Take Note – Stay Safe!
1) Loan Requirements for consumer (owner-occupant) conventional loans will have additional requirements for qualification and added restrictions—less people will be able to qualify for these loans. Wholesalers will not have to make modifications, but their cash buyers may have more difficulty finding qualified buyers for their properties.
2) Investors who offer private lending to consumer borrowers will be required to do more buyer qualification and disclosures.
3) Loans offering balloon payments, variable interest rates, prepayment penalties, negative amortizations, or in excess of 30 years are not “qualified” loans, and are not protected against litigation from a borrower.
4) All seller finance transactions to consumer borrowers (unless you only do one per year) require additional underwriting and pre-prequalification of buyer as well as additional disclosures.
5) Doing more than three transactions with consumer borrowers in a year’s time may require becoming or hiring a Mortgage Loan Originator (MLO).
6) The enforcement of these standards is generally left to borrowers and their attorneys who can sue for damages based on non-compliance. Awards can be up to three years of payments plus down payments, plus attorney’s fees and court costs.
7) Note Buyers will assume responsibilities on notes/mortgages initiated after the January 10, 2014 implementation of Dodd/Frank. If the note exposes the buyer to excessive liability potential, that would be a good note to avoid.
The Big Issue—Buyer’s Ability to Repay
Dodd/Frank essentially makes it the responsibility of the lender to determine if the borrower has the ability to repay, and gives the borrower the right to sue the lender if they did not adequately assess the buyer’s ability. If the lender offers a “qualified” loan, and can show that they made adequate efforts to determine the borrower’s ability, they should be relatively safe from lawsuits.
“Qualified Loan” Requirements—if you have complied with the qualified loan provisions below, the burden of proof rests with the borrower.
- No Negative Amortization
- No Balloon Payments
- Cannot Exceed 30 Years
- No Prepayment Penalties
- Variable Interest Rate—can be included but underwriting must be based on the highest rate that will occur in the first five years. This point also implies that credit and Debt to Income ratio must be verified (43% DTI limit)
- Must Verify Income
- “Non-Qualified Loan” Exemptions—If you offer a loan that is non-qualified, the burden of proof for exemption rests with the lender. (Recommendation: For any loan that falls under the exemptions below, disclose to the borrower in the actual loan agreement in large print: “NOTICE—THIS LOAN FALLS UNDER A DODD/FRANK EXCLUSION AND PENALTIES WILL NOT APPLY.”
1) Meets 8 Loan Underwriting Requirements Exemption
a. Current Income Verification (All Sources)
b. Employment Status Verification
c. Monthly Loan Payments Verified
d. Other Loan Payments Verified
e. Other Mortgage Obligations Verified
f. Alimony and Child Support Payments Verified
g. Debt to Income Ratio (Including Subject Loan) not to exceed 43% of income
h. Credit History Reviewed
2) One Seller Finance Per Year Exemption
a. A private party or trust (not a business entity) is allowed to do one seller finance transaction per year without having to meet “qualified loan” or other requirements. It is still recommended to do background credit, income and employment verification.
3) Non-Consumer Loan Exemption
a. Dodd/Frank requirements are for protection of consumers, if the borrower is not receiving owner-occupant financing, the restrictions do not apply. Loans to an investor who will not occupy the property are exempt.
4) De-Minimus Provision Exemption
a. If you issue a consumer real estate loan 3 times or less within a year, you will not need to become or hire a Mortgage Loan Originator (MLO), over that number will require professional underwriting. (Another source says 5 transactions)
5) All Cash Transactions Exemption
a. If the transaction is an all-cash transaction, there will be no loan issued, and it does not fall under Dodd/Frank regulations.
Special Notes on Lease Options:
1) A lease option between a seller and an investor (non-owner occupant) is not restricted under Dodd/Frank;
2) Technically, since a Lease Option between an owner and a tenant/buyer does not convey title, it is not a sale, which means it does not fall under the regulations of Dodd/Frank; however, if either the IRS or a court determines that it is an installment sale to a consumer borrower, it would be deemed a loan. To avoid such designation, and avoid lawsuits:
a. Use Separate Documents for lease and option, executed on different dates, and with no reference to each other. You can charge option consideration with the option agreement as it is a legal requirement of an option, but do not accept option consideration in installments;
b. Keep Term of lease to tenant buyer under 3 years;
c. Offer No Purchase Credit/Rent Credit on monthly or periodic payments
d. Major repairs and maintenance are the responsibility of the owner—do not assign these to the tenant/buyer;
e. Complete some basic lease option underwriting and pre-qualification
i. Conduct a Credit Check;
ii. Confirm Employment;
iii. Confirm Income;
iv. Recommended: Request information on all Monthly Loan Payments, Other Loan Payments, Other
Mortgage Obligations, and Alimony and Child Support Payments;
v. Run a Debt to Income Calculation, including their monthly Lease Payment.
3) Suggested: For any arrangement that could fall within Dodd/Frank legislation, have borrower complete a Uniform Residential Loan Application, such as the FNMA 1003, (Reference: https://www.fanniemae.com/content/guide_form/1003rev.pdf ) or modify such a form for your own usage—then use that information to research borrower’s repayment capability per the instructions above.