Dodd/Frank Act--An Investor's Analysis

Overview—(Note: The following information is a summary of the Dodd/Frank Act, (Reference: http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf ), a U.S. Regulation that is in initial implementation as of this writing. Note that there is no case law precedent to reference, so investors are encouraged to be cautious and thorough in dealing with the tenets of these regulations.
Passed in 2008 as the impact of the U.S. Financial collapse was affecting the entire world, this bill was well-intentioned in attempting to prevent a recurrence, but probably deals more with some symptoms than the actual causes. Nevertheless, it is designed as a consumer protection in the issuance of mortgages (by institutions or private lending) that tightens qualifications for borrowers and gives power of enforcement to borrowers who were not carefully screened regarding their ability to repay the loan.
The Dodd Frank legislation will affect investors in two areas: 1) The ability of consumer buyers to obtain qualified conventional mortgages will be more difficult, and this can make it more challenging to find an end buyer (owner-occupant) for properties; 2) Investors engaging in private lending (including offering properties using any seller finance method) will need to require more buyer qualification procedures, and add specific disclosures to their owner-occupant buyers or borrowers.
Penalties for not complying with Dodd Frank regulations will primarily not be enforced by government, but instead will result in lawsuits initiated by unhappy buyers and borrowers, who will claim that their lender did not properly screen their ability to repay the loan, and the court can award three years of previous payments on the loan plus down payments back to the borrower. It is very likely that predatory attorneys will exploit this opportunity.
Like many things in life, we can bemoan the inconvenience of these new statutes, or look for opportunity. There are potential huge opportunities to be found in learning how to work with these new standards as an investor, solving problems for buyers and sellers.

The Seven Ways Dodd/Frank Affects Investors
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 have shifted the burden of proof for any issue to the borrower.

The Qualified Loan
“Qualified Loan” Requirements—if you have complied with the qualified loan provisions below, the burden of proof rests with the borrower.
1) No Negative Amortization
2) No Balloon Payments
3) Cannot Exceed 30 Years
4) No Prepayment Penalties
5) 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)
6) 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 below:
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.

Dodd/Frank Act and Lease Options
The Dodd/Frank Act was officially implemented on January 10, 2014, and affects all consumer loans, including real estate loans. The act applies to all seller finance transactions in real estate, and basically makes the lender/seller responsible to either provide a qualified loan or to comply with one of the exceptions under the act. Lease Options, as indicated below are not technically loans, but could under some circumstances, be considered as installment sales of properties. In order to avoid this designation, here are some recommendations. We are not attorneys and cannot legally advise, and this act has not been tested in court yet to determine how it will be perceived, so we encourage taking a cautious approach, as indicated here. We supply this information for educational purposes only, and recommend having all legally binding agreements reviewed by your trusted legal advisors.
1) A lease option between a seller and an investor (non-owner occupant) is not restricted under Dodd/Frank;
2) For Lease Option Transactions between a seller and a consumer (Owner/Occupant, or Tenant/Buyer), 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.

I've posted in installments the results of some research on the Dodd/Frank Act from a real estate investor's perspective.
Now I would like to go back to the disclaimers on what is published here, these are very important:
1) This information is published for educational purposes only. The reader is encouraged to review this information with their local attorney before implementing any specific or legally binding actions that relate to this content.
2) All investors and individuals are solely responsible for any decisions or commitments regarding real estate. All contracts are legally binding and the responsibility for entering a binding agreement rests solely with that individual.
3) The ACT mentioned in these posts is new and untried. We can only speculate on future enforcement and court decisions. Do not set yourself up to be a trial case, always take a conservative approach to the steps outlined in the act with respect to your real estate or other transactions.

Very informative and precise of you as can be expected.
When things change we have to try and keep up but most of us dont so we just keep doing what we do.
A good power team member is an attorney that should keep you in the clear.

I like owner financing and L/O so I will be checking up on this.

Thank you

Aaron

How does this affect anyone thats going through a modification program?

Aaron

Thanks for posting this information Dallin. I heard one on a IE chat talk about this act that passed but I never looked into it. Where did you post the installments?

