ALL ABOUT SELLER-CARRIES!
NEW RULES FOR SELLER-CARRIES IN A NUTSHELL: The new rules will govern seller-carried residential finance using a trust deed, mortgage, land sale agreement, land trust agreement or like financing tool where a purchasers title of any kind is vested in the buyer and the buyer intends to use the property as a personal home and not as investment or business property.
The rules require that some due diligence steps are taken by almost all of the professionals in the transactional chain to assure compliance in some cases that the creditworthiness of the buyer is determined and that the credit information is put before the seller so that the seller and his or her advisers can make a well-based and reasoned decision to extend a loan to the buyer–and the rule goes on then to limit the terms of the loan the seller can demand, depending upon how many properties the seller has sold in any 12 month period (looking back and forward). For most mom and pop one-time-only home sellers, there are some exclusions from these rules for them and the professional transactional participants.
Before one concludes that this is an onerous development in the law, one ought to consider the fact that assuring the borrower is creditworthy and assuring that the seller and seller’s qualified advisers knowledgeably weigh the borrower’s ability to repay and consider sound terms for the financing has ALWAYS BEEN THE RIGHT PROTOCOL for seller-carried transactions.
IT HAS LONG BEEN A REAL ESTATE AGENTS DUTY TO SEE TO IT THAT THIS HAPPENS (THOUGH NOT NECESSARILY TO CONDUCT ALL OF THE REQUIRED DUE DILIGENCE)! WARNING CAVEAT: ITS IS NOT THE AGENTS DUTY OR EVEN THE AGENTS RIGHT TO GATHER CREDIT OR MAKE CREDIT RECOMMENDATIONS OR DETERMINATIONS. IT IS INSTEAD THE AGENTS DUTY TO ASSURE THE SELLER AND BUYER GET THAT INFORMATION FROM COMPETENT THIRD-PARTY SOURCES. PASSING A CREDIT OPINION TENDS TO MAKE THE AGENT A GUARANTOR FOR THE DEAL AND IN SOME CASES NOW VIOLATES THE NEW RULES AND EVEN FAIR CREDIT ACTSA VERY RISKY SPOT TO BE IN!
A WARNING: THERE IS STRONG AND AUTHORITATIVE LEGAL ANALYSES THAT SUGGEST THAT CARs (California) and AARS (Arizona) NEW SELLER-CARRY ADDENDUMS DO NOT ACCURATELY RECITE OR COMPLY WITH THE CFPB/SAFE 12
RULES! CONTINUE TO USE A COMPETENT ATTORNEY WELL-VERSED ON THESE AND RIGHT UP FRONT ON YOUR DEALS BEFORE CONSUMMATING IT THROUGH AN AAR RESIDENTIAL SALE AGREEMENT USING THESE FORMS. MOST ATTORNEYS IN THIS AREA OF PRACTICE HAVE THEIR OWN COMPLIANCE FORMS!
THREE-STEP LITMUS TESTS IN SELLER-FINANCING ANALYSES
AFTER JANUARY 10, 2014
After January 10, 2014, there have been three tests required for the consumers, licensees and other entities to consider in the listing-to-sale-to-buying-to-financing-to-closing process to comply with the CFPB/SAFE Act.
All in this chain (real estate broker to mortgage broker or banker to appraiser, if any, to inspector, if any, to escrow) are responsible to know them and apply them and not to participate in a transaction or an act that violates them or furthers a wrongdoing earlier in the transactional stream. For the discussion, below, of this basic 3-test list, all of these entities seller and buyer, real estate licensee, real estate brokerage, Mortgage Loan Originator or mortgage broker, any lender, title insurer and escrow company and all managing or participating persons and assignees will be collectively referred to as Transactional Participants. If there is an exception for the seller-carry regulatory coverage, the exception from those rules (remembering, of course, that all Participants may have other rules that apply to them) is good for all Transaction Participants.
If there is not an exception, then compliance by each Transactional Participant is the burden of all Transactional Participants.
First Test:
Is the transaction a consumer transaction? If it is not, the seller is outside of the rest of the tests and outside of the SAFE Act and the CFPB and the consumer analyses for seller-carried finance is over. Whether or not the proposed transaction is a consumer transaction is a critical first test as most commentators are mis-quoting or mis interpreting it. The Transactional Participants need to assure that it is not mis-stated and that the correct rule is followed as a matter of appropriate advice, disclosure and professional practice.
SAFE does NOT state that it applies to all seller-carries or all transactions in which a residence or dwelling (1 to 4 units) is sold or to all sellers or all sellers over 3 properties a year or all transactions in which the buyer is an individual, though these are commonly explained by commentators as the threshold. Those analyses are WRONG.
