Seller Financing Exemptions

Some of my most popular articles and blogs have to do with the rules and regulations around seller financing. Many notable changes occurred as a result of the passage of the Dodd Frank Act in 2010.

Financing the sale of residential real estate is regulated at both the state and federal levels. In Washington the Consumer Loan Act, chapter RCW 31.04(link is external) and chapter WAC 208-620(link is external), regulates the lending of money or extension of credit for family, personal, or household use. This includes financing residential mortgages. Regulation under the Consumer Loan Act begins with the licensing process. Licensing is twofold in that both companies and individual mortgage loan originators must license.

There are some exemptions from licensing at both the company and individual levels. The company level exemptions are found at RCW 31.04.025. The individual level exemptions are found at WAC 208-620-105(link is external).

A license waiver is available pursuant to RCW 31.04.025(3) for eligible transactions under the Consumer Loan Act. The State Department of Financial Institutions (DFI) will issue a license waiver for eligible seller-financed residential mortgage loan transactions. An eligible transaction is one in which the seller owns the property being sold, is selling to a buyer for their family, personal or household use, is carrying the financing taking an interest in the property, and who is not subject to the federal law that requires the licensing of mortgage loan originators.

You may qualify for an outright exemption from the Consumer Loan Act. If you sell the home that was your primary residence and carry the financing for the sale, you are exempt from the Consumer Loan Act. You do not need a license or a license waiver. Also, you do not need a license or license waiver to lend money, secured or unsecured, to an immediate family member. 

Additionally, you do not need a license waiver if you are carrying the financing on raw land, even if that raw land is zoned residential. 

 DFI provides forms for a license waiver,  and disclosure summary forms to provide to the buyer for the type of seller-financed loan (fixed or variable rate interest).

Steps to claim an exemption for Seller Financing are as follows: 

1. Print the License Waiver
2. Fill out the license waiver, including the declaratory portion at the bottom, and return it to the Department via email to Lucinda.Fazio@dfi.wa.gov, via fax to the attention of Cindy Fazio at 360-596-3868, or via hard copy to the Department to the attention of Cindy Fazio. You can now provide the completed License Waiver to the escrow or title company or attorney.
3. As to Item No. 1 in the License Waiver, print, fill out and provide the applicable disclosure summary to the borrower. That's it!

More details may be found on the DFI website at http://www.dfi.wa.gov/residential-seller-financing

Happy Investing! 

Seller Financing under Dodd-Frank Act

Frank Dodd Act
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!