Private Lending: Is this an issue with Dodd-Frank

[John Jacobs]

I have been asked to make a loan with a 3 year balloon. The borrower who is in real estate characterizes the purchase as a "live in flip." Nevertheless he and his wife would be living in the home. I had a concern as the private lender that creating a note with a 3 year balloon is not allowable under Dodd Frank as I would consider the borrower (despite the "live in flip" characterization) to be an owner occupant, and, as such, balloon payment notes are not allowed when dealing with owner occupants. Do I have this correct? Would I need a mortgage loan originator? It was suggested to me that one way to circumvent Dodd Frank in this regard is to have the aforementioned borrower buy the home in his LLC. By buying the home in his LLC and not in his personal name then the balloon payment issue relative to owner occupants would not be applicable. I was wondering what others thought.

[Andrew Postell]

@John Jacobs exceptions are written into the Dodd-Frank act to accommodate owner financed transactions.  Essentially, if you finance 3 or fewer properties in a 12-month period you will be exempt from these rules WITH THE EXCEPTION OF...balloon payments. Those would be a no-no if you finance 3 or fewer.

However, if you finance a single property in a 12-month period then you CAN have a balloon payment if the following can apply:

1. The seller must be a natural person and can only finance the sale of a single property in any 12-month period. The property must have been owned by the seller and must serve as security for the loan. For the single-property exclusion, the seller may only be an individual, trust or estate. Corporations, LLC's, partnerships or other seller entities do not qualify for the one-property exclusion.

1. The seller did not construct, or act as a contractor in the construction of, the residence in the ordinary course of the person’s business. 

The terms of the loan offered must meet the following requirements:

• First, the financing must have a repayment schedule that does not result in negative amortization. Note that this condition does not require the loan to be fully amortizing, meaning that a balloon payment can be a component of a one-property exclusion loan.

• Second, the loan must have a fixed interest rate or an adjustable interest rate that remains fixed for at least five years.

*WHEW*  That's a lot of information.  But I at least hope this helps.  If it does, please vote for my post.  Thanks so much!