SAFE specifically states that it applies ONLY to CERTAIN mortgage transactions. To-wit: A mortgage transaction, which means a credit or loan transaction for the sale of a collateral that is or will be (1) used by the debtor primarily for personal, family, or household purposes and (2) is secured by a mortgage or equivalent consensual security interest on (3) a dwelling (4) or residential real estate. THE UPSHOT? If this is a purchase for commercial or business purposes by the borrower, a non-consumer transaction, i.e. the buyer is buying for investment or business purposes and not for personal or family occupancy in whole or in part, now or later, this part of the CFPB/SAFE Act does not cover the transaction and the rest of the 13 tests do not apply and the Transactional Participants then need only comply with other laws governing commercial deals.
Assuming that under the first test above, one continues to remain inside the Safe Act and CFPB regulations as a governed transaction, i.e. a consumer transaction. then one goes to the second test.
SECOND TEST:
This test looks at the transaction financing instrument and asks is the installment purchase/finance agreement to be used with a consumer party covered by CFPB/SAFE Act? (And only because there is so much confusion on this specific question) as to the financing instrument, is something like a land sale contract exempt? Is a bare lot on which a dwelling is to be built exempt?
Discussion: Some financing methods and land types are inside or outside of SAFE/CFPB coverage though they may not look like they are inside because of the borrower’s purpose, above. Generally, though, the CFPB/SAFE Act does apply to sellers if even if they don’t directly lend purchase money funds, but merely carry back installment-paid paper, generally to be considered as a purchase debt repaid in 3 or more installments. And it can even apply to bare lots on which a home is intended to be built, but not so if a residence or dwelling is not intended to be built. It also does not apply to agricultural properties or business opps where a dwelling may be the non-primary part of the collective property being sold under a single agreement.
The definition of the type of paper and what it is secured by to be under the new rules may also exempt it and is specifically addressed in HUDs Final Rule (and HUD is now under the CFPB). The below is from SAFE:
A residential mortgage loan includes an installment sales contract. Residential mortgage loans, as defined by section 1503(8) of the SAFE Act, refers to typical financing mechanisms such as mortgages and deeds of trusts. But in addition, the SAFE Act definition also includes other equivalent consensual security interest on a dwelling (as the term dwelling is defined by section 103(v) of TILA) or residential real estate upon which is constructed or intended to be constructed a dwelling,) which has the potential for including a broad range of other financing mechanisms.
For the purpose of this rule, equivalent consensual security interests specifically include installment sales contracts, consistent with the treatment by many states of such contracts in the same manner as mortgages and purchase money mortgages offered by sellers of residential real estate.” Installment sales contracts are varying called land sale contracts, contracts for deed, and other names, but they are all the same. They are widely used for seller-carries because they contain both the language for a sale (critical sale terms, conditions, property disclosures and disclaimers and the like which just finance language does not contain) and the language of finance (I owe yous) whereas most trust deed and mortgages contain only the language for finance.
More Points on Use of Installment Contracts: In many states installment sale contracts are STATUTORY and a non-judicial foreclosure on them is conducted like that on a trust deed and a judicial one is exactly like one on a mortgage. The “equitable title” argument fails to avoid the CFPB.
The “security interest” could be the retention of a “lien secured by possession of legal 14 title until performance is complete, very similar to a financed vehicle title. And if it was true that an equitable holder had no color of any title at all, the casualty insurers would not insure it, title insurers would not insure it and liens through a creditor’s bill could not attach to and execute on it and no homestead exemption would apply to it, where such exemptions are otherwise available. Moreover, most title insurers will not insure foreclosure of an installment sale agreement unless all third-party lienors who arise by, through or under the buyer’s equitable title are also joined, the same way as required for a legal title in which buyer has deed, such as in the case of a mortgage or trust deed in a lien-theory state.
Paperwork Exceptions: Interestingly, this definition does not appear to cover a lease/option (one in which a buyer’s duty to buy and an amortization satisfying the price is NOT consummated at the first transactional closing) though it likely applies to a lease/purchase as in that case a buyers duty to buy and an amortization of the price IS consummated at closing. Also, the purchase of a bare lot which is not intended to have a dwelling built on it would be excluded.
The definition would not cover unsecured options conveying neither a legal or equitable title. It also may not cover certain land trusts, where the buyer has been deemed to have neither a legal nor an equitable title during the purchase period (having merely a springing interest after the condition precedent of paying in full) and is indebted by an unsecured promissory note.
As has already been noted, if the lien is not for purchase (merely a lien for a cash loan, like a business loan or line of credit), or the collateral is not the regulated type (not residential land or dwelling) or the buyer is not buying for personal, family or household purposes, the SAFE/CFPB rules for seller-carries do not apply, anyway. Interesting
Documentation Caveat: Is a preliminary agreement to purchase, such as those commonly published by Realtor Associations, varyingly called Residential Sale Agreements, Residential Resale Agreements, Earnest Money Agreements or other titles an exempt transaction or document under the SAFE/CFPB rules? Short Answer: No. If the parties and terms meet the above, they must comply. Particularly the Seller Finance sections, whether inside the agreement or as an addendum! Do all now currently comply? No! Despite what many trade Associations and spokespersons may be saying about CFPB/SAFE Act application and their own documents, many do not comply and the my association said it was okay and even drafted the non-compliant papers defense is no defense at all to the CFPB/Safe Act Rules.
