Florida residential real estate transactions are governed by a variety of laws, rules, and regulations. Unfortunately, some real estate agents minimize or ignore these requirements in the name of getting the deal closed. They say they want to keep things simple for buyers and sellers. After all, the standardized forms they use cover all of these requirements, right?
Wrong. The reality is that these laws are complicated and they exist at the local, state, and federal levels. They apply to the most basic real estate transactions (i.e. transactions where no federally insured mortgage is involved).
Anyone buying or selling a home or condo in Florida needs to understand how Dodd-Frank can impact their residential real estate transaction even when there’ no Fannie Mae loan or other government or quasi governmental loan involved in the transaction.
What is the Dodd-Frank Act?
The full name of the Dodd-Frank Act is the “Dodd-Frank Wall Street Reform and Consumer Protection Act.” It was passed by Congress and signed into law by President Obama in 2008. The Act is a massive piece of legislation (it’s over 2300 pages long) and it was designed to improve transparency in the financial system and protect consumers.
For residential buyers and sellers in Florida, the important thing to know about the Dodd-Frank Act is how it impacts residential real estate transactions relating t0 seller financing and private financing of these deals.
Why Care about the Dodd-Frank Act if you are selling a Florida Home?
The Dodd-Frank Act imposes all sorts of new financial regulations on the banking industry. Specifically, it imposes rules on banks and other mortgage lenders related to how mortgage financing occurs in a real estate transaction.
But it does more than just deal with banks. The Dodd-Frank Act imposes restrictions on seller’s who finance the sale of their residential property.
These are loans where the seller loans the buyer the money to buy the seller’s home or condominium. In “seller financing” deals, the closing occurs without any bank or other kind of institutional lender being involved.
Sometimes, it’s a good deal for sellers and buyers. The seller can sell their property fast. The buyer can get immediate access to financing without all the complications of a formal mortgage application process with the local bank.
However, after Dodd-Frank was passed, things got a lot more complicated for a seller financing the sale of his or her home. Now, a home owner who negotiates seller financing with a buyer is considered a “mortgage loan originator” and is subject to the terms of the Act.
Dodd-Frank Act and Seller Financing of Residential Home Loans
The Dodd-Frank Act sets up rules for seller financing of residential property. It also sets up rules for private loans made on residential property not owned by the person doing the financing.
The Act creates new laws for anyone involved in making consumer home loans. It controls and mandates things like licensing and the regulation of mortgage brokers and bank loan officers.
1. The Loan Originator Rule
Under the Dodd-Frank Act, the Loan Originator Rule is the centerpiece of the legislation relating to residential real estate transactions. The rule generally regulates how compensation is paid to a loan originator and sets out the qualifications of, and the registration or licensing of loan originators. Basically, the rule states when a seller is financing the sale of his or her home with a purchase money mortgage, then, depending on the terms of the loan, the seller may be subject to the act.
Fortunately, there are exclusions under the law as to who is considered a loan originator.
2. Exclusions from Loan Originator Rule
If you are a seller wanting to finance the sale of your residence, there are two exclusions from having to follow the Loan Originator Rule. They are:
a. The One Property Exclusion
The Loan Originator Rule will not apply to a residential sale where a “natural person, estate or trust” provides seller financing for only one property in any 12-month period.
b. The Three Property Exclusion
The second exclusion to the Loan Originator Rule is called the “three property exclusion.” Here, the Rule does not apply to a seller who is financing three or fewer properties in any 12-month period if certain financing terms are met (see below) and the seller is not a contractor or builder.
c. Seller Must Be Owner and Not a Contractor or Builder
These exclusions to the Loan Originator Rule under the Act apply only if:
- The Seller is the owner of the property that is securing the loan.
- The Seller is not the contractor of the residence in the ordinary course of business.
- The Seller is not the builder of the property in the ordinary course of business.
Simply put, if you are a home builder or a contractor on a residential project, then you cannot be excluded by the rule (meaning, you will have to follow the financial requirements of residential home loans under the act).