"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;"

Dallin, say you are one year into a 2 year lease option agreement and the tenant/buyer fails to make the lease payments and you have to evict, how do you clean up the option?

Aaron, the Dodd/Frank Act has application with any consumer loan, including buying a car or a sofa on an installment purchase, not just real estate. All loans must either be qualified loans, or fit one of the exemptions. If they are qualified loans, the burden of proof in a civil lawsuit rests with the borrower, if an exception, the burden of proof rests with the lender.
A loan modification is not a new loan, so the original loan would be the document upon which the Act would have impact. Any loan initiated prior to Dodd/Frank implementation on January 10, 2014 is not subject to the Act, any loan initiated after that date is subject to the terms of the Act.

Reynoldo, when I mentioned at the beginning that I would be posting in installments, I meant that I would be adding the content in pieces, which I have done above, there are six numbered segments plus a summary. So I have completed the installments I planned to include and will add additional information based on questions or comments received here.

TRSD, if you are referring to an actual situation where there is already a lease option in place for a year, that agreement is not influenced by the Dodd/Frank Act, only agreements that are initiated on or after January 10, 2014.
The purpose of the information in this stream is to provide an investors perspective for agreements that you are initiating after the Dodd/Frank Act went into effect.

for taking the time in sharing this info. I know it is out there and have read only the barest summary of this act. It is very handy to bookmark this and have one thread where I can look into a bit more. Yes, I read your disclaimer and yes as with everything I will do my own research as well. I really do appreciate the ongoing dialogue and education that you and other members bring to us all it is much appreciated.

warmest regards,
Lisa

First, thank you Lisa for your kind words, very much appreciated.
I thought I would provide my own personal conclusions regarding this act. I'm not in the position of issuing consumer loans except in a situation where I may be planning to sell a property using seller finance.
I have already modified my approach to lease options per the Dodd/Frank Act, and will simply not offer any other version of seller finance. I'm confident I can make it clear, through my documentation and due diligence regarding the background of the tenant/buyer that they do NOT want to face me in court. It's an old and tired maxim used by the Boy Scouts, but is still critical to our success--BE PREPARED!

always wise. "Be Prepared"

Again, thanks for what you have shared.

Lisa

Dallin...Feb 1, 2014 I execute a 2 year lease option with a tenant buyer. The lease and option are independent of each other. FEB 1, 2015, the tenant buyer fails to pay rent and has to be evicted. If the lease and option are independent of each other, the tenant buyer still has an option on the property for another year. If you set up the option in installments, the option could be voided. Is their a particular reason not to accept installment payments for the option?

TRSD, the reason for not accepting installment payments on the option is that this could be perceived as doing seller finance, and there is a significant increase in potential liability in doing seller finance with Dodd/Frank.
I've been thinking this through myself in terms of how we can nullify the rights of the option in the event of default on the lease, and still not link the two together. I'm certainly open to thoughts and suggestions.

I am going to find reviews and commentaries on Dodd/Frank from other real estate investors and share them here. My objective is for this string to become the best location to find Real Estate information on Dodd/Frank. Here is the first article from Elizabeth Weintraub. For the full article go to:
http://homebuying.about.com/od/buyingahome/fl/Buying-a-Home-With-Creativ...

Dodd-Frank Act and Creative Financing Terms for Home Buying

The Dodd-Frank Act is a shortened term for the Dodd-Frank Wall Street Consumer Reform and Protection Act, signed into law in July of 2010. Penned by former Congressman Barnett Barney Frank and then-Senator Christopher John Dodd, the Dodd-Frank Act brought about sweeping changes to financial regulations and amended the Truth In Lending Act. This comprehensive transformation created new agencies and changed many laws. You can't swing a dead cat in financing without hitting the Dodd-Frank Act. I apologize to the poor cat for this reference; it's that the phrase fits so well.

Part of the Dodd-Frank Act pertains to seller financing. It regulates and disallows certain types of financing that was easily allowed in the past. Unlike the free-swinging days of the 1970s when anybody could arrange a loan and get paid for it as long as the person had a real estate license, now an individual must be licensed as a mortgage loan originator. Sellers are exempt providing they don't extend owner financing terms on more than 3 properties a year. Other rules are:

The seller can offer owner financing as long as the seller did not build the home. This eliminates home builders from offering owner financing.