Transactional Participants are best advised to have their own attorneys review ALL of the transactional documents, whether or not they originated with the Participant.
The Seller Caveat: If the seller sells only one property on consumer finance every 12 months and is other than a natural person, estate or trust, the seller is NOT excluded from the SAFE Act Safe Harbors and will otherwise be restricted to the terms for 2-3 sales per 12-mont period, below, irrespectively of whether the seller would otherwise qualify; if the seller sells 2-3 properties on consumer finance in any 12 month period, and whether or not he is a natural person, corporation, partnership, proprietorships, estates, and trusts, the seller is NOT excluded from the SAFE Act Safe Harbors, below.
THIRD TEST:
Assuming that after the above tests, the transaction is still CFPB/SAFE Act-regulated, then which regulatory rule of three applies? Is it: (1) The single-sale-per-any-12-month-period rule, or (2) the more-than-one-but-15
Less-than-four-sales-per-any-12-month-period rule, or (3) the four-or-more-sales-in- any 12 month-period rule? IN THIS LAST TEST, THE ANSWER AS TO WHICH RULES APPLIES IS A FUNCTION OF TRANSACTIONAL TERMS. SAID ANOTHER WAY, THE RULES SET FORTH SAFE HARBOR ALLOWABLE TRANSACTIONAL TERMS. IF THE TERMS DESIRED ARE OUTSIDE OF THOSE SAFE HARBORS THEN THE USE OF AN MLO IS REQUIRED,
See how each of these Rule Brackets apply, below.
If the transaction is a regulated transaction, the Transactional Participants are responsible to assure it and all parties in it meet the rules.
In general the New CFPB Rules provide as follows:
THE NEW CFPB RULES FOR SELLER-CARRIES (SALES CLOSED AFTER JANUARY 10, 2014)
The Basic Rule:
The basic rules of seller-carries is now this:
1. Provided that certain safe harbor financing terms and limits are met, and provided that one seller does not sell more than 3 seller-carried residential properties in any 12 month period and provided further than the seller is not the builder of the dwelling sold, the use of Seller-Carries to finance consumer transactions are permissible without the use of an MLO. But.
2. If the one seller conducts more than 3 seller-carried consumer finance transaction in any one 12 month period or is the builder of the dwelling sold or if the terms of the financing exceed the safe harbor terms and limits, use of an LOM is required. Notwithstanding.
3. Irrespectively of the foregoing, the seller and buyer may elect to use an MLO in a seller-carried transaction if they wish.
More explanation on this seemingly complex topic:
THE ONE PROPERTY PER 12-MONTH PERIOD MLO EXCLUSION
This is the most flexible exception and applies only to a more narrow definition of persons (only natural persons, estates, and trusts) that sell only 1 property in a 12-month period. The exclusion is not available to other organizations, such as corporations, partnerships, or proprietorships. To be exempt from the definition of loan originator using the 1-property exclusion, one must meet the following criteria:
A. The seller provides financing for the sale of only one property in any 12-month period. The
Property must be owned by the seller and serve as security for the financing.
B. The seller has not constructed, or acted as construction contractor for, a residence on the property in the ordinary course of business of the seller. (This is the same requirement as applies for the 3-property exclusion.)
C. The seller provides seller financing that meets the following requirements:
1. The financing has a repayment schedule that does not result in negative amortization. A balloon mortgage is permitted. (NAR sought relief from the prohibition against balloon mortgages.)
2. The financing has a fixed interest rate or an adjustable interest rate. If it has an adjustable rate, it must have reasonable annual and lifetime limits on rate increases and provide for the rate to be determined by the addition of a margin to an index rate based on a widely available index such as indices for US. Treasury securities or LIBOR. CFPBs Official Interpretations note that an annual rate increase of up to 2 percentage points is reasonable. A lifetime cap of 6 percentage points, subject to a minimum floor and maximum ceiling up to any applicable usury limit, is reasonable. (This is the same requirement as applies for the 3-property exclusion.)
If a seller sells one property using the less restrictive exclusion rules of a 1-property sale, above, then that seller is unable to sell another within 12 months of the first sale without sanctions, as the first sale then count and the 2-sales per 12 month period would not qualify for the more astringent standards of the more-than-one-sale-every 12 months exclusion.
Thus, if the seller sells under the 1-property rule, above, the single-sale exclusion, then seeks to sell a second property, the safest course would be to wait for the expiration of 12 months after consummation of the first sale before selling the second property. The only other option for the seller if there was any doubt which exclusion to use would be to routinely quality even a 1-property sale under the 3-sale exclusion, since in that case the second sale and even third sale is always permissible inside the 12 months and none of those would then invalidate the first sale’s compliance.
