It’s back… seller financing and purchase money mortgage notes are under attack again! As regulators attempt to sort out the impact of the Dodd Frank Act, Safe Act, and TILA/Regulation Z laws on seller financing your help is needed.
Our efforts had a positive impact once before and we can make a difference again.
Urgent News: Seller financing is under regulatory attack and your comments are needed by 10/16/12.
This email just came in from the desk Ric Thom, President of Security Escrow. We appreciate Ric sharing this important information and providing his sample comments.
The Consumer Financial Protection Bureau (CFPB) is requesting comments on a proposed rule on Seller Financing with an October 16, 2012 deadline. The Federal Reserve who had regulatory supervision of the Truth-in-Lending Act (TILA) chose not to include Title XIV, Section 103(cc)(2)(E) of the Dodd-Frank Act (DFA)in its final amended Truth-in-Lending Act. Section 103 of the Dodd-Frank Act would have limited the use of seller financing on dwellings to three transactions in 12 months plus additional restrictions. The Federal Reserve felt that because Seller Financing is not table funded individuals offering seller financing would be considered creditors under TILA. Creditors are allowed to use seller financing on 5 owner occupied dwellings per year with no additional restrictions. This rule and definition has been in TILA since it was enacted.
However, regulatory supervision for TILA has now passed from the Federal Reserve to the Consumer Financial Protection Bureau. CFPB has brought back the Dodd-Frank provision and is proposing a rule that not only limits seller financing transactions on dwellings to three transactions per year, but the seller must also comply with the following restrictions:
- The seller has to verify and document the buyer’s ability to repay the installment sale using the same criteria mortgage loan originators (MLOs) and banks are required to use. This is the same criteria that are required under the controversial Qualified Mortgage definition. If the seller does not qualify the buyer the fines are the same as they are for MLOS and banks.
- The buyer and seller are not allowed to negotiate a balloon payment. The installment sale cannot negatively amortize, nor can you have an interest only installment sale.
- Furthermore, the installment sale has to have a fixed interest rate for the first five years before the interest rate can increase.
In July 2011 the Federal Reserve asked for comments on Dodd-Frank amending TILA. At that time we were all concerned they were going to require property owners who offered seller financing to prove the buyer’s ability to repay. Everyone rallied, sent comments and the Federal Reserve responded favorably. It worked with the Federal Reserve, we now need to write comments to the Consumer Financial Protection Bureau explaining why this proposed rule would basically destroy seller financing which in turn takes away the opportunity for a segment of the American population to purchase a home. I have provided links to the proposed TILA rule and a link where you can send your comments. I have also attached my comments. Comments must be received no later than October 16, 2012. It also wouldn’t hurt if you forwarded this information to other individuals who believe in private property rights.
Visit www.regulations.gov to submit your comments on the Truth In Lending proposal. Search for Docket CFPB-2012-0037, RIN 3170-AA13
For specific details on the proposed rule relating to seller financing visit this link: The Truth in Lending Act (Regulation Z); Loan Originator Compensation 36(a)-1.v (seller financing)
Comments on Proposed Seller Financing Regulation From Ric Thom
Thank you for letting me comment on seller financing under the proposed rule Loan Originator Compensation 36(a)-1.v. My name is Ric Thom and I have owned Security Escrow Company for over 25 years. It is the oldest escrow company in New Mexico and is the custodian for documents for individuals who have bought or sold property using seller financing from all over the state. We are regulated by the New Mexico Licensing and Regulations Department. I have served on the Board of Directors of the Realtor’s Association of New Mexico, the Greater Albuquerque Association of Realtors and the Valencia County Board of Realtors. I am a certified instructor for the New Mexico Real Estate Commission’s continuing education program. I instruct the four hour course “Practical Application of Real Estate Contracts” which I wrote. I have an in-depth understanding of seller financing as a viable and necessary instrument to transfer private property. I have grave concerns about the proposed rule in Truth in Lending Act (Regulation Z); Loan Originator Compensation 36(a)-1.v (seller financing) and the unintended consequences that will affect a segment of private property owners, and will slow the recovery of the real estate market as a whole. I would like to give you some statistics and observations that I and my employees have seen.
What is Seller Financing?
Seller financing is where the seller agrees to receive their equity in their property from the buyer in an installment sale. Seller financing is also known as owner financing, seller carryback, installment sale and credit sale. There is no table funding. There is no third party. No money is lent. No loan is originated. There are no points or fees charged by the seller. The buyer and seller negotiate the terms of the sale which include sales price, down payment, monthly payment, interest rate and amortization. The seller receives payments while the buyer gets all the benefits of a property ownership.
Who Uses Seller Financing?
98% of property owners who offer seller financing are private individuals who offer seller financing only once or twice in their lifetime. The vast majority are forty years or older. Many of them are elderly. They are not an industry or business. The buyers come from all walks of life and one of the main reasons they request seller financing is because they cannot meet the credit requirements that the banks require. In seller financing the seller is willing to take the risk and give an opportunity to the buyer.
Why Use Seller Financing?
The three most common reasons the owner of a property offer seller financing is either for investment purposes or because their property is non-conforming or a tight credit market. An example of offering seller financing for investment purposes might be that they have a rental house and have been approached by the renter to sell it to them using seller financing. This is appealing to the seller because they can make 5 or 6% interest on the installment sale while receiving their equity over time without the responsibility of ownership. It is appealing to the buyer because they can usually get into the property with little down, no qualifying and are building equity instead of renting. A non-conforming property is one a bank will not provide a mortgage loan for, like a 1986 mobile home permanently attached on an acre of land. The only way the seller can sell the property is by offering seller financing.
