Seller Financing: New Info Makes Things Even More Complicated

Here is a little background to today’s post.  All mortgage loan originators must have a license. Owners who hold the financing when selling their property are considered mortgage loan originators. So, seller financing requires a licensed mortgage loan originator. Despite that, Alabama has something called the “Five-Property Exemption.” It is also called “The Interim Rule.” It says that if you seller-finance five or fewer properties in a twelve month period, you are exempt from the licensing requirements.

The Alabama State Banking Department, which issued the Interim Rule on April 14, 2011, also said in that rule, “Please take notice that when and if HUD issues a final rule, regulation, interpretation, or formal guidance of the federal SAFE Act that is contrary to this position, the Department will have no alternative but to rescind its position and enforce said final rule, regulation, interpretation or formal guidance.”

I recently posted that the Interim Rule would no longer be effective on January 10, 2014, because that is when the final federal regulations take effect. No, they are not HUD regulations, because the CFPB (Consumer Finance Protection Bureau) has taken over HUD’s responsibilities in this area. The final federal regulations by CFPB have something called a “One-Property Exemption” and a “Three-Property Exemption.” Three is the most you can do without a license, or hiring someone with a license.

That’s all  old news. Here is the new part. I called Scott Corscadden today. He is the head of the Division of Loans in the Alabama State Banking Department. I asked him about the Interim Rule no longer being effective after January 10, 2014.

Scott said they had not yet made a determination if they would rescind the Interim Rule or not! They might continue the Five-Property Exemption even after January 10th!  I guess they must have figured out some sort of loophole, which might or might not be good news.

The reason I said it “might not” be good news is this:

The Alabama Interim Rule, allowing seller financing for up to five properties in any twelve months, is ONLY for individuals.  Corporations, LLCs and such cannot take advantage of the Five-Property Exemption.

Presumably, corporations and LLCs are stuck with the Alabama statute at 5-26-24, which says that the ONLY exemption is for an individual selling their personal residence. In other words, there is a Zero-Property Exemption for corporations, LLCs and other artificial entities.

The new federal regulations taking effect on January 10, 2014, say that:

All sellers (individuals, corporations, LLCs, etc) can do three seller financed transactions per year, as long as they are fully amortizing and the interest rate does not adjust during the first five years.

Individual sellers can do one seller financed transaction per year, but it can have a balloon and the interest rate can adjust from the very beginning, if the parties agree.

So, for corporations and LLCs, the new federal rule is better than the Alabama Interim Rule.

Stay tuned to future posts. This topic gets more complicated every day!