Though the CFPB made minor changes to the statute, such as the one property exclusion noted above and not requiring proof of documentation of a borrower’s ability to repay, the Bureau determined to not eliminate the criteria in the seller financing exclusion as defined in the Dodd-Frank Act. Accordingly, credit verifications and ability-to-pay evaluations should continue to be made.
THE THREE-PROPERTIES PER 12-MONTH PERIOD MLO EXCLUSION:
This exclusion applies to persons as defined broadly under TILA to include not only natural persons but also a wide range of organizations such as corporations, partnerships, proprietorships, estates, and trusts. To be excluded from the definition of loan originator using the 3-property exclusion, one must meet all of the following criteria:
A. The seller provides financing for the sale of 3 or fewer properties in any 12-month period. Each property must be owned by the seller and serve as security for the financing.
B. The seller has not constructed, or acted as construction contractor for, a residence on the property in the ordinary course of business of the seller.
C. The seller provides seller financing that meets the following requirements:
1. The financing is fully amortizing (no balloon mortgages or negative amortization).
2. The seller determines in good faith that the consumer (buyer) has a reasonable ability to repay (ATR). The regulation does not require documentation of the determination, which significantly eases the regulatory burden, though CFPB points out it may be a good idea in the case questions arise whether the seller made the determination. CFPBs Official Interpretations of the regulation provide guidance on how a seller could make the determination that the buyer has a reasonable ability to repay.
This could include considering earnings as evidenced by payroll or earning statements, W-2s, etc.; other income from a federal, state, or local agency providing benefits and entitlements; and/or income earned from assets (such as financial assets or rental property). The value of the dwelling may not be considered as evidence of the buyer’s ability to repay. The seller may rely on copies of tax returns. The use of an MLO to aid the seller to develop the ATR due diligence (using conventional methods and data) is considered to be per se compliance with the ATR Rule by the seller.
3. The financing has a fixed interest rate or an adjustable interest rate that is adjustable after 5 or more years. If it has an adjustable rate, it must have reasonable annual and lifetime limits on rate increases and provide for the rate to be determined by the addition of a margin to an index rate based on a widely available index such as indices for U.S. Treasury securities or LIBOR. CFPBs Official Interpretations note that an annual rate increase of up to 2 percentage points is reasonable. A lifetime cap of 6 percentage points, subject to a minimum floor and maximum ceiling up to any applicable usury limit, is reasonable. These safe harbors are not mandatory, but sellers would be wise to adopt them.
In any of the above cases, the seller should verify the borrower’s ability to repay (see below) and when an MLO is used, that is essentially what the MLO does. In cases where the seller’s terms do not meet the safe harbors of the above, they are prohibited from doing the deal unless an MLO is involved. Recall that when an MLO is needed, the acts do not say that the seller needs to be the MLO. It is just that an MLO must be engaged to assist in the transaction in the limited manner set forth, below.
USING THE MLO OPTION
Obviously, the other option is to engage an MLO to qualify the transaction in any and all events. The MLO review always qualifies the transaction under the CFPB/SAFE Act as Safe Act compliance. Note: Though the MLO involvement qualifies the transaction as compliant, the MLO is not required to guaranty to pass an opinion on the likely performance of the borrower the MLO can do that, but is not required to.
The MLO in the seller-carry is required to simply develop and accumulate accurately all of the personal, financial and credit data upon the borrower that would be the case in a conventional loan and provide it to the seller as the seller is the lender in the transaction. The data does not have to include a property appraisal unless the transactional terms the parties have arrived at call for it. In any event, unless the MLO has contracted otherwise with the seller, the MLO does not elect to make the loan or dictate loan terms (unless they violate the consumer laws) the seller makes that decision.
The MLO will assist with a Good Faith Estimate (GFE) where required and will generate a Truth-in-Lending Statement (TIL) where required and will assist escrow with the new HUD-1s the CFPB/HUD requires (which now must explain variations between any estimated loan rates and transaction cost and the actual, final transaction rates and costs and give the borrower a 3-day review period prior to closing escrow initially and after any changes). Escrows and Real estate licensees SHOULD NOT act as MLOs and develop this paperwork as in most states they are not licensed for it as part of their other professional or operational real estate sales licenses.
ECKLEY & ASSOCIATES, P.C.
DIAL TOLL-FREE 1-(800) 999-4LAW
ABOUT THE AUTHOR/SPEAKER:
J. ROBERT ECKLEY is a multi-state real estate, agency, construction and banking attorney, successful litigator, popular writer, educator and national speaker with an immense personal and professional involvement in forefront issues over the past four decades. He has established precedent at the Supreme Court and co-founded transactional laws, rules and forms that guide practitioners today. He has been named in the prestigious The Marquises Honor List of Who’s Who in American Law. He was a real estate licensee for three decades, 5 years of which were with the Beverly Hills Board of Realtors, 10 with the Phoenix, Scottsdale and Portland Associations of Realtors, and is now an affiliate member of the North San Diego County Association of Realtors. He was named to numerous Commissioner’s Advisory Committees, He was a Director for 3 years of the Central Valley Chapter of Oregon Escrow Council, has been a 15-year Member of the American Society of Certified Fraud Examiners and is a 20-year member of the International Association of Financial Planners.
