Seller Financing Dodd Frank Exemptions in each state

22 Replies

I am an MLO in California. The Exemptions in California follow the Federal law. I am doing a survey. What are the laws in each of the other states with respect to exemptions and seller financing?

Thanks in advance for your responses.

Terry Lewis

SELLERS PROCESS FOR DETERMINING EXEMPTIONS

INVESTOR IS THE BUYER WITH THE SELLER CARRYING THE LOAN

Seller must determine if the buyer is an investor or “consumer” defined in the DFA. “If buyer is an investor the transaction is exempt.”

1 TRANSACTION PER 12 MONTHS

a) Seller must determine if the buyer is an investor or “consumer” defined in the DFA

b) Seller is a natural person, "not a Corporation, LLC, partnership, trust, estate, etc."

c) The seller did not construct the property

d) The financing has a fixed rate or does not adjust for the first 5 years, a balloon is allowed

e) No negative amortization

3 TRANSACTIONS PER 12 MONTHS

a) Seller must determine if the buyer is an investor or “consumer” defined in the DFA

b) Seller is a natural person, "or" a Corporation, LLC, partnership, trust, estate, etc."

c) The seller did not construct the property

d) The financing has a fixed rate or does not adjust for the first 5 years, a balloon is not allowed

e) The borrower has a reasonable ability to repay the loanThe loan is fully amortized (no balloon)

ALL OTHER SCENARIOS REQUIRE A MORTGAGE LOAN ORIGINATORS LICENSE AND ALL REQUIRED TILA, HOEPA, RESPA, AND HUD, COMPLIANCE UNDER THE DFA.

Violations of the Acts all under oversight of the CFPB are subject to Federal and State fines, and rescission of the sale,

What about the seller offering a lease with the option to buy where there are 2 written agreements. Is that allowed without being a MLO?

Is "natural person" the language used in the law?  I thought that the 1 per year exemption was for a  "person, trust or estate" selling real property and carrying back the note. 

I didn't check the details for the 3 per year exemption.  But here's the code from Regulation Z, for the one sale per year exemption.  You can sell as a person, trust or estate:

SELLER FINANCERS; ONE PROPERTY.A natural person, estate, or trust that meets all of the following criteria is not aloan originator under paragraph (a)(1) of this section:

  1. The natural person, estate, or trust provides seller financing for the sale of only one property in any 12-month period to purchasers of such property, which is owned by the natural person, estate, or trust and serves as security for the financing.

@Terry Lewis   I'm going to be honest and say it freaks me out a bit when a professional offering MLO services doesn't quote the code correctly. Do you have a different understanding from the language in the code?

Craig, an option where the option price is paid in full as one payment is not a financing contract.

Options generally apply to an agreed sale price, not a legal requirement but customary. If the option price has installment payments with the amounts credited to the sale price you have a financing arrangement.

For all the thinkers out there, agreeing to a lower than market price after an option price has been paid without credits to the sale price is still a financing arrangement.

If you have any conditions requiring performance by a buyer/tenant in connection with an option, where performance is required in order to exercise the option, you don't have an option and you may have a financing contract taking a payment that reduced the sale price. A down payment or earnest money on a purchase contract is not a financing contract but consideration.

Terry, qualifications for exempt loans can be more complicated than that, homeowners selling their principal residence are generally exempt. A dealer, in the business of real estate and providing financing has two issues, one the exempt sale but also unrelated to Dodd Frank can be mortgage brokerage laws. A seller who sells to a rehab guy investor, who has the intent of selling, but finds he can't sell and later moves in now has a consumer loan. Notes can change classifications depending on use of the property. Some homes are zoned in commercial areas, a seller might assume it will be a commercial loan, but if the buyer moves in using it as a residence, it's a consumer loan.

The difficult thing about taking a survey, which I'd like to see too, is that the respondents may read the listed "possible" exemptions and fail to look at the difference that some states apply as to an owner selling and someone being in the business of financing real estate sales, or land that may be used to build a residence. Just saying, we might get an idea but I wouldn't rely on non-lenders reading compliance requirements as there can be other requirements beyond the initial Dodd-Frank matters.......and, if the lender does fall into a dealer/broker category, then different aspects of Dodd-Frank can apply. Simply put, nationally, it's a bit of a mess.

 We have had good and bad posted here about the DF Act and SAFE Act, I did listen to any attorney seminar (D-F expert, but not really) that broke it down quite well for investors, except that he went on to employ trusts, business entities, family members and other types of convoluted exchanges to justify staying within the exemptions. I'd have to say he missed that part of the Act which stated that "any method or scheme" employed with the intent of circumventing the Act would be a covered transaction. They will also look "behind the door" as to principles in any type of entity or partnership (married or not) as to who benefits from such activity. You're not going to get away with you and your family setting up 50 LLCs and financing through different entities.

