As you probably have heard by now, effective January 10, 2014, a seller of a residential property who finances the buyer’s purchase of seller’s property may be considered a “loan originator” under Dodd-Frank requiring seller to comply with various rules, disclosures, and licensing obligations, unless seller falls under one of the two loan originator exclusions.
As a result, the FR/BAR Committee revised the Seller Financing Rider (“Rider C”) to comply with the new Dodd-Frank Loan Originator Rules which was released earlier this week. Rider C is broken down into two (2) sections with the first section addressing the loan originator exclusions and the second section setting forth the seller’s financing terms.
The 2 loan originator exclusions are the “One Property Exclusion” and the “Three Property Exclusion”. First, see if the seller falls under the One Property Exclusion since balloon payments are allowed under the One Property Exclusion. If the seller finances only 1 property in any 12 month period and:
- a. Seller owns the property as a natural person, trust or an estate; and
- b. Seller did not construct or act as the contractor for the construction of the residence during the ordinary course of business; and
- c. Financing doesn’t result in negative amortization; and
- d. 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.
If seller satisfies all of the above, you can proceed to Section II of Rider C to complete the financing terms. Otherwise, see if the seller falls under the Three Property Exclusion. If the seller finances no more than 3 properties in any 12 month period, and:
- a. Seller owns the property and is a natural person, entity, trust, or estate; an
- b. The loan is fully amortized with no balloon payment or negative amortization; and
- c. Seller determines in good faith that buyer has ability to repay the loan; and
- d. Satisfies b and d under the One Property Exclusion above.
If seller satisfies all of the above, you can proceed to Section II of Rider C to complete the financing terms. Remember balloon payments are not allowed under the Three Property Exclusion so do not check (b) under Section II.
When can you ignore Section 1 and go straight to Section II? If the property is commercial property or vacant land; buyer is purchasing the property as investment property; or buyer is an entity; then the loan originator rule under Dodd-Frank is not applicable and you can proceed directly to Section II.
When should you not use Rider C? If buyer is obtaining financing from a private lender that doesn’t own the property, then the 2 exclusions do not apply and the parties should seek the advice of a real estate attorney. Likewise, sellers should seek the advice of a real estate attorney before agreeing to finance buyer’s purchase of seller’s property if they have questions or concerns about complying with Dodd-Frank. As always, should you have any questions regarding the foregoing, please consult with your real estate attorney.
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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