Dodd Frank Rules re RMLO and Prohibited Loan Terms

Many people ask if they need a Residential Mortgage Loan Originator, when they seller-finance, but a simple "Yes" or "No" does not fully answer the question.

INDIVIDUALS who finance one residential consumer transaction per 12 months are eligible for the One Property Exception. They do NOT need a RMLO but DO have the following restrictions: 

• No negative amortization;
• Adjustable interest rates allowed but must be tied to a national standard and cannot adjust any earlier than 5 years after origination;
• Recommend as a safe harbor, but not required: interest rate adjustments no more than 2% per year and no more than 6% lifetime;
• Balloons are allowed but recommended no earlier than 5 years after origination; and
• You do NOT have to verify the borrower or determine its ability to repay the mortgage loan. 
• Entities such as LLCs, corporations, trusts or self-directed IRAs are not eligible for the One Property Exception. Even if they do only one transaction per twelve months, they fall under the Three Property Exception.

INDIVIDUALS OR ENTITIES who seller finance 3 or fewer residential properties to consumers per 12 months are eligible for the Three Property Exception. They do NOT need a RMLO, but DO have to comply with the following restrictions: 

• No balloons allowed at all; 
• Loan must be fully amortizing over a period not exceeding 30 years;
• No negative amortization;  
• Adjustable loan rates allowed but cannot adjust any earlier than 5 years after origination; 
• Recommended as a safe harbor, but not required: no more than 2% rate increase per year, 6% lifetime cap;
• Seller must determine, in good faith, that the consumer has a reasonable ability to repay the loan. It is not required they document how they arrived at the determination, but its a good idea to do it anyway, in case the transaction is challenged.

If you have one of the prohibited loan provisions--such as a 5-year balloon--you are not eligible for the Three Property Exception. You must have an RMLO.