The Frank-Dodd Act, which took effect January 10, 2014, has a significant impact on seller financing, a technique that many investors use to purchase houses. I have used over $1.5million of seller financing to purchase properties in the past.
I have also recommended to many clients that they consider seller financing to get top dollar for their properties and to enlarge their pool of prospective buyers.
Under Frank-Dodd, a seller now has more due diligence in verifying a buyer's qualifications to assume financing. If the seller does not follow the new rules, they could be liable for repaying to the buyer all of their funds paid in the last three years, along with attorney and court costs.
For this reason, sellers that are required to follow the new law, may want to partner with a loan originator to make sure that third party verification and due diligence on the borrower's capabilities have been done.
Of course, it is great if the Seller is exempt from Dodd-Frank. Sellers may be exempt if they do not originate more than three seller-financed deals per year. Commercial deals, loans to non-owner occupied buyers, and cases where both buyer and seller are entities are all exempt from Dodd-Frank.
But an exemption does not mean that all aspects of the new law are waived. The law still requires the following:
--No balloon payments
--Interest rate fixed for at least five years
--Seller must qualify the buyer
It is possible that a note secured by a mortgage on a home may not even be considered a "security," according to the Supreme Court findings in Reves v. Ernst & Young, 110 S. Ct. 945 (1990). However, I am not an attorney, and my opinions should not be relied upon as legal advice.
Dodd-Frank and the Consumer Financial Protection Bureau were set up to protect consumers from predatory lending practices. Seller financing is not a big focus of the Act, but buyers and sellers considering owner financing should be sure to consult with their attorneys on the new rules.
Educate yourself as an investor, a buyer or a seller considering owner financing.
Happy Investing!
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