To whomever it May Concern:
The Dodd-Frank Act does not exempt property owners who wish to useÃƒâ€šÃ‚Â seller financingÃƒâ€šÃ‚Â (installment sale) even though no money is lent, there is no tableÃƒâ€šÃ‚Â funding, and under the TruthÃƒâ€šÃ‚Â and Lending Act they are not considered creditors. The Dodd-Frank ActÃƒâ€šÃ‚Â (ACT) does exemptÃƒâ€šÃ‚Â property owners who offer seller financing from having to becomeÃƒâ€šÃ‚Â Mortgage LoanÃƒâ€šÃ‚Â Originators (MLO) provided they only sell 3 properties or less in a 12Ãƒâ€šÃ‚Â month period andÃƒâ€šÃ‚Â they follow the restrictions below. Yet, the Act subjects the propertyÃƒâ€šÃ‚Â owner to the sameÃƒâ€šÃ‚Â liability as an MLO:
Title XIV Section 1401 (2) (E)
1. The seller did not construct the home to which the financing is beingÃƒâ€šÃ‚Â applied.
2. The loan is fully amortizing (no balloon mortgages allowed).
3. The seller determines in good faith and documents the buyer has aÃƒâ€šÃ‚Â reasonable ability toÃƒâ€šÃ‚Â repay the loan.
4. The loan has a fixed rate or is adjustable after 5 or more years,Ãƒâ€šÃ‚Â subject to reasonableÃƒâ€šÃ‚Â annual and lifetime caps.
5. The loan meets other criteria set by the Federal Reserve Board.
Under this Act the only buyers who will be able to benefit from seller financingÃƒâ€šÃ‚Â are the buyers whoÃƒâ€šÃ‚Â can already qualify for conventional financing with perhaps theÃƒâ€šÃ‚Â exception of how much of aÃƒâ€šÃ‚Â down payment they need.
Seller financing has always been the alternativeÃƒâ€šÃ‚Â to governmentÃƒâ€šÃ‚Â regulated financing. It is a meeting of the minds between two privateÃƒâ€šÃ‚Â individuals who negotiateÃƒâ€šÃ‚Â an armÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s length contract to purchase property using an installment sale.
The following is aÃƒâ€šÃ‚Â breakdown of these restrictions, listed in order of greatestÃƒâ€šÃ‚Â impact on property owners,Ãƒâ€šÃ‚Â buyers and the economy:
The seller determines in good faith and documents that the buyer has aÃƒâ€šÃ‚Â reasonable abilityÃƒâ€šÃ‚Â to repay the loan.
The implication is that the seller must use the ability-to-repayÃƒâ€šÃ‚Â underwriting requirementsÃƒâ€šÃ‚Â when offering seller financing consistent with the Dodd-Frank Act whichÃƒâ€šÃ‚Â amends the Truth inÃƒâ€šÃ‚Â Lending Act. This new, proposed rule is 169 pages long:Ãƒâ€šÃ‚Â http://snipurl.com/fedrule
The Consumer Financial Protection Bureau has spent a lot of energyÃƒâ€šÃ‚Â developing a new,Ãƒâ€šÃ‚Â easy to read, two page mortgage disclosure form. It is unreasonable toÃƒâ€šÃ‚Â expect sellers and buyersÃƒâ€šÃ‚Â to fully understand and apply this 169 page rule. If buyerÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s andÃƒâ€šÃ‚Â sellerÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s negotiations deviate inÃƒâ€šÃ‚Â the least the buyer has up to three years to rescind the sale and demandÃƒâ€šÃ‚Â back all money paid toÃƒâ€šÃ‚Â the seller, or anyone that the seller might have assigned rights andÃƒâ€šÃ‚Â interest to, or any bank thatÃƒâ€šÃ‚Â takes the note as a collateral assignment.
This could be financially devastating to the seller. LetÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s not forgetÃƒâ€šÃ‚Â that todayÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s buyer willÃƒâ€šÃ‚Â be tomorrowÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s seller. These sellers are a diverse group. They come fromÃƒâ€šÃ‚Â all walks of life: lowÃƒâ€šÃ‚Â income, high income, non-English speaking, seniors, widows, minorities,Ãƒâ€šÃ‚Â but this requirementÃƒâ€šÃ‚Â places the same standards on individuals as banks and mortgage lenders,Ãƒâ€šÃ‚Â only with more risk ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“Ãƒâ€šÃ‚Â the banker is in the business of mortgage loan origination and factorsÃƒâ€šÃ‚Â that risk into his businessÃƒâ€šÃ‚Â plan, whereas the individual seller does not have capital reserves andÃƒâ€šÃ‚Â doesnÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t do this as aÃƒâ€šÃ‚Â business. Also, unlike a bank, they do not carry errors and omissionÃƒâ€šÃ‚Â insurance.