He has received a host of leadership and instructor awards, is a CCIM Affiliate, testified in Congress against the due-on-sale clauses in 1982, received a perfect auditors score an keynote speaker and educator for the Las Vegas annual convention of the National Association of Realtors, successfully fought against anti-consumer trends in state and federal in state and federal courts, fought against all and defended a half dozen state and nationally chartered banks and thrifts, and has received leadership awards and honors from the late former California Governor and then U.S. President Ronald Reagan and former Arizona Governor and Secretary of U.S. Homeland Security Janet Napolitano, to cover just a few of the miles he has gone. In July, 2011, he was appointed by the Arizona Commissioner of Real Estate to serve a 2-year term on the state Commissioners Advisory Committee and was renamed in 2013. He was recently named to the prestigious International Bar Association in London, England.
He is a member of the Arizona Bar Association, the Oregon Bar Association, the U.S. District Court bars of various jurisdictions, Beverly Hills Bar Association and Los Angeles County Bar Association in California. He has put together, written up or advised on tens of thousands of transactions. He is a been there, done that type who is often as entertaining as he is practical and enlightening! See more at www.eckleylaw.com. If you want to be on his Counselors Corner monthly hotline e-mail to education@eckleylaw.com or call toll-free 1-800-999-4LAW and ask for the help you need or to get on the hotline. UNIFORM DISCLAIMER:
THE MATERIALS AND INFORMATION HEREIN IS FOR EDUCATIONAL USE ONLY AND NOT THE RENDERING OF DIRECT LEGAL, REAL ESTATE, ACCOUNTING OR FINANCIAL ADVICE. PROPER TECHNICAL ANSWERS VARY GREATLY FROM CASE TO CASE AND THUS REQUIRE SEPARATE AND DIRECT ANALYSES IN EVERY EVENT. ALL LEGAL, ACCOUNTING AND GENERAL ADVICE AND OPINIONS SHOULD THEREFORE IN EVERY CASE BE SOUGHT DIRCTLY FROM A COMPETENT, DULY-LICENSED PROFESSIONAL. 34
PERMISSION IS GRANTED BY THE AUTHOR TO ALL BROKERS AND EDUCATORS TO UTILIZE THIS ENTIRE PUBLICATION, WITH ACCREDITATION TO THE AUTHOR AND WITH THE ABOVE UNIFORM DISCLAIMER, IN THEIR CLASSES AND IN THEIR PRACTICES AND MAY CIRCULATE IT TO CLIENTS, CUSTOMERS AND COLLEAGUES
EXHIBIT A
CFPB TRANSACTIONAL ADVISORY AND BUYERS CERTIFICATE OF PURPOSE
COPYRIGHT, 2014 THE ONLINE LAW STORE
VERSION 15-2
DATE:______________________________
TO BUYER:__________________________
RE:______________________________
INSTRUCTIONS FOR USE
To Broker: This document should be completed by Buyer prior to engaging in any commitment to a binding sale or other seller-financing transaction for a 1 to 4 unit residential dwelling. The selling Broker or buyer Broker (or the same Broker if this is dual agency transaction) should require it be completed by the Buyer prior to any sale commitment to assure both the Seller and the Buyer can or will make the intended sale on the terms anticipated. The first step in seller-financing is to determine whether or not this transaction will be a consumer transaction as that is defined in federal law. A consumer transaction under federal law is one in which the Buyer (a borrower in a seller-financed transaction) is buying/borrowing for personal, family or household use or resultant residential occupancy by himself or his family and not buying solely as a business or investment in which the property will not be occupied in whole or part as a residence by the Buyer or his family).
If it is a consumer transaction as to the Buyer/borrower, then there are Seller qualifications and limits to consumer transaction terms that can come to bear. If it is a consumer transaction, the listing Broker must then obtain a Sellers CFPB Certificate (ONLINE LAWSTORE FORM 14-2) to qualify the Seller as being able or willing to extend the regulated consumer financing terms allowed for a consumer transaction. If this is a consumer transaction, then the selling Broker must require the Sellers Certificate.
In short-hand, normally, but not always, the Buyer’s intended use of the property determines whether the Sellers Certificate is required. See rules, below.
READ AND COMPLETE THIS DOCUMENT AND RETURN IT TO YOUR AGENT OR ATTORNEY TO SEE HOW THESE RULES WILL APPLY TO THIS TRANSACTION. ANSWER THE QUESTIONNAIRE, AS IT WILL HELP CLASSIFY YOUR TRANSACTION AND IDENTIFY ANY LIMITATIONS.
