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Seller Financing to Owner-Occupants after Dodd-Frank
By: David M. Tkacik, Esq.

Seller financing has traditionally been a method utilized to sell a property to an owner-occupant who cannot obtain approval for a bank loan.  It has also been a method for investors to acquire more properties without much cash down.  The laws regarding seller financing have changed within the last several years, and are now relatively complex.  While you should always consult with a real estate attorney for analysis of your specific situation, the following is an attempt to briefly summarize the last several years of changes to seller financing law and explain the current law.

The Secure and Fair Enforcement (S.A.F.E.) Mortgage Licensing Act of 2008 (the “SAFE Act”) was passed in the wake of the subprime mortgage crisis on July 30, 2008 and defines as a “loan originator” anyone who takes a residential mortgage application and offers or negotiates terms of a residential mortgage loan for compensation or gain.  A mortgage loan is “residential” whenever the loan is primarily for “personal, family, or household use.”  A loan to an investor who intends to make a profit and not use the property for personal, family, or household use, is by definition a commercial loan and not subject to the SAFE Act’s requirements.  The SAFE Act deferred the task of establishing minimum standards for loan originators to the U.S. Department of Housing and Urban Affairs (HUD), which published them on June 30, 2011.  HUD in turn deferred interpretation of the SAFE Act to the states, and thus the Pennsylvania Department of Banking interpreted the SAFE Act to not apply to an individual making or brokering three or less mortgage loans per calendar year. The PA Department of Banking also interpreted the SAFE Act to apply to installment land contracts in the same way as a mortgage.  Historically, Pennsylvania law has always interpreted land installment contracts (or so called “rent-to-own” agreements) much in the same way as mortgages.   

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was passed as a broad overhaul of the financial regulation system.  On July 21, 2011, the Dodd-Frank Act transferred rule-making authority for the SAFE Act from HUD to the newly created Consumer Financial Protection Bureau (CFPB), which decided to re-do the SAFE Act regulations.  The new regulations took effect on January 10, 2014.  The CFPB regulations are the current law and require “creditors,” as defined by the Dodd-Frank Act, to perform an “ability to repay” analysis.  However, the Dodd-Frank Act exempts from the definition of “creditor” seller financing five or less loans per calendar year.  However, even investors who make less than five seller financed loans per year can be subject to the Dodd-Frank Act for other reasons.

The CFPB definition of “mortgage originator” generally requires makers of residential mortgages (including land contracts or rent-to-own agreements) to be licensed loan originators.  Unlicensed activity is illegal and subject to fines and other liability; however there are two notable exemptions.

The “one property exemption” for seller financing to an owner occupant applies when:

  1. The seller is a natural person, estate, or trust (corporations, LLCs and partnerships do not apply);
  2. The seller provides financing for only one property in a twelve month period;
  3. The seller owns the property securing the financing
  4. The seller did not construct or act as the contractor for the construction of a residence on the property;
  5. The financing has a repayment schedule that does not result in a negative amortization; and
  6. The financing must have a fixed rate or an adjustable rate tied to an index that resets after five or more years.

Note that under this exemption balloon payments are allowed and the seller does not have to determine the borrower’s “ability to repay.” 

The “three or less property exemption” for seller financing to an owner-occupant is slightly more restrictive and applies to all LLCs, corporations, and partnerships:

  1. The seller provides financing for only three or less properties in a twelve month period;
  2. It does not matter what type of entity the seller is;
  3. The loan is “fully amortizing” which means no balloon payments and no negative amortization;
  4. The buyer must have the “ability to repay,” meaning that the following factors should be taken into consideration by the lender:
    • current or reasonably expected income or assets;
    • current employment status;
    • the monthly payment on the proposed loan;
    • the monthly payment on any simultaneous loan;
    • the monthly payment for mortgage-related obligations;
    • current debt obligations, alimony, and child support;
    • the monthly debt-to-income ratio or residual income; and
    • credit history.

(Note that as a seller / lender you should retain written documentation as to these ability to repay factors.)

          5.     The Seller did not construct or act as the contractor for the construction of a residence on the property; and

          6. The financing must have a fixed rate or an adjustable rate tied to an index that resets after five or more years

In sum, unless sellers of residential property to owner occupants qualify under one of the above exemptions, they are violating the Dodd-Frank Act.  Dodd-Frank’s impact on seller financing is still being determined and my research for this article has not revealed any instances where the PA Department of Banking or CFPB enforced the mortgage originator definition against real estate investors selling properties through seller financing.  However, investors should take this law seriously as failure to comply could be a defense to a foreclosure action if the buyer defaults and could result in the borrower recovering the down payment and finance charges.  One possibility to cure the issue could be to include a licensed mortgage originator in your transaction, although it remains to be seen whether that is possible from the licensed mortgage originator’s perspective. 

If you are contemplating a seller-financed loan that will be secured by real estate, you should consult with a real estate attorney experienced in this area of the law.  This article is intended to be general information; it is not legal advice.  Please contact me to discuss the specifics of your situation.  

 David M. Tkacik, Esq. is the managing attorney of Tkacik Law Office, a landlord, and real estate broker.  He can be reached at 412-414-9644 or