New regulations introduced by the Frank-Dodd act have put new limits on seller financing at a time when the real estate market can hardly handle any more shocks. The Dodd-Frank Wall Street Reform and Consumer Protection Act (PL-111-203), which was signed into law July 21, 2010, allows only up to three residential carrybacks within any 12 month period. (Hint: this is not much.) Sellers who wish to carry back a fourth note must obtain a mortgage originator’s licence in order to be able to do so legally.
The Dodd-Frank act has amended the S.A.F.E. act by increasing the number of allowable nonlicensed owner carrybacks from one to three per year (which was the prior HUD interpretation). But why limit them to three and not to five or seven or not limit them at all is anyone’s guess.
If you think that shielding each property in a separate LLC is sufficient to comply with the new regulations, think again.
Even if you happen to stay within the limit of three carrybacks in any 12 month period, each of your carryback notes must comply with all the other requirements, too. In order for you, the seller, to not need a mortgage originator’s license for any particular note, you must:
- not have participated in the development of a residence on the property in the ordinary course of your business, AND
- the loan must be fully amortizing, AND
- you must verify that the buyer is in a position to repay it, AND
- the interest rate may not be adjusted within the first five years, AND
- any rate increases over the lifetime of the loan must be “reasonable” (whatever that means) AND
- you must comply with any other regulations “the Board” might have introduced in the meantime.
“The Board” is the Consumer Advisory Board under the Bureau of Consumer Financial Protection, which has recently been established within the Federal Reserve. (So much red tape might create jobs but mostly jobs of the wrong kind.)
What this means is: Notes with balloon payments or notes in which interest rates adjust during the first 5 years are not included in the allowable transactions limit and must be licensed even for a single, solitary one. (Individuals who are seller-financing their primary residence are in most likelihood exempt from the S.A.F.E. act.)
For more information on the S.A.F.E. act and related regulations, see: http://www.ffiec.gov/safeact.htm
You could use a licensed third party to comply with the law. Even though this is going to cost you money and the numbers may not work out for every deal, it most likely beats the alternative of getting licensed yourself.