Real Estate

The Truth About The “Truth-in-Lending” Act

dianahill
Diana Hill
Professional Real Estate Investor Instructor

Financing is always a hot topic and on January 10, some very interesting new rules went into effect.   The Dodd-Frank Act amended the Truth-in-Lending Act and established new rules.  One of the biggest changes is how a “loan originator” is compensated.

Mortgage loan originators (MLOs) may not be compensated based on any of the following:

  • Interest rate of the mortgage loan
  • Yield spread premium of a mortgage loan
  • Sale of services such as title insurance from an affiliated company
  • MLOs cannot steer consumers into any transaction that results in more compensation to the MLO unless the transaction is in the consumer’s best interest
  • Proxy for a term of a transaction; such as steering the consumer into a portfolio loan which may pay a higher commission to the MLO

Acceptable forms of mortgage originator compensation are:

  • Salary
  • Commission based on dollar volume of loans closed or number of loans closed
  • Participation in a designated tax-advantaged compensation plan such as 401(k), ESOP, bonus, or retirement plan
  • Participation in a non tax-advantaged, non-defined benefit bonus plan provided the bonus paid through the plan does not exceed 10% of the MLO’s total compensation for that reporting period

It’s important information to know when looking for a loan but I would like to focus on how the changes made by Dodd-Frank affect seller financing.

First, let me define seller (or owner) financing for those of you who are unfamiliar with it.

When a property buyer finances the purchase directly through the person or entity selling it. This often occurs when the prospective buyer cannot obtain funding through a conventional mortgage lender, or is unwilling to pay the prevailing market interest rates. The seller may agree to owner financing if he or she is having difficulty selling the property. Owner financing may only cover part of the purchase price, with a smaller bank loan making up the difference.  Also known as “creative financing” or “seller financing”. Investopedia

So, if you are use seller financing, you may be considered a loan originator.  There are two exclusion.

First Exclusion: Guidelines for those who plan to sell only one property in a 12 month period.

  1. This must be an individual not an entity like an LLC, S-Corp, Partnership, etc.
  2. The natural person, estate or trust has not constructed or acted as a contractor for the construction of the residence.
  3. The natural person, estate or trust provides seller financing that meets the following requirements:
    1. No negative amortization (a balloon payment is permitted)
    2. The seller does not have to determine if the buyer has a reasonable ability to repay
    3. Fixed or adjustable rate (after five years).  There must be annual and lifetime limitations.

Second Exclusion: Guidelines for those who plan to sell up to three properties in a 12 month period.

  1. Same as above as related to what kind of entity can offer seller financing.
  2. Same as above related to construction.
  3. The natural person, estate, or trust must meet the following
    1. Financing must be fully amortizing. A balloon payment is NOT permitted
    2. The person who is providing the financing is one who determines in “good faith” if the consumer has a reasonable ability to repay.  They don’t have to retain documentation and there is not a standard DTI (debt to income) ratio or credit score.
    3. Subject to the same financing guidelines as above.

I understand these rules were put in place to protect the consumer, however part of my wealth plan is to offer Owner Carried Financing on some of my properties.  This would allow me to have an income stream without the issues of being a landlord.  These laws will make it necessary for me to be even more strategic.

If you would like to know more about real estate join me in real estate investing class. I enjoy basing articles on questions our students have.

Great Fortune,
Diana Hill – dhill@tradingacademy.com

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.