Greetings, Buyer: New Federal law (the Federal Consumer Financial Protection Bureau, the CFPB) now governs private transactions in which the Owner (Seller) agrees to extend financing to the Buyer or Transferee (Buyer) for the purchase of a residence. Accordingly, 36 Buyers need to be qualified as to the purposes for which they are buying as being either (1) for personal, family and household use as a personally-occupied residence or (2) for a business or investment purpose in which they or their family will not occupy the residence or any part thereof themselves.
To qualify your purpose in buying property, you will need to read, use and complete this Form in the process of putting together your private financing in this transaction if the last payment from in your residential loan from the Seller will occur after December 31, 2013. Which of the many new rules apply to your specific transaction and what terms are permissible and steps are required is determined by your status as a Buyer.
If you are buying for purpose of personal occupancy, there are many requirements. If you are buying for purposes of business or investment, there are far fewer. READ AND COMPLETE THIS DOCUMENT AND RETURN IT TO THE SELLER, YOUR AGENT OR ATTORNEY TO SEE HOW THESE RULES WILL APPLY TO THIS TRANSACTION.
A MINI-SUMMARY OF THE RULES
Rules Affecting Your Seller: Depending upon the status of the Seller and the number of residential properties the Seller has sold or will sell in any given 12-month period (counting 12 months backward and 12 months forward in time as of the date of a present sale) and the terms of the financing Seller carries back, the Seller and Buyer may or may not need the services of a professional, Mortgage Loan Originator or a like person or entity as established under this law or in the state where the property is located (collectively referred to here as it is by the CFPB as an MLO), if different.
If an MLO Is used, he is to obtain form the buyer and provide to the seller the same type of standard financial and credit information as a conventional lender would want. The MLO will not approve or disapprove of the buyer as being creditworthy it it only the seller is the only has the right to approve and the MLO is not thereafter responsible if the buyer defaults, unless the MLO failed to give the seller correct and complete material financial or credit information and it led to the breach by buyer. The MLO will usually charge a fee for this service.
Rules Affecting You as a Buyer: If the Buyer is not buying for Buyer’s own primary residential occupancy and instead buying the property as a business or investment property, these rules generally do not apply either for the Seller or for the Buyer.
THE LONGER CFPB RULES ARE GENERALLY DISCUSSED ON THE REVERSE OF THIS NOTICE. THIS NOTICE IS A DISCLOSURE ONLY AND NOT THE RENDERING LEGAL ADVICE TO ANY PARTY.
THE SELLER AND BUYER NEED ALWAYS TO CONSULT WITH THEIR ATTORNEYS IN THE ELECTION TO USE SELLER FINANCING, THE TERMS OF SELLER FINANCING AND THE GENERAL RISKS TO SELLERs AND BUYERS. NO ONE BUT THE SELLER AND AN MLO SHOULD PASS AN OPINION ON A BUYER’S FINANCIAL QUALIFICATIONS AND CREDITWORTHINESS AS A BORROWER. THE DRAFTING OF FINANCING DOCUMENTS SHOULD ONLY BE DONE BY AN ATTORNEY. WHERE THE LAW REQUIRES, THE PARTIES MAY NEED AN MLO TO ASSIST THE BUYER TO PROVE OR 37 ESTABLISH HIS OR HER CREDITWORTHINESS TO PAY THE SELLER AND THE APPROVAL OF THIS CREDIT IS SUBJECT ONLY TO THE SATISFACTION OF THE SELLER. FEDERAL AND STATE FAIR HOUSING RULES APPLY IN APPROVAL OR DENIAL OF CREDIT TO THE BUYER BY SELLER.
CREDIT INFORMATION RECEIVED FROM THE BUYER OR MLO IS TO BE KEPT CONFIDENTIAL TO STRICTLY SELLER AND THE MLO. IN MOST CASES, YOUR REAL ESTATE AGENT IN THIS TRANSACTION IS DISQUALIFIED FROM RENDERING CREDIT OPINIONS OR HAVING CONFIDENTIAL CREDIT INFORMATION ABOUT YOU IN THIS MATTER UNLESS THE YOU GIVE IT TO HIM.
BUYER’S DISCLOSURE
Buyer is currently intending to buy a residential property and to seek carry-back finance from the Seller for the purchase of it. Buyer understands that in order to determine what financing terms are permissible between Seller and Buyer and whether the services of a Mortgage Loan Originator (MLO) will be required to lawfully consummate the transaction, Buyer’s intended use must be determined by the scoring process, below.
Buyer certifies that Buyer’s answers to the below scoring questions are true and accurate and arrived at by Buyer’s own independent analyses and planning without reliance or input by his agents, if any. Buyer represents that all third parties, including the Buyer, may rely on Sellers below answers.
BUYER’S SCORING QUESTIONNAIRE:
The following series of questions and your answers will help determine what, if any, of the CFPB rules might apply to this transaction and then what you would have to comply with as far as procedure and terms of the financing.