There is no balloon payment. A favorite way to offer creative financing was generally a short term loan, say 3 or 5 years, with a balloon at the end, meaning the entire balance would be due and payable. Owner-financed loans must now be amortized.

The seller can't offer owner financing to just any buyer who happens along. The seller has a responsibility to determine that the buyer is qualified to buy the home and pay back the loan. This could mean the seller would need to run a credit report on the buyer, which would probably eliminate all home buyers with bad credit.

The loan must be fixed rate or adjustable after 5 years subject to reasonable annual increases, and a reasonable lifetime cap.

The owner-financed loan must meet other criteria established by the Federal Reserve Board. However it's the no-balloon requirement that will put a stop to many creative financing endeavors. A solution for some sellers and buyers might be a lease-option sale.

Before buying a home through creative financing, get legal advice.

The following posted article is lengthy on Dodd/Frank Act, but does cover some areas of concern with regard to balloon payments and other restrictions in seller finance loans. I think the tone is more to the negative, but remember, in every new piece of legislation, there is opportunity for those who learn how to comply and use the new laws to advantage. I am still of the opinion that this opens the way to solve problems with lease options, which is one of my favorite techniques. The location for this article is: http://www.greateraustinhomes.com/dodd-frank-safe-act-owner-financing-an...

The Dodd-Frank Act does not exempt property owners who wish to use owner financing (installment sale) even though no money is lent, there is no table funding, and under the Truth and Lending Act they are not considered creditors.

The Dodd-Frank Act (ACT) does exempt property owners who offer seller financing from having to become Mortgage Loan Originators (MLO) provided they only sell 3 properties or less in a 12 month period and they follow the restrictions below. Yet, the Act subjects the property owner to the same liability as an MLO.

Title XIV Section 1401 (2) (E)

1. The seller did not construct the home to which the financing is being applied.

2. The loan is fully amortizing (no balloon mortgages allowed).

3. The seller determines in good faith and documents the buyer has a reasonable ability to repay the loan.

4. The loan has a fixed rate or is adjustable after 5 or more years, subject to reasonable annual and lifetime caps.

5. The loan meets other criteria set by the Federal Reserve Board.

Under this Act the only buyers who will be able to use seller financing are the buyers who can already qualify for conventional financing with perhaps the exception of how much of a down payment they need. Seller or Owner financing has always been the alternative to government regulated financing. It is a meeting of the minds between two private individuals who negotiate an arm’s length contract to purchase property using an installment sale.

The following is a breakdown of these restrictions. I listed them in order of greatest impact on property owners, buyers and the economy.
1. The seller determines in good faith and documents the buyer has a reasonable ability to repay the loan

The implication is that the seller must use the ability-to-repay underwriting requirements when offering seller financing consistent with the Dodd-Frank Act which amends the Truth in Lending Act. This new, proposed rule is 169 pages long. http://www.gpo.gov/fdsys/pkg/FR-2011-05-11/html/2011-9766.htm

The Consumer Financial Protection Bureau has spent a lot of energy developing a new, easy to read, two page mortgage disclosure form. It is unreasonable to expect sellers and buyers to fully understand and apply this 169 page rule. If buyer’s and seller’s negotiations deviate in the least the buyer has up to three years to rescind the sale and demand back all money paid to the seller, or anyone that the seller might have assigned rights and interest to, or any bank who takes the note as a collateral assignment.

This could be financially devastating to the seller. Let’s not forget that today’s buyer will be tomorrow’s seller. These sellers are a diverse group. They come from all walks of life: low income, high income, non-English speaking, seniors, widows, minorities but this requirement places the same standards on individuals as banks and mortgage lenders, only with more risk – the banker is in the business of mortgage loan origination and factors that risk into his business plan, whereas the individual seller does not have capital reserves and doesn’t do this as a business. Also, unlike a bank, they do not carry errors and omission insurance.

