Although we have written about Seller Financing in the post Dodd-Frank world previously, we thought it would be helpful to give a little refresher course on the matter. This is especially so given the increase in seller financed deals we have recently seen.
As a result of the real estate collapse, Congress adopted a new law known as the “Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”)”. Dodd-Frank significantly regulates the terms of seller financing by requiring the following terms:
- the note cannot contain a balloon payment;
- the seller as lender must qualify the borrower in the same manner that an institutional lender qualifies a borrower for a loan;
- the interest rate must be fixed for at least five years and thereafter may only adjust two percentage points a year with a maximum of six percentage points; and
- the loan must have a term of 30 years.
Given these restrictions, sellers need to be extremely cautious when providing seller financing. The good news is that the above-referenced restrictions do not apply on an individual seller that provides financing on one (1) property in a 12 month period (the “Seller-Financing Exception”). So long as the seller meets the requirements of the Seller-Financing Exception, the terms of the financing will allow for a balloon payment and the seller will not have to qualify the borrower for the financing. The other rules still remain in effect, which means that the note must still be amortized over thirty years and must still contain a fixed interest rate for the first five years. It is important to note that the Seller-Financing Exception does not apply when the seller constructed the home or if the seller is not an individual or trust. This means that a limited liability company would not meet the qualifications required for the Seller-Financing Exception and would need to fully comply with the above-referenced regulations.
Given the complexity and significant penalties associated with Dodd-Frank and the impact on seller-financed deals, we strongly encourage you to consult with your local real estate attorney to determine if your proposed transaction fully complies with Dodd-Frank.
Berlin Patten Ebling, PLLC
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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