Just saying, nailing down exemptions can be a bit more difficult than reading an initial laundry list under one aspect of state law, so while I'd like to see state specifics too, without having to go to each state and dig, as I started to do, would be interesting but caution on relying on such responses.

Actually, the best thing might be to call the state department of finance and run by the pending deal and ask if you need to comply as a consumer loan originator, they might just tell you......but they will also tell you or not, that taking that answer would be a lot like calling  the IRS for tax assistance, the tax payer is ultimately responsible. Another way is to ask a RMLO, regardless, it won't hurt to assume compliance being required.

Last thought on exempt loans, this goes to note buyers/sellers, better pay attention to notes that are claimed to have been exempt! The due diligence to show or prove Harry Homeowner lived in that house hasn't surfaced yet no has the ability to prove that note was the second under three exemptions, or that the classification didn't change or, that it wasn't wrongfully originated but the borrower moved out leasing the place, can't really make an illegally generated note go lawful 100%. Best practice, IMO, is to have a RMLO make a determination of an exemption and squeeze that letter of opinion, attaching it to the note and buy the RMLO lunch, an honest one shouldn't hold you up for an opinion! :)

Back to the count down, about 1100 shy last time I looked :)     

Originally posted by @Brian Gibbons :

Work with an RMLO or perish in note and seller financing residential properties.  It's enough to go commercial! Lol

This message is definitely out there now.  What I don't understand is how the RMLO actually prevents one from perishing. So the RMLO creates the file and originates the loan.  So presumably you have loan made per the regs.  You get a servicer to be compliant with all the communication/collection aspects.  But if the borrower decides to fight a foreclosure or make claims of bad loan, it's still the seller/lender that's going down.  Right?  What's the RMLO on the hook for?  

It is my understanding according to dodd frank of you go through a rmlo underwriting an owner occupant bier you have a safe haven from being sued n federal court from a seller saying that the buyer was not properly underwritten as per the Ability to Repay Rule.

Originally posted by @Brian Gibbons :

It is my understanding according to dodd frank of you go through a rmlo underwriting an owner occupant bier you have a safe haven from being sued n federal court from a seller saying that the buyer was not properly underwritten as per the Ability to Repay Rule.

"Safe haven"?  For a lender?  For reals?  I'm so going to have to read up on that.  

IMO Ability to Repay is only a one part of the entire loan origination process.  There are a ton of a claims an unhappy borrower (with an attorney) could come up with.  

Will definitely be looking into RLMO and safe haven.....

There is a "safe haven", of sorts, most RMLOs can't underwrite, they took a 100 question test base on secondary market requirements and the new qualification requirements of qualified and high cost loans, neither of which take an approach of qualifying a borrower 3 or 5 years into the future.

If the loan is originated under prudent lending practices, verifications are processed, income guidelines followed and compliance met, a borrower won't be able to cry foul so easily.

The issue is that RMLO types have no training in prudent underwriting, they are originators, not underwriters and there is a big difference. What we get are new RMLOs with a fever for entrepreneurship and they may pass a bit of a confidence test by their sponsor, who looks to fee income more than the necessary qualification of that RMLO. We had one here before, I'd think he talked a good talk and convinced the sponsor he had some expertise......but was far from it. You'll also find sponsor brokers who have little experience and knowledge, but have enough money to basically buy into the brokerage position. Hard for regulators to pick these types out and be consistent in licensing requirements. Any one who has enough money and is not a criminal can open a bank!

The investor only needs to meet the RMLO requirement, but if they fail to select a good one, depending on may factors, they could still be taken down with a bad RMLO. I'd think the Originator would really have to mess up as any prudent person selecting the originator probably wouldn't be held to a higher standard. Depends on how bad the deal is and probably how often the originator and note holder worked together, if there was some obvious collusion going on. Lots of factors.

And, RMLOs are not really trained in predatory dealing so much, they are not attorneys nor do they look to fairness of the transaction or the likelihood of any borrower meeting future obligations.....pretty much the moratorium on balloon notes. RMLOs are not trained to go there.

A RMLO is the beginner level of mortgage loan financing, they meet the public, explain a loan product, sell the product and qualify an applicant to proceed to underwriting. 3 months ago, they could have worked at Wal Mart.  :) 

Originally posted by @Bill Gulley :

A RMLO is the beginner level of mortgage loan financing, they meet the public, explain a loan product, sell the product and qualify an applicant to proceed to underwriting. 3 months ago, they could have worked at Wal Mart.  :) 

Here in CA agents do the state mandated origination training and the required "background check" in order to get the RMLO cert.  Three months ago they were an agent without a cert.  Three months before that they may have been working at Walmart.