And, the same is true if you don’t own the home. If you do not own the residential property being sold, then none of the exclusions from the Loan Originator Rule apply to you.
d. Financing Terms
Under each exclusion (one property; three property), there are special financing terms. For instance, are you offering adjustable rate financing? Then the Dodd-Frank Act and its Loan Originator Rule requires:
- An annual rate increase of 2 percentage points or less be used;
- There must be a lifetime limitation of an increase of 6 percentage points or less;
- There cannot be any negative amortization;
- Balloon mortgages are acceptable;
- Fixed rate or an adjustable rate must reset after 5 years or more, subject to reasonable annual and lifetime limits;
- The home loan must be fully amortizing;
- There must be a good faith determination that the consumer has a reasonable ability to repay the home loan. (Want to know how that’s decided? These criteria can be found online in Regulation Z §1026.43(c).)
Dodd-Frank Does Not Cover All Residential Sellers
The Loan Originator Rule does not apply to every residential property deal. It does not apply to loans involving:
- Business credit;
- Commercial credit;
- Agricultural credit;
- Organizational credit, or
- Credit extended to other than a natural person.
Are You Being Asked To Sign A Contract Form in Violation of the Dodd-Frank Act?
Most residential real estate deals happen in Florida using standardized forms. That’s fine; it saves time and money for everyone.
Thing is, it’s important that those who are presenting those forms for use as a binding contract know whether or not those forms are up-to-date and accurate. Unfortunately, a lot of real estate agents, and lawyers, use outdated forms.
Rider C of the Residential Contract for Sale and Purchase Form
This means in a residential real estate transaction in Florida, the form for “Seller Financing” (as provided by the Florida Realtors/Florida Bar Residential Contract for Sale and Purchase) needs to be checked for compliance.
Every day, there are transactions occurring where the contract does not comply with Dodd Frank because the form is outdated. Rider “C” of this contract, which has the heading “Seller Financing” should be checked to see if it meets the federal financial regulation requirements of Act. This evaluation and alteration should not be done by a Florida real estate agent.
Why? Real estate agents cannot practice law and some agents are just simply unaware of the requirements of the Act.
Read: When Is a Florida Real Estate Agent or Broker Guilty of the Unauthorized Practice of Law?
Help With Seller Residential Financing
If you are involved in a residential real estate transaction here in Florida and your buyer is having difficulty obtaining financing, then you may want to consider offering seller financing (this type of financing will become more popular as interest rates rise). For some sellers and buyers, handling the financing between them and avoiding the bank down the street is a great idea. It works for lots of people.
However, it’s very important for sellers and buyers to make sure that they are conforming to all of the laws that apply to their residential real estate transaction. This includes all the financial requirements under the Dodd-Frank Act and its Loan Originator Rule.
If a Seller does not comply with the law and there is a default of the mortgage in the future, then will the Seller be legally protected by having the right to foreclose? Maybe not. If the buyer stops making payments, then the seller needs to know that he or she has the right to enforce the terms of the mortgage. If the buyer pays off the loan, then he or she needs to know that the seller can be forced to turn over clear title to the property (including the requirement to issue a satisfaction of mortgage).
Sellers need to make sure that their residential real estate transaction complies with every law out there before they decide to hold a mortgage. The laws, especially new ones like Dodd-Frank, are constantly being amended and/or replaced.
If you are selling or buying real estate in Florida and are considering seller financing in Florida, a good piece of advice is to speak with an experienced Florida real estate lawyer to learn about your rights, including the requirements of Dodd-Frank (pre-contract and post-contract). Most real estate lawyers, like Larry Tolchinsky, offer a free initial consultation (over the phone or in person, whichever you prefer) to answer your questions.
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We have a condo that we want to purchase through owner finance. The owner does have a small mortgage on the property so we want to know if it is legal in Florida for them to do owner financing since they have a mortgage on the property already?