Alarmist Emails Regarding Seller Financing

I’ve been seeing some emails about the Federal Reserve killing off seller financing through changes to the Dodd Frank Act. I don’t think the sky is falling. Please let me know if I’m wrong, or you disagree.

The proposed change is the Truth in Lending Act. It would require borrowers to meet certain underwriting requirements and be considered “credit-worthy” before a mortgage loan could be extended to them.  If the lender does not comply, the borrower could have three years to rescind—or “un-do”—the loan.

The emails say this law will apply to seller financed transactions, and will effectively destroy seller financing.

I admit, I might be wrong. BUT, according to my interpretation and that of many experts, Truth in Lending laws apply to people who finance six or more home mortgages during any twelve month period.  Most of the financing sellers don’t fall into that category. Of the ones who do, they are truly in the business of extending credit, not just selling real estate. They should have to meet the same requirements as larger lenders, in my opinion.

HERE is a link to the Federal Reserve Board press release.

Truth in Lending applies when “the offering or extension of credit is done regularly.”  12 CFR Part 226.1(c)(ii)

A person “regularly extends credit” only if  “it extended credit … more than 5 times for transactions secured by a dwelling … in the preceding calendar year.”  [with different rules if you use a mortgage broker] 12 CFR Part 226.2(a)(17)(v)

I know what you are thinking. Really, I do!  You’re thinking, “But, the SAFE Act requires me to use a licensed mortgage originator if I do seller financing for anything except my personal residence. So, does that take me out of the “more than 5 times” requirement for Truth in Lending?”

I have two answers for you:

  1. Right now, Alabama has a temporary rule that allows you to do up to five seller financed transactions a year without needing a mortgage loan originator’s license or hiring someone who does;
  2. A licensed mortgage loan originator for purposes of the SAFE Act is not the same thing as a mortgage broker under Truth in Lending.

I think you don’t have anything to worry about.