Unlike banks and mortgage lenders, both the buyer and seller are consumers. They should both be equally protected. The buyer is purchasing real property and the seller is investing in/creating a financial product where they receive their equity over time. The seller is relying on the buyer to make monthly payments and maintain and protect the property. Terms are not dictated to either party, but rather they are negotiated between the parties.

Requiring the buyer to turn over all their financial information to a stranger opens the door for Identification theft and fraud. Furthermore, why should the buyer be required to divulge their income and assets to the very person with whom they are negotiating the terms of a sale? This is not required when there is a 3rd party lender.

This also creates the opportunity for predatory borrowing. This is where an unscrupulous buyer knowledgeable about the Dodd-Frank Act leads an uninformed seller (and this will be the majority of sellers) into negotiations not in compliance with the ability-to-repay requirements. (An example of that could be a balloon, an interest rate greater than 1.49% above a standard mortgage, or the seller did not know how to calculate the income to debit ratio correctly, or know what residual income means). That buyer lives in the property trying to resell it for a profit and if they are not successful within three years they rescind the sale and get all their money back.

The SAFE Act does not put in place the ability to repay requirements, or any other requirements, unless the individual habitually and repeatedly uses seller financing in a commercial context. So there is some consistency between the two laws the Dodd-Frank Act should not require sellers to use the standard of the ability-to-repay unless they use seller financing more than three times in a 12 month period. It is HUD’s feeling that Congress never intended under the SAFE Act to restrict private property owners from using seller financing, unless they did it as a business.
2. The loan is fully amortizing (no balloon mortgages allowed).

There is a good chance that a seller 55 years or older will die before receiving all their equity by not allowing them to negotiate a balloon payment. A lot of seniors have invested in real property with the intent of selling it using seller financing (an installment sale) in order to supplement their income in retirement, but also with the hope that they would not be stuck with a 30 year investment. The Dodd-Frank Act does the same thing insurance companies do who sell 30 year annuities to seniors. Our government has criticized this deplorable practice because seniors will die before they receive all their investment.

The restriction of no balloon doesn’t affect just seniors, it has financial consequences for anyone using owner financing. Under the Dodd-Frank Act community banks are allowed to originate fully amortizing loans with a five year balloon. The rationale is that they hold these loans in their own portfolios and the government recognizes their need to hedge against inflation and rising interest rates. Yet, the Act refuses to recognize that private property owners who have 100% skin in the game need the same protection. Obviously the Act does not feel that a five year balloon is predatory lending. This restriction should not be placed on seller financing until a property owner sells more than three properties in a 12 month period. If there has to be a restriction it should at the very least be the same allowance given to community banks of a balloon in 5 years.
3. The loan has a fixed rate or is adjustable after 5 or more years, subject to reasonable annual and lifetime caps.

This restriction is reasonable, but it will eliminate the ability for any buyer to wrap an existing obligation that has an adjustable rate even if they feel they can afford any rate increase. Again, for consistency with the SAFE Act there should not be any restrictions on any property owner that uses seller financing 3 or fewer times in a 12 month period. If the seller does not know about the ability-to-repay requirements and that they are not able to have a balloon, they certainly will not know that you have to have a fixed interest rate for the first five years.
4. The seller did not construct the home to which the financing is being applied.

There are a lot of small builders that have a spec house or two that they can’t sell unless they offer great terms using seller financing. Otherwise they have to let these properties go back to the bank which does not help housing or the economy. There is also that group of out of work construction workers who built their own homes when times were good and now need to sell. This takes away their ability to use seller financing. Builders should not be subject to any restrictions unless they sell more than three properties in a 12 month period using seller financing. Builders are in the business of building; not of originating loans.

Using a mortgage loan originator to facilitate a seller financed transaction creates additional risk and expense for both the buyer and the seller.

It has been said that a seller financing the sale of his or her own property would completely avoid the issue of licensing by retaining the services of a licensed loan originator. If a mortgage loan originator (MLO) fails to properly follow the ability-to-repay guidelines the buyer still has three years in which to rescind the sale which leaves the seller at risk and will most likely bankrupt them. Furthermore, there is no provision in a MLO’s errors and omission insurance that covers seller financing. None of the continuing education classes or the exams that an MLO must complete has a single chapter or question regarding seller financing.

