to reasonable annual and lifetime limitations on interest rate increases. If the financing agreement has an adjustable rate, the rate is determined by the addition of a margin to an index rate and is subject to reasonable rate adjustment limitations. The index the adjustable rate is based on is a widely available index such as indices for U.S. Treasury securities or LIBOR.  (5) Seller financers; one property. A natural person, estate, or trust that meets all of the following criteria is not a loan originator under paragraph (a)(1) of this section:  (i) The natural person, estate, or trust provides seller financing for the sale of only one property in any 12-month period to purchasers of such property, which is owned by the natural person, estate, or trust and serves as security for the financing.  (ii) The natural person, estate, or trust has not constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of the person.  (iii) The natural person, estate, or trust provides seller financing that meets the following requirements:  (A) The financing has a repayment schedule that does not result in negative amortization.  (B) The financing has a fixed rate or an adjustable rate that is adjustable after five or more years, subject to reasonable annual and lifetime limitations on interest rate increases. If the financing agreement has an adjustable rate, the rate is determined by the addition of a margin to an index rate and is subject to reasonable rate adjustment limitations. The index the adjustable rate is based on is a widely available index such as indices for U.S. Treasury securities or LIBOR.

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