DODD-FRANK AND SAFE ACT CONSIDERATIONS
In order to implement requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Loan Origination Rule came into effect on January 10, 2014. If a loan will be secured by a property that the borrower will use for residential purposes, then the person who arranges the loan is defined as a “loan originator,” and must have a mortgage originator license. But read on before getting too concerned.
Seller-financers must be licensed mortgage originators unless they qualify for one of two exceptions. To see how this applies in your situation, refer to this flowchart.
If you do one to three seller finance deals per year you probably won't need to be licensed based on Dodd-Frank. But check the flowchart or other pertinent resouces for the details. Either way you have the option of using a licensed mortgage originator to handle certain requirements for you. A mortgage broker is a common example of a "licensed mortgage originator." You could hire a mortgage broker to process the seller financed underwriting and paperwork for you.
Even if the property being purchased is a residential property, Dodd-Frank does not apply to non-consumer buyers. This refers to entities such as corporations, limited liability companies, and partnerships.
By providing seller financing you are extending credit to your property buyers. There is a requirement that you determine the buyer's ability to repay the financing. While this rule is not a requirement if you qualify for the "one property exception," this approach should be part of any seller financing, and may be required as part of a simultaneous closing in order to sell the note. At a minimum, creditors generally must consider eight underwriting factors:
Current or reasonably expected income or assets
Current employment status
The monthly payment on the covered transaction
The monthly payment on any simultaneous loan(not to be confused with simultaneous closing)
The monthly payment for mortgage-related obligations
Current debt obligations, alimony, and child support
The monthly debt-to-income ratio or residual income
Credit history
Creditors must generally use reasonably reliable third-party records to verify the information they use to evaluate the factors. Such records include a credit history, Fannie Mae 1003 Loan Application, Verication of Employment(VOE), and a Verifcation of Rents(VOR). You can find some of these forms at the Additional Resources section of my website.
For qualified mortgages, the Consumer Protection Financial Bureau "requires that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the consumer have a total (or “back-end”) debt-to-income ratio that is less than or equal to 43 percent."
Rather than find these requirements burdensome, it's better to use them as a helpful guide for seller financing. You want to extend credit that works, and is paid back on time. And whether you sell your note as part of a simultaneous closing, or at a later date, the higher the quality of the note you create, the higher the price you will receive for your note.
There is one more consideration here, and that is the SAFE Act. According to HUD, the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) is designed to enhance consumer protection and reduce fraud through the setting of minimum standards for the licensing and registration of state-licensed mortgage loan originators. SAFE Acts vary by state, and are not to be confused with "safe acts" written for other purposes. This could add some confusion to seller financing, because a particular state's laws may refer to seller financing, and could be in conflict with the Dodd-Frank Act.
For starters I suggest that you view this section of information as simply as possible. Even if you are represented by a realtor, there's a lot going on when you are selling a property. If you choose to offer seller financing, you may do so whether or not you are using a realtor. But seller financing gives you an edge that could help you skip those commisions.
If you are doing this for the first time this page gives you a good start. The Dodd-Frank and SAFE Acts can seem like a nuisance even for an experienced seller. But after taking the time to get more familiar with this information, by using the right resources you can take one step at a time and reach a successful conclusion. Working with an attorney is a good idea no matter how you handle the sale of your property. While you're at it, make sure and ask how the SAFE Act in your state affects your transaction.
For more insights about Dodd-Frank and related concepts take a look at Note Solutions For You - Part1
PLEASE NOTE THAT WE ARE NOT LENDERS AND DO NOT PROVIDE LOANS