Unlike banks and mortgage lenders, both the buyer and seller areÃƒâ€šÃ‚Â consumers. They shouldÃƒâ€šÃ‚Â both be equally protected. The buyer is purchasing real property and theÃƒâ€šÃ‚Â seller is investing in/creating a financial product where they receive their equity over time.Ãƒâ€šÃ‚Â The seller is relying onÃƒâ€šÃ‚Â the buyer to make monthly payments and maintain and protect theÃƒâ€šÃ‚Â property. Terms are not dictated to either party, but rather they areÃƒâ€šÃ‚Â negotiated between theÃƒâ€šÃ‚Â parties.
Requiring the buyer to turn over all their financial information to aÃƒâ€šÃ‚Â stranger opens the doorÃƒâ€šÃ‚Â for identification theft and fraud.
Furthermore, why should the buyer beÃƒâ€šÃ‚Â required to divulgeÃƒâ€šÃ‚Â their income and assets to the very person with whom they areÃƒâ€šÃ‚Â negotiating the terms of aÃƒâ€šÃ‚Â sale? This is not required when there is a 3rd party lender.
This also creates the opportunity for predatory borrowing. This is whereÃƒâ€šÃ‚Â an unscrupulousÃƒâ€šÃ‚Â buyer knowledgeable about the Dodd-Frank Act leads an uninformed sellerÃƒâ€šÃ‚Â (and this will be theÃƒâ€šÃ‚Â majority of sellers) into negotiations not in compliance with theÃƒâ€šÃ‚Â ability-to-repay requirements.Ãƒâ€šÃ‚Â (An example of that could be a balloon, an interest rate greater thanÃƒâ€šÃ‚Â 1.49% above a standardÃƒâ€šÃ‚Â mortgage, or the seller did not know how to calculate the income-to-debtÃƒâ€šÃ‚Â ratio correctly, or knowÃƒâ€šÃ‚Â what residual income means). That buyer lives in the property trying toÃƒâ€šÃ‚Â resell it for a profit and ifÃƒâ€šÃ‚Â they are not successful within three years they rescind the sale and getÃƒâ€šÃ‚Â all their money back.
The SAFE Act does not put in place the ability to repay requirements, orÃƒâ€šÃ‚Â any otherÃƒâ€šÃ‚Â requirements, unless the individual habitually and repeatedly usesÃƒâ€šÃ‚Â seller financing in aÃƒâ€šÃ‚Â commercial context. It is HUDÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s position that Congress never intendedÃƒâ€šÃ‚Â under the SAFE Act toÃƒâ€šÃ‚Â restrict private property owners from using seller financing, unlessÃƒâ€šÃ‚Â they did it as a primary business.
The loan is fully amortizing (no balloon mortgages allowed).
By not allowing seller financers to negotiate a balloon payment, there is a goodÃƒâ€šÃ‚Â chance that a sellerÃƒâ€šÃ‚Â 55 years or older will die before receiving all their equity. A lot ofÃƒâ€šÃ‚Â seniors have invested in realÃƒâ€šÃ‚Â property with the intent of selling it using sellerÃƒâ€šÃ‚Â financing (an installment sale) in order to supplement their income inÃƒâ€šÃ‚Â retirement, but also withÃƒâ€šÃ‚Â the hope that they would not be stuck with a 30 year investment. TheÃƒâ€šÃ‚Â Dodd-Frank Act essentially does theÃƒâ€šÃ‚Â same thing insurance companies do who sell 30 year annuities to seniors.Ãƒâ€šÃ‚Â Our government hasÃƒâ€šÃ‚Â criticized this deplorable practice because seniors will die before theyÃƒâ€šÃ‚Â receive all theirÃƒâ€šÃ‚Â investment.