RMLOs have to be an RE agent first?

DF and CFPB announcements specific safe haven assumptions as to regulated lenders for qualified and high priced mortgages, a seller financing deal isn't necessarily accomplished by a regulated lender, so the best approach would be to follow the origination process.

Safe haven is only to the extent that the regulators don't come knocking making claims if certain paths were taken, there is no real safe haven against claims by borrowers (or some note buyer) against an originator or the lender/note holder. Pretty much CYA. :)

Originally posted by @Bill Gulley :

So, some guy in a bank needs to be a RE broker to be a loan officer?  Hmmmm????

Of course not, banks do whatever they want, banks are exempt, they are big business with big lobby money, checkout the FAQ to the previous link I gave you, search for the term 'bank' ... all exempt:

Banks are exempt

David, mortgages originated by any lender, including banks, must be accomplished by an originator with the national RMLO registry number, banks aren't exempt nor are the loan officers.

Before I go there, CA has its state licensing requirement, which may exempt bank employees who have the national RMLO license, passing the national test and offer an avenue for RE brokers to obtain a license. That makes` sense being a RE broker first.   Thanks for the link. :)

Can't down load a pdf, but I see it's at the DRE, the DRE doesn't regulate banks, the Div of finance or banking will. An agency turf thing. Just guessing, a regulated mortgage brokerage or mortgage banker probably doesn't need to go to RE school either.

So, guess you could have a RMLO who worked at WalMart last month.

I know a brand new RMLO here who went to work for a bank and was an RE agent, a new hire at the bank. Granted, she doesn't have a clue really, but she is filling out loan applications. LOL

Hi all,

WOW, I asked for a simple response to how there can be up to 50 different state regulations on seller financing exemptions. I feel this was a great exercise in the confusion and massive problems of government regulation and over step of free markets.

I am well aware that a MLO properly trained and aware of the individual states regulations can be the safety net for a seller financed transaction under the DFA. This law is complex and created to cause confusion, doubt and fear about a buyers and sellers ability to enter into a real estate seller finance transaction. 

Bill you are very well versed and articulate in the DFA. The question is what are the answers and solutions that will move us back into a free market. Under this massive regulation we have the creation of criminals and possible rescission of notes if guidelines are not followed properly. What are the answers and solutions that will move us back into a free market. Until this law DFA and the SAFE Act a buyer and seller could pretty much make their own deal with the help of whomever they chose for advice. This could be a broker, attorney, trusted family member,

Seller financing did not bring about the real estate bubble. It was the product of bad loan products being created an sold to an unsuspecting securitized market by the banks and wall street. Then bailed out by you and me as tax payers.

Bill and Marie Whatever your opinion is of the previous employment of a RMLO licensing is the law and the law has made this designation a requirement of seller finance creation with different state exemptions. As a MLO I see that it can be a business model and help people navigate this nightmare. I would like to be a problem solver in the space. The bad guys are always around and will not stay in business in the long run. 

And, RMLOs are not really trained in predatory dealing so much, they are not attorneys nor do they look to fairness of the transaction or the likelihood of any borrower meeting future obligations.....pretty much the moratorium on balloon notes. RMLOs are not trained to go there.

A RMLO is the beginner level of mortgage loan financing, they meet the public, explain a loan product, sell the product and qualify an applicant to proceed to underwriting. 3 months ago, they could have worked at Wal Mart. :) 

I would like to have the conversation address problem solving. How can seller financing survive under the DFA? Or did the banking lobby succeed in such confusion in the space to scare sellers, brokers and lenders out of it?

Respectfully submitted

Terry Lewis

Bill,

In California there are two types of MLO licenses. The MLO's working for the banksters are able to pass a 10-20 question test and become an MLO for purposes of taking a loan application at a bank. And you are right they are order takers and not underwriters. However a broker or agent in California that wants to become a MLO needs 20 hours of continuing education and pass the federal and state test. I don't recall but it is a much more rigorous process. And a bank MLO cannot be a broker qualified MLO.

Terry

Originally posted by @Terry Lewis :

Bill and Marie Whatever your opinion is of the previous employment of a RMLO licensing is the law and the law has made this designation a requirement of seller finance creation with different state exemptions. As a MLO I see that it can be a business model and help people navigate this nightmare. I would like to be a problem solver in the space. The bad guys are always around and will not stay in business in the long run. 

I'm well aware that my opinion of previous employment of a RMLO is irrelevant.  I was riffing off of Bill's misunderstanding that everyone getting the RMLO is just entering the biz.  Agents here in CA get the cert so they can be full service.  If you don't get the cert you have to exempt yourself from certain transactions.  Any good broker is going to want all their agents to be up to speed and be RMLOs.

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