Potential For Liability with Seller and Private Financing

The present rules on “Seller” financing and “Private” financing (private loans made to a consumer on residential properties not owned by the financer) adopted by the Consumer Financial Protection Bureau (the “CFPB”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), target not only private lenders and seller financers, but also real estate agents who arrange for credit and set up loans (particularly if the agent receives compensation).  An agent could be considered a mortgage originator and have to be licensed under the regulations.

Anyone who performs activities related to the origination of a residential mortgage loan is defined to be a “mortgage originator.” What this means is that private lenders, or sellers who finance their real estate transactions on residential dwellings (or an agent who arranges for such financing), must be a licensed mortgage originator or include a licensed mortgage originator in the transaction. These rules apply whether the buyer is purchasing a primary, second, or vacation residence.

Not fully aware of the rules, Buyers, Sellers, Agents, and Closing Agents continue to be surprised by the limitations on Seller and Private financing. Safe harbors do exist; these regulations apply only to transactions involving owner occupants of residential dwellings. The regulations do not apply to loans secured by vacant land, commercial properties, rental properties, properties used for investment purposes, or residential properties on which the buyer does not intend to reside.

Notwithstanding these new regulations, under the following specific conditions, financing sellers (but not private lenders) can be exempt from these rules under one of two available exclusions:

The “one property exclusion” where a seller finances only ONE property in any 12 month period, and:

(a) The seller owns the property and is a natural person, a trust, or an estate; and

(b) The seller did not construct or act as the contractor for the construction of a residence on the property in the ordinary course of business; and

(c) The financing does not result in negative amortization; and

(d) The financing has a fixed rate or an adjustable rate that does not adjust for the first 5 years and is subject to reasonable annual and lifetime rate adjustment limits (an annual rate increase of two percentage points or less and a lifetime limitation of an increase of six percentage points or less are deemed reasonable; the index you use must be widely available).

-or-

The “three property exclusion” where a seller finances no more than THREE properties in any 12 month period, and:

(a) The seller owns the property and is a natural person or organization (corporation, LLC, partnership, trust, estate, association, etc.), and

(b) The seller did not construct or act as the contractor for the construction of a residence on the property in the ordinary course of business; and

(c) The loan is fully amortized, specifically there is no balloon payment or negative amortization; and

(d) The financing has a fixed rate or an adjustable rate that does not adjust for the first 5 years and is subject to reasonable annual and lifetime rate adjustment limits; and

(e) The seller determines in good faith that the buyer/borrower has the reasonable ability to repay the loan.

Unfortunately, there are no exclusions from the Loan Originator Rule for private loans made on residential properties not owned by the private lender. However, Regulation Z and the Loan Originator Rule do not apply to business, commercial, agricultural or organizational credit, or credit extended to other than a natural person (non-consumer buyers, such as corporations, limited liability companies, partnerships, etc).

To the extent Agents provide only real estate brokerage services and are not compensated by a lender or mortgage originator, Agents can avoid having to become licensed as a mortgage originator.  Individuals must only be licensed as a mortgage originator if they engage in the business of a mortgage originator.  Agents must be careful not to participate in the taking of a residential mortgage loan application or offer to negotiate terms of a residential mortgage loan for transactions involving private or seller financing.  Since the regulations are relatively new and untested in the courts, and governmental agencies have not been able to provide much clarity, a lot of uncertainty remains as to how they may be applied. Accordingly, Agents would be prudent to stay within the “literal meanings” and “safe harbors” of the rules and regulations, and be mindful to:

  • provide only real estate brokerage services
  • not accept compensation from a lender or mortgage originator
  • not participate in the taking of a residential mortgage loan application
  • not offer to negotiate terms of a residential mortgage loan for transactions involving private or seller financing

The attorneys at Berlin Patten Ebling are eminently familiar with the regulations regarding seller and private financing.  As always, should you have any questions regarding seller or private financing, we urge you to consult with your local real estate attorney.

Sincerely,

Berlin Patten Ebling, PLLC

Article Authored by Mark Hanewich, Esq. mhanewich@berlinpatten.com

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

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