Who is supposed to pay the MLO? MLOs can charge a flat fee or up to 3% of the transaction. The only advertisements I have seen so far advertise a flat nonrefundable fee of $450. This fee has to be paid in advance, which makes sense because why would a MLO spend hours and hours on an installment sale transaction which might not close? If the buyer pays the fee, then this is a forced origination fee never before imposed on buyers seeking seller financing. Why should the buyer have to pay money just to have an offer presented to the seller? A lot of buyers use seller financing because they are low income and seller financing, up to now, has been an inexpensive way to purchase property. If the seller pays they will have to pay money for the simple act of the MLO forwarding them the installment sale offer. If the seller receives multiple offers this could easily run into thousands of dollars in MLO fees just to sell their property. A lot of sellers are also low income individuals. The MLO will have to be a part of every offer and counteroffer because the sale and terms of an installment sale are one and the same and cannot be separated. For instance, the buyer might be willing to pay a higher interest rate if the seller is willing to come down on the price and down payment. A lot of seller financing takes place in rural areas that are underserved by mortgage lenders and banks. It is going to be very difficult to find a MLO in those areas who are also willing to take the risk facilitating a seller financed transaction. This has the potential of pushing seller financing underground – not a desired result.

The Dodd-Frank Act allows a property owner to use owner financing without having to become a mortgage loan originator as long as they don’t use it more than three times in a 12 month period and comply with the above restrictions. In the SAFE Act there are no restrictions to the number of times seller financing can be used as long as you are not in the business of being a mortgage loan originator. The coauthor of the Dodd-Frank Act, Representative Barney Frank, sent a letter to HUD on July 22, 2010 urging them to place the maximum amount of seller transactions that an individual could do before becoming a MLO, or having other restrictions on them, at five in a 12 month period. I would propose that the Dodd-Frank Act adopt that same number and place no restrictions on seller financing until 5 is surpassed. The only restrictions that should apply to 5 or less are those restrictions that the States already impose either through state statute or case law.

Under The Act loan officers at community banks do not have to become a Mortgage Loan Originator if they originate 5 or less transactions in a 12 month period. The rationale is that this is burdensome, costly and there is not enough volume to create a systemic risk. Ma and Pa on Main Street should be granted those same allowances. The Act puts more restrictions and risk on Ma and Pa than it does on financial institutions.

In watching the debates in Congress last summer it was repeatedly said that the Wall Street Reform and Consumer Financial Protection Act would not negatively affect or over regulate Ma and Pa on Main Street. If this doesn’t negatively affect and regulate seniors, minorities, and lower income individuals on Main Street I don’t know what does. These restrictions will all but do away with owner financing which will have a negative impact on housing, existing property owners, those desiring to be property owners and the economy.

Some of those who are reading this forum have already existing seller finance arrangements with consumers (occupant buyers). While it has been indicated above that the act was implemented on January 10, 2014, and applies to new loans originated after that date, which would "grandfather" seller finance loans before that date, there is an aspect of that act to which the grandfathering does not apply.
If you have a loan where a portion of the loan is applied to principle, which would include all wrap-around mortgages and AITD's, and will also include any land contract to which a portion of the monthly payment is applied toward the purchase, and MAY include lease options where rent credits toward purchase are included in the agreement, the act states that you must use a licensed loan servicer to manage those funds.
Our recommendation is that you be very careful in compliance with this act, and complete your own research with a trusted legal advisor to make certain that you are not violating the terms with your existing seller finance properties.