You, as Buyer, being fully advised as above and otherwise, certify, disclose and represent to the Seller and all real estate agents or brokers, legal and, or accounting representatives involved in any seller-carried transaction entered into by you, as follows:
Mark an X as Appropriate for Each Question:
YES NO QUESTION:
1. ___ ___ You are purchasing the property for personal, family or household use or you or your family will occupy the property purchased as a home, dwelling or residence in whole or part at some point in time during the period of the seller-carried financing.
2. ___ ___ You are purchasing the property for purposes of investment and/or
business and not for personal, family or household use and you or your family will not occupy the property purchased as a home, dwelling, or residence in whole or part at any time during the period of the seller-carried financing.
BUYER COVENANT:
Buyer warrants that Buyer has read these documents, acknowledges an understanding of the laws and rules, and warrants the above answers as true and accurate. If Seller elects to extend seller-carried financing to the Buyer, Buyer will, if applicable, comply with the financing limitations, rules and terms set forth by the CFPB and will, where a Mortgage Loan Originator involvement is required, use and cooperate with one.
Buyer promises to defend, indemnify and hold persons and entities harmless for any liability generated due to Buyer’s breach or misrepresentations above or Buyer’s failures to comply with the governing laws.
DATED this__________________day of________________________________, 20_____
X___________________________________
BUYER
X___________________________________
BUYER
GENERAL SUMMARY OF SAFE ACT/CFPB RULES GOVERNING THE PRIVATE SALE AND SELLER FINANCE OF BUYER-OCCUPIED RESIDENTIAL REAL PROPERTY
The sale of residential real property where the Seller will carry back finance and the Buyer will occupy the property as a residence and not use it as a rental or for investment purposes is governed by Federal Law. If the Buyer is buying for business or investment purposes and neither the buyer nor any member of his immediate family will occupy the property as a dwelling or residence in whole or part for the life of the loan, the SAFE ACT/CFPB should not apply and none of the below restrictions apply as they would when the property is being purchased by the Buyer as a personal family residence, not for business or investment purposes, or with intent to occupy all or part of it as a residence.
If this is the latter of the above, a personal transaction for the Buyer, then what section of the law governs the transaction is dictated by how many properties the Seller sells with seller-carried finance in any 12 month period (12 months back, 12 months forward) and the terms of the finance.
The more properties the seller sells and the stiffer the terms of the finance are for the Buyer, the more regulated the seller-carried finance transaction will be. When the number of the properties sold or the terms of the finance exceed the Exclusions set forth by the Federal guidelines, it is mandatory that the transaction use a Mortgage Loan Originator or 39 Some other person or entity licensed by the state (collectively called an MLO in this information packet) to develop a credit application package, get information, review the terms, the documentation and, most particularly, the Buyer’s ability to repay the loan. Generally speaking, builders, fix-and-flippers and those selling, more than 3 properties in any 12 month period do not qualify for Exemptions and will always need to either engage an MLO to assist in the transaction or will be required to be, themselves, an MLO.
The rules are detailed and the following is only a summary. The parties should always consult their attorneys in these matters and the use of an MLO is always advisable, whether or not the transaction mandates one under the rules.
Seller-Carry Exclusion Categories:
In response to NAR and many other commentators, CFPB provided some flexibility in the new Final Rule by excluding from the definition of loan originator two categories of seller financing: (1) those sellers who sell 3 or fewer properties in any 12-month period and (2) those sellers who sell only one in any 12-month period, and in both cases meet other criteria.
If a seller sells one property using the less restrictive exclusion rules then one is unable to sell another within 12 months of the first sale, as the first sale would not qualify for the more astringent standards of the more-than-one-sale-every 12 months exclusion. Thus, if the seller sells under exclusion 1, above, the single-sale exclusion, then seeks to sell a second property, the safest course would be to wait for the expiration of 12 months after consummation of the first sale before selling the second property.
The only other option for the seller if there was any doubt which exclusion to use would be to routinely qualify under the 3-sale exclusion, since in that case the second sale and even third sale is always permissible inside the 12 months. Though the CFPB made minor changes to the statute, such as the one property exclusion noted above and not requiring proof of documentation of a borrower’s ability to repay, the Bureau determined to not eliminate the criteria in the seller financing exclusion as defined in the Dodd-Frank Act. Accordingly, credit verifications and ability-to-pay evaluations should continue to be made.
Seller Financiers 3-Property Exclusion:
This exclusion applies to persons as defined broadly under TILA to include not only natural persons but also a wide range of organizations such as corporations, partnerships, proprietorships, estates, and trusts. To be excluded from the definition of loan originator using the 3-property exclusion, one must meet all of the following criteria:
A. The seller provides financing for the sale of 3 or fewer properties in any 12-month period. Each property must be owned by the seller and serve as security for the financing.
