In Congress’s effort to control more of our money and lives, Congressmen Dodd and Frank are up to their grand rules creation again. On January 10, seller financing will come under the control of the Consumer Financial Protection Bureau or CFPB (didn’t know we had one of those). In their effort to protect the public, these new regulations will put new restrictions on a an investor’s ability to sell properties using self-financing (via Contract for Deed, rent to own, etc).
If you sell houses on contract for deed or even finance the loans yourself and then sell the notes, you need to read this carefully and then go out and educate yourself. You may now be limited on how many deals per year you can do, need to become a licensed mortgage originator or simply stop doing any of this type of financing.
Here are some highlights:
- Under Dodd-Frank, you may no longer sell more than 3 properties per year if you finance them for the buyer. If you finance more than 3, you may need to obtain a mortgage originator license from your state. You will then fall under all the regulations and scrutiny that a mortgage guy sees.
- While most contract for deeds are written with a 30-year amortization and then a some type of 3-5 year balloon, this becomes illegal under Dodd-Frank. You cannot offer a loan term of less than 30 years (which seems strange since I can get a 15 year mortgage from a bank).
- A builder is now prohibited from seller financing any home he has constructed, or acted as a contractor for the construction of in his ordinary course of business.
- The loan must have a fixed interest rate for a minimum of 5 years. It must also meet criteria identified by the Federal Reserve Board, just like a bank.
- While selling the note is still legal, since there is no longer a balloon payment, it would be unlikely that an investor would want to tie up his cash for 30 years by buying this note.
- Many sellers use seller financing to help people with bad or no credit. Now you will have to follow the same underwriting standards as a bank and verify the following:
- Current income or assets;
- Current employment status;
- Credit history;
- The monthly payment for the mortgage;
- The monthly payments on any other loans associated with the property;
- The monthly payment for other mortgage related obligations (such as property taxes);
- Other debt obligations; and
- The monthly debt-to-income ratio or residual income the borrower would be taking on with the mortgage.
One glimmer of hope is that these new rules only apply to owner occupant buyers, not investor buyers (which is not as prevalent, but does happen). These rules do also NOT affect vacant land, commercial property, multi-family and single-family residence where the buyer does not plan to move into the property. If you are found in violation of Dodd-Frank the penalties can range from double statutory damages to an affirmative defense to foreclosure actions i.e., you won’t be getting the property back if your borrower stops paying the mortgage.
I recommend that you do more research on these items (here is a good reference) and retool your business to accommodate. For further clarification and interpretation please contact the Consumer Financial Protection Bureau at (202) 435-7700 or via email at CFPB_reginquiries@cfpb.gov.