Three in One Rule Not Consistent with SAFE ACT or the intent of TILA
Some of the rules placed on seller financing are even more stringent than those imposed upon mortgage loan originators (MLOS) and community banks. Under the proposed rule a property owner who uses seller financing three or less times in one year does not have to become a MLO. However, loan officers at community banks do not have to become a MLO unless they originate more than five transactions in a 12 month period.
In HUD’s proposed SAFE Act rule seller financing was limited to a seller’s personal residence. After 14 states exempted seller financing from their state SAFE Acts and HUD received more than 4000 comments, HUD changed the rule to its present form. The SAFE Act does not require an individual to become a MLO or place any other restrictions on that seller financed transaction unless the individual offers seller financing “repeatedly and habitually”.
The intent of TILA has always been to regulate businesses. Non table funded transactions were exempted from Mortgage Loan Originator rules. They were considered creditors. These creditors were allowed five credit sales per year that included the buyer’s dwelling. Now individuals, Grandma and Grandpa, are being regulated under TILA if they do just one sale using seller financing. They have to comply with some of the same rules that MLOs are held to. The coauthor of the Dodd-Frank Act, Representative Barney Frank, sent a letter to HUD on July 22, 2010 urging them to place the maximum amount of seller transactions that an individual could do before becoming a MLO, or having their restrictions on them, at five in a 12 month period.
Additional Required Rules for Seller Financing: Ability to Repay; No Balloon; Fixed Interest Rate
Ability to Repay: In the proposed rule if seller financing is used the seller must determine in good faith and document that the buyer has a reasonable ability to repay the credit transaction. They must comply with the requirements of §1026.43. These are the same requirements that banks and Mortgage Loan Originators must comply with in order to meet the controversial Qualified Mortgage definition. It is our belief that the average property owner offering seller financing will not a) know what these requirements are and b) will not know how to evaluate the criteria. They are not going to know how to calculate debt to income ratio, residual income, seasonal income, additional income, etc. Furthermore, can the seller really rely on the buyer surrendering complete financial information while they are negotiating the terms of the installment sale? It also seems doubtful the buyer is going to want the seller to be the custodian of this personal and confidential information. The bottom line is if the buyer can qualify for a Qualified Mortgage they wouldn’t be pursuing seller financing. Seller financing does not create a financial systemic risk. The buyer isn’t being sold a loan; the buyer is negotiating the terms of an installment sale.
No Balloon: In TILA community banks are allowed to make loans that have balloon payments. The rationale behind this is so they can hedge their assets against rising interest rates and inflation. Under the proposed rule an individual who uses seller financing is not allowed to negotiate a balloon payment. They are denied the same right a bank has. Anyone who is 55 years or older who cannot use a balloon will probably die before they receive all their equity from an installment sale. A lot of seniors have invested in real property with the intent of selling it using seller financing (an installment sale) in order to supplement their income in retirement, but also with the hope that they would not be stuck with a 30 year investment. An example of the use of a balloon in seller financing would be a 70 year old retiree who sells their rental house to the tenant who negotiates a balloon payment in 10 years in exchange for a lower interest rate. The retiree sold the property using seller financing so she could continue getting cash flow from the property without having to worry about doing repairs to the property. The retiree wants the balloon so her heirs will have cash when it is time to settle her estate. This gives the buyer ample time to refinance or sell the property before the balloon is due.
Fixed Rate: This restriction is reasonable, but it will eliminate the ability for any buyer to wrap an existing obligation that has an adjustable rate. Again, seller financing is not a loan that is being sold to the buyer, but a negotiation of terms between buyer and seller. For an adjustable rate to catch the buyer unaware is highly unlikely. The buyer is the one who creates and agrees to the terms.
This proposed rule won’t only negatively affect seniors, minorities, and lower income individuals. These restrictions will all but do away with seller financing which will have a negative impact on housing, existing owners of private property, those desiring to be property owners and the recovery of the real estate market.
It will drive seller financing underground. People will no longer use realtors, title companies, escrow companies or record transfer documents in order to avoid these onerous restrictions. This is not predatory lending. The default rate we see is only about 5%. These are not businesses like Pay Day Loans or High Cost Finance Companies.
There is no justification for this rule which will have an economic impact on all those who are involved with or rely on seller financing. The rule is neither necessary nor justified by economic analysis of the use of seller financing. States already have case law and statutes that regulate seller financing. Seller financing has always been the alternative when buying and selling property during financial crises. It was used in the early ‘80s when the mortgage interest rates were 20%, when the RTC took over all the savings and loans during the early 90’s and now due to tight credit. Just because you can’t meet bank lending criteria doesn’t mean you shouldn’t be allowed to buy yourself and your family a dwelling.
We do not believe it was Congress’s intent to kill seller financing and exclude hundreds of thousands of families from home ownership, nor to leave hundreds of thousands of people with no way to sell their non-conforming property. We believe that will be the result if this proposed rule goes forward. We request that you do not enact 36(a)-1.v.
We strongly encourage the CFPB to keep the current definition in TILA of creditor and credit sale which allows 5 seller financed transactions a year that involve a dwelling that are not table funded with no additional restrictions.
How Can You Make A Difference?
Note Investor encourages you to make comments directly at www.regulations.gov and voice your opinion below!