B. The seller has not constructed, or acted as construction contractor for, a residence on the property in the ordinary course of business of the seller.
C. The seller provides seller financing that meets the following requirements:
1. The financing is fully amortizing (no balloon mortgages or negative amortization).
2. The seller determines in good faith that the consumer (buyer) has a reasonable
Ability to repay. The regulation does not require documentation of the determination, which significantly eases the regulatory burden, though CFPB points out it may be a good idea in the case questions arise whether the seller made the determination. CFPBs Official Interpretations of the regulation provide guidance on how a seller could make the determination that the buyer has a reasonable ability to repay. This could include considering earnings as evidenced by payroll or earning statements, W-2s, etc.; other income from a federal, state, or local agency providing benefits and entitlements; and/or income earned from assets (such as financial assets or rental property). The value of the dwelling may not be considered as evidence of the buyer’s ability to repay. The seller may rely on copies of tax returns.
3. The financing has a fixed interest rate or an adjustable interest rate that is adjustable after 5 or more years. If it has an adjustable rate, it must have reasonable annual and lifetime limits on rate increases and provide for the rate to be determined by the addition of a margin to an index rate based on a widely available index such as indices for U.S. Treasury securities or LIBOR. CFPBs Official Interpretations note that an annual rate increase of up to 2 percentage points is reasonable. A lifetime cap of 6 percentage points, subject to a minimum floor and maximum ceiling up to any applicable usury limit, is reasonable. These safe harbors are not mandatory, but sellers would be wise to adopt them.
Obviously, the other option is to engage an MLO to qualify the transaction. The MLO review is the safe harbor.
Note: If the seller is considered a creditor under TILA because the seller makes 2 or 3 high cost loans under the Homeownership and Equity Protection Act (HOEPA), the seller is automatically considered to be a loan originatorfor purposes of the loan originator qualification requirements in 12 CFR section 1026.36(f) and (g) and any other rules applicable to creditors under TILA. This is true even if one is exempt from the definition of loan originator under the 3-property exclusion. Check with an expert to avoid providing seller financing subject to HOEPA, which imposes many more limits and requirements.
Seller Financing 1-Property Exclusion:
This more flexible exception applies only to a more narrow definition of persons (only natural persons, estates, and trusts) that sell only 1 property in a 12-month period. The exclusion is not available to other organizations, such as corporations, partnerships, or proprietorships. To be exempt from the definition of loan originator using the 1-property exclusion, one must meet the following criteria:
A. The seller provides financing for the sale of only one property in any 12-month period. The property must be owned by the seller and serve as security for the financing.
B. The seller has not constructed, or acted as construction contractor for, a residence on the property in the ordinary course of business of the seller. (This is the same requirement as applies for the 3-property exclusion.)
C. The seller provides seller financing that meets the following requirements:
1. The financing has a repayment schedule that does not result in negative amortization. 41
A balloon mortgage is permitted. (NAR sought relief from the prohibition against balloon mortgages.)
2. The financing has a fixed interest rate or an adjustable interest rate. If it has an adjustable rate, it must have reasonable annual and lifetime limits on rate increases and provide for the rate to be determined by the addition of a margin to an index rate based on a widely available index such as indices for US.
Treasury securities or LIBOR. CFPBs Official Interpretations note that an annual rate increase of up to 2 percentage points is reasonable. A lifetime cap of 6 percentage points, subject to a minimum floor and maximum ceiling up to any applicable usury limit, is reasonable. (This is the same requirement as applies for the 3-property exclusion.)
Other Requirements Apply Even if Seller is Not Classified as a Loan Originator:
Even if the seller is excluded from the definition of loan originator, the seller is only exempt from the loan originator requirements of the regulation. An exempt person would still be subject to the rule prohibiting anyone from paying a loan originator compensation based on the terms of the transaction (e.g., higher payments for loans with higher interest rates). This would occur if a seller financier engages a loan originator to assist with setting up the financing for the seller financing. In addition, the limits on mandatory arbitration would also apply, i.e. the contract or other agreement for any credit transaction, including any seller financing, may not require arbitration or other non-judicial procedures to resolve disputes.
After a dispute arises, however, the parties may agree to use arbitration or other non-judicial procedure.
Exclusion of Professional Real Estate Activities from Loan Originator Compensation Rule The new Final Rule establishing Loan Originator Compensation Requirements applies broadly to loan originators, excluding licensed persons engaged solely in real estate brokerage activities. Loan origination for a fee is not one of those activities. The Consumer Financial Protection Bureau (CFPB) released the rule on January 20, 2013, as part of its implementation of amendments to the Truth in Lending Act (TILA) made by the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted on July 21, 2010. The rule takes effect on January 10, 2014. See 12 CFR section 1026.36.
If a Seller sells on seller-carried finance more than 3 residential properties (used as residences by the owner-occupiers) in any 12 month period, then Seller must, himself, have a license as an MLO or licensed Mortgage Broker.