The restriction of no balloon doesnÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t affect just seniors, it hasÃƒâ€šÃ‚Â financial consequences forÃƒâ€šÃ‚Â anyone using seller financing. Under the Dodd-Frank Act community banksÃƒâ€šÃ‚Â are allowed toÃƒâ€šÃ‚Â originate fully amortizing loans with a five yearÃƒâ€šÃ‚Â balloon. The rationale is that they hold these loans in their ownÃƒâ€šÃ‚Â portfolios and the governmentÃƒâ€šÃ‚Â recognizes their need to hedge against inflation and rising interestÃƒâ€šÃ‚Â rates. Yet, the Act does not recognizeÃƒâ€šÃ‚Â that private property owners who have 100% skin in the gameÃƒâ€šÃ‚Â need the sameÃƒâ€šÃ‚Â protection. Obviously, the Act does not recognize that a five yearÃƒâ€šÃ‚Â balloon is predatory lending. IfÃƒâ€šÃ‚Â there has to be a restriction it should at the very least be the sameÃƒâ€šÃ‚Â allowance given to communityÃƒâ€šÃ‚Â banks of a balloon in 5 years.
The loan has a fixed rate or is adjustable after 5 or more years,Ãƒâ€šÃ‚Â subject to reasonableÃƒâ€šÃ‚Â annual and lifetime caps.
This restriction is reasonable, but it will eliminate the ability forÃƒâ€šÃ‚Â any buyer to wrap anÃƒâ€šÃ‚Â existing obligation that has an adjustable rate even if they believeÃƒâ€šÃ‚Â they can afford any rateÃƒâ€šÃ‚Â increase. This is again inconsistent with the SAFE Act.
Moreover, if the seller does not know about the ability-to-repayÃƒâ€šÃ‚Â requirements and that theyÃƒâ€šÃ‚Â are not able to have a balloon, they certainly will not know that youÃƒâ€šÃ‚Â have to have a fixed interestÃƒâ€šÃ‚Â rate for the first five years.
The seller did not construct the home to which the financing is beingÃƒâ€šÃ‚Â applied.
There are a lot of small builders that have a spec house or two thatÃƒâ€šÃ‚Â they canÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t sell unlessÃƒâ€šÃ‚Â they offer great terms using seller financing. Otherwise they have toÃƒâ€šÃ‚Â let these properties go backÃƒâ€šÃ‚Â to the bank, which does not help housing or the economy.Ãƒâ€šÃ‚Â There is alsoÃƒâ€šÃ‚Â that group ofÃƒâ€šÃ‚Â unemployed construction workers who built their own homes when timesÃƒâ€šÃ‚Â were good and nowÃƒâ€šÃ‚Â need to sell. This takes away their ability to use seller financing.
Builders are in the business ofÃƒâ€šÃ‚Â building; not of originating loans.
Using a mortgage loan originator to facilitate a seller-financedÃƒâ€šÃ‚Â transaction createsÃƒâ€šÃ‚Â additional risk and expense for both the buyer and the seller.Ãƒâ€šÃ‚Â It has been said that a seller financing the sale of his or her own property wouldÃƒâ€šÃ‚Â completely avoid the issue of licensing by retaining the services of aÃƒâ€šÃ‚Â licensed loan originator. IfÃƒâ€šÃ‚Â a mortgage loan originator (MLO) fails to properly follow theÃƒâ€šÃ‚Â ability-to-repay guidelines theÃƒâ€šÃ‚Â buyer still has three years in which to rescind the sale which leavesÃƒâ€šÃ‚Â the seller at risk and willÃƒâ€šÃ‚Â most likely bankrupt them. Furthermore, there is no provision in a MLOÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢sÃƒâ€šÃ‚Â errors and omissionÃƒâ€šÃ‚Â insurance that covers seller financing. None of the continuing educationÃƒâ€šÃ‚Â classes or the examsÃƒâ€šÃ‚Â that an MLO must complete has a single chapter or question regardingÃƒâ€šÃ‚Â seller financing.
Who is supposed to pay the MLO? MLOs can charge a flat fee or up to 3%Ãƒâ€šÃ‚Â of theÃƒâ€šÃ‚Â transaction. The only advertisements I have seen so far advertise a flatÃƒâ€šÃ‚Â nonrefundable fee ofÃƒâ€šÃ‚Â $450. This fee has to be paid in advance, which makes sense, because whyÃƒâ€šÃ‚Â would a MLO spendÃƒâ€šÃ‚Â hours and hours on an installment sale transaction which might notÃƒâ€šÃ‚Â close? If the buyer pays theÃƒâ€šÃ‚Â fee, then this is a forced origination fee never before imposed onÃƒâ€šÃ‚Â buyers seeking sellerÃƒâ€šÃ‚Â financing. Why should the buyer have to pay money just to have an offerÃƒâ€šÃ‚Â presented to theÃƒâ€šÃ‚Â seller?
