The Dodd-Frank Act, passed in 2010, established new requirements for loan originators who finance owner-occupied residential properties. This year, the Consumer Financial Protection Bureau (CFPB) issued regulations to implement certain portions of the Act. These regulations will be effective on January 10, 2014.
The Act’s passage raised many questions among the public regarding its effect on individual, non-institutionalized lenders. On June 7, 2013, the CFPB released a compliance guide to assist small loan originators and creditors in this regard. Generally speaking, a seller financer of an owner-occupied residence is defined as a “loan originator” and is required to abide by a significant number of new regulations under the Act. These regulations impose a multitude of requirements regarding loan originator compensation, qualification, and mandatory procedures. The guide, however, describes an exclusion from the new requirements for two categories of seller financers.
Under the first exclusion, a seller financer is not categorized as a “loan originator” under the Act if the financer is a natural person, estate, or trust, and meets the following additional requirements: 1) it provides seller financing for only one property in any 12-month period; 2) it previously owned the property securing the financing; 3) it did not construct, or act as a contractor for the construction of, a residence on the property in the ordinary course of business; 4) the financing does not include a repayment schedule that results in negative amortization; and 5) the financing has a fixed or an adjustable rate that resets after five or more years (rate adjustments may be subject to reasonable annual and lifetime limits).
Under the second exclusion, a seller financer is not required to be a natural person, estate, or trust, and may provide financing for up to three properties during a 12-month period. But to qualify for this exclusion, the above-listed requirements for the first exclusion must be met; the financing must be fully amortizing; and the financer must determine in good faith that the consumer has a reasonable ability to repay the loan.
Assuming one of the two exclusions applies, the seller financer is relieved from the compensation, qualification, and procedural requirements placed on “loan originators” under the Act. The guide and further information may be located on the CFPB website at the following address:
http://files.consumerfinance.gov/f/201306_cfpb_compliance-guide_loan-originator-compensation-rule.pdf
Each case a business or individual may face is unique and may require legal advice. This article does not constitute, and should not be considered, legal advice. You are urged to consult with an attorney on your own specific legal matters. If you would like additional information regarding the content of this article, please contact Mr. Womack at rwomack@jsslaw.com or 602-262-5865.
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