For years, the world of owner financing was the Wild Wild West. The seller and buyer essentially came up with terms that each could live with. No more.
As of January 10, 2014 the Consumer Financial Protection Bureau (CFPB) issued new regulations that apply to mortgage lending and owner carry transactions. These rules were a reaction to the mortgage meltdown, and an attempt to remedy the process that allowed people to get loans from lenders they did not qualify for.
The rules now require stringent procedures and licensing requirements for loan originators, now referred to as Mortgage Loan Originators. Unfortunately, owner carry transactions were included in the mix, even though these sellers and buyers played little or no role in the meltdown. It’s important to know the rules if you plan on doing an owner carry transaction.
Here is a brief summary:
The One Per Year Rule
If you are an individual, a trust or an estate and you do just one owner carry transaction in a calendar year on a property that the buyer will use as their primary residence, then:
1. Your note may have a balloon payment.
2. You do not have to prove or document your buyer’s ability to pay.
3. The note must have a fixed interest rate for five years. After the 5th year, the interest rate can increase no more than 2 points per year with a cap of 6 points above whatever you started at. You have to use an index like a T-bill or prime rate in the beginning.
The More Than One Per Year Rule
The second category applies to individuals, trusts and estates that do more than one owner carry transaction per year when the buyer will use the property as his primary residence. It also applies to any owner carry transaction – even one – where the seller is a Corporation, LLC, Partnership or other legal entity when the buyer will use the property as his primary residence. The rules here are:
1. The note cannot have a balloon.
2. The note must have a fixed interest rate for five years. Same as #3 above.
3. The seller must determine the buyer’s ability to repay.
4. If the seller does 3 or less transactions per year, he does not have to become a Mortgage Loan Originator(MLO).
5. If the seller does more than 3 transactions per year, he must become an MLO.
These rules apply only where the buyer will use the property as his primary residence. If the buyer does not live there, the rules don’t apply. If you sell land, an apartment or commercial building, these rules do not apply.
Most people can easily meet these rules. Most people will do one and only one owner carry transaction in their lifetime. But, mom and pop transactions should not be lumped in with those of major lenders to begin with. Mom and pop should not have to worry about becoming licensed to sell a home they own and want to sell by offering to carry the note. Mom and pop don’t lend money – they offer to sell their home by accepting a down payment and monthly installments.
For more background and detail, please visit www.savesellerfinancing.org. Ric Thom leads this note industry group and has met several times with the CFPB trying to get them to understand our business and how it differs from traditional mortgage lending. Please read the White Paper, sign the Petition and make a pledge if you can.