A lot of buyers use sellerÃƒâ€šÃ‚Â financing because they are lowÃƒâ€šÃ‚Â income individuals, and seller financing, up to now, has provided a more affordable way to purchaseÃƒâ€šÃ‚Â property. If the seller pays the fee, they will have to pay money to have the MLOÃƒâ€šÃ‚Â forward them the installment sale offer. If the seller receivesÃƒâ€šÃ‚Â multiple offers this could easilyÃƒâ€šÃ‚Â run into thousands of dollars in MLO fees just to sell their property.
A lot of sellers are also low income individuals. The MLO will have toÃƒâ€šÃ‚Â be a part of everyÃƒâ€šÃ‚Â offer and counteroffer because the sale and terms of an installment saleÃƒâ€šÃ‚Â are one and the same andÃƒâ€šÃ‚Â cannot be separated. For instance, the buyer might be willing to pay aÃƒâ€šÃ‚Â higher interest rate if theÃƒâ€šÃ‚Â seller is willing to come down on the price and down payment.
A lot of seller financing takes place in rural areas that areÃƒâ€šÃ‚Â underserved by mortgageÃƒâ€šÃ‚Â lenders and banks. It is going to be very difficult to find a MLO inÃƒâ€šÃ‚Â those areas who is alsoÃƒâ€šÃ‚Â willing to take the risk facilitating a seller financed transaction.
This has the potential of pushingÃƒâ€šÃ‚Â seller financing underground ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ not a desirable result.
The Dodd-Frank Act allows a property owner to use seller financingÃƒâ€šÃ‚Â without having toÃƒâ€šÃ‚Â become a mortgage loan originator as long as they donÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t use it more thanÃƒâ€šÃ‚Â three times in a 12Ãƒâ€šÃ‚Â month period and comply with the above restrictions. In the SAFE ActÃƒâ€šÃ‚Â there are no restrictionsÃƒâ€šÃ‚Â to the number of times seller financing can be used as long as you areÃƒâ€šÃ‚Â not in the business of beingÃƒâ€šÃ‚Â a mortgage loan originator. The coauthor of the Dodd-Frank Act,Ãƒâ€šÃ‚Â Representative Barney Frank,Ãƒâ€šÃ‚Â sent a letter to HUD on July 22, 2010 urging it to place the maximumÃƒâ€šÃ‚Â amount of sellerÃƒâ€šÃ‚Â transactions that an individual could do before becoming a MLO, or having other restrictions onÃƒâ€šÃ‚Â them, at five in a 12 month period. I would propose that the Dodd-FrankÃƒâ€šÃ‚Â Act adopt that sameÃƒâ€šÃ‚Â number and place no restrictions on seller financing until 5 isÃƒâ€šÃ‚Â surpassed. The only restrictionsÃƒâ€šÃ‚Â that should apply to 5 or less are those restrictions that the statesÃƒâ€šÃ‚Â already impose either throughÃƒâ€šÃ‚Â state statute or case law.
Under The Act loan officers at community banks do not have toÃƒâ€šÃ‚Â become a Mortgage Loan Originator if they originate 5 or lessÃƒâ€šÃ‚Â transactions in a 12 month period.Ãƒâ€šÃ‚Â The rationale is that this is burdensome, costly and there is not enoughÃƒâ€šÃ‚Â volume to create aÃƒâ€šÃ‚Â systemic risk. Ma and Pa on Main Street should be granted those sameÃƒâ€šÃ‚Â allowances. The ActÃƒâ€šÃ‚Â puts moreÃƒâ€šÃ‚Â restrictions and risk on Ma and Pa than it does on financial institutions.
In watching the debates in Congress last summer it was repeatedly saidÃƒâ€šÃ‚Â that the Wall StreetÃƒâ€šÃ‚Â Reform and Consumer Financial Protection Act would not negatively affectÃƒâ€šÃ‚Â or over-regulate MaÃƒâ€šÃ‚Â and Pa on Main Street. If this doesnÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t negatively affect and regulateÃƒâ€šÃ‚Â seniors, minorities, andÃƒâ€šÃ‚Â lower income individuals on Main Street I donÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t know what does. TheseÃƒâ€šÃ‚Â restrictions will all butÃƒâ€šÃ‚Â do away with seller financing, which will have a negative impact onÃƒâ€šÃ‚Â housing, existing propertyÃƒâ€šÃ‚Â owners, those desiring to be property owners and the economy.
(This draft sample letter is provided by The National Real Estate Investors Association, a national trade association representing more than 200 local real estate investor associations in the United States.)