There is no doubt that the Dodd/Frank Act and increasing mortgage rates are going to make it more difficult for property buyers to obtain consumer loans for real estate purchases.
Combine this with the fact that there are a higher number than anytime previously of people who have previously been homeowners and lost their homes to foreclosure in the past few years.
Tighter mortgage controls and more difficult qualification vs. more people in a sketchy situation for qualification Equals Opportunity.
These people need someone to help provide an interim step for them, as their mental mindset is that they are a displaced homeowner.
Dodd/Frank makes it nearly impossible to construct a satisfactory seller finance program for both seller and buyer using either a Wrap-around Mortgage or land contract, but not necessarily a lease option.
The government has been setting up a very difficult situation for those who were ejected from their homes due to circumstances like divorce, illness, lay-off, or other one-time circumstances that damaged their income and their credit. As investors we can assist these people to get back on their feet as homeowners, as long as we learn the new requirements and structure the transaction correctly.

thank you for breaking it down like this; makes it less painful to read and easier to understand it...

it will definitely be more challenging to do any owner financing, L/O, land contracts, etc. but as an investor you want to protect yourself at all times.
The nice, soft spoken, smiley couple that wants to L/O your property today can and will become an ogre when two years down the road they change their minds for whatever reason and decide that they want to get out of the contract and get their money back... believe it, they will know how to make the law work in their favor.

Valerie: You have a great way of putting things, and I couldn't help but laugh right out loud reading your ogre comment. I am sure I have dealt with that couple before, you must know them too!!!!

For All: The government in its ultimate wisdom (Pause for laughter) has given the authority for enforcement of a governmental law to consumers who might get angry at you for not letting them bring a St. Bernard into your property after two years. And to their predatory lawyer who wants to prey on landlords. Our job is to head them off at the pass so they do not have a meritorious case and it will be thrown out of court, embarrassing them and their attorney. Read the posts above, CAREFULLY qualify lease option tenants, and take MAJOR care if you are interested in offering seller finance to an owner occupant. We'll keep adding details to this post string as we find other reports and online updates.

yes Dallin, I do know that couple! Donna Doo calls them 'professional tenants'

so true what you say about reading everything, and being careful with the tenants that we put in our properties! We can laugh about it, but as anyone who has dealt with good tenants turned bad... not funny at all!

A couple of questions come to my mind already... the 'law' states that if you do one loan per year, not all the rules apply as if you did 3 or more... does this mean Jan through Dec, or within 12 months? Also, does it mean carrying only one loan at a time, or several loans, even if the sales were done a year apart from each other?... I'm already looking for loopholes

Valerie, your comments are always spot on, and I hope those reading realize the importance of doing proper due diligence so that, if your Dr. Jekyll tenants turn into Mr. Hyde, you will have adequately protected yourselves.

Valerie, in answer to your questions, although I do not have a legal answer to your questions, I believe that the answer to the first question is inherent in the type of enforcement. The Act says that a person has a right to do one seller finance transaction per year without falling under the Dodd/Frank Act. This was intended for a personal residence owner to sell their property using seller finance, but it does not specify that it has to be your personal residence.

The enforcement for this act comes from the borrowers, who, if they become dissatisfied, can take you to court. So the answer is, do whatever is defensible in court. Put something in the operating agreement of your LLC that states whether you are operating under a calendar year or some other "fiscal" year policy for your company. Do the prequalification necessary to comply with Dodd/Frank, then, if you want to put terms in the loan that are not Dodd/Frank compliant, you have covered yourself. And for the icing on the cake, put a clause in 14 Point Bold in the loan agreement that states: “NOTICE—THIS LOAN FALLS UNDER A DODD/FRANK EXCLUSION AND PENALTIES WILL NOT APPLY.” This will alert your borrowers and their predatory attorneys that you know your stuff and are not to be "tangled with."

With every tenant, tenant/buyer, or seller finance buyer I deal with, I have a little "ceremony" that I go through with them, where I point out some element of the agreement and say, "Now, you ARE going to make your payments on time, right? I just wanted to make sure because if not, DO NOT go into this agreement with me."
Then, looking them straight in the eye, I say, "It's important that you understand things clearly and are willing to complete our agreement, because you really do not want to face me in court. I ALWAYS WIN IN COURT."
And that statement, made very slowly, and deliberately, is accurate. My eyes flash when I make that final statement, so that they can see that I have some claws hidden in these paws. This little "ceremony" is one of the things that people must go through if they want to go into one of my properties. And it has saved me MANY MANY trips to court.

In answer to the other question about having multiple loans at one time, the average mortgage loan extends longer than one year, and I have seen no regulation in Dodd/Frank that indicates you cannot have concurrently running loans. Just the one per year regulation.