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Dodd Frank

DODD FRANK LIMITS ON SELLER FINANCING

If you are selling property to a person who will live there, bear in mind that Dodd Frank may impact you.

Read the Board of Realtors summary of what Dodd Frank means for those who sell on seller financing.Dodd-and-Frank

I will write more on this important subject later. For now I will simply give you the raw law itself so you can have something to read yourself to sleep:

 

§ 1026.36 Prohibited acts or practices and certain requirements for credit secured by a dwelling.

  1. Definitions.
    1. LOAN ORIGINATOR.
      1. For purposes of this section, the term “loan originator” means a person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities: takes an application, offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or through advertising or other means of communication represents to the public that such person can or will perform any of these activities. The term “loan originator” includes an employee, agent, or contractor of the creditor or loan originator organization if the employee, agent, or contractor meets this definition. The term “loan originator” includes a creditor that engages in loan origination activities if thecreditor does not finance the transaction at consummation out of the creditor‘s own resources, including by drawing on a bona fide warehouse line of credit or out of deposits held by the creditor. All creditors that engage in any of the foregoing loan origination activities are loan originators for purposes of paragraphs (f) and (g) of this section. The term does not include:
        1. person who does not take a consumer credit application or offer or negotiate credit terms available from a creditor to that consumer selected based on the consumer‘s financial characteristics, but who performs purely administrative or clerical tasks on behalf of a person who does engage in such activities.
        2. An employee of a manufactured home retailer who does not take aconsumer credit application, offer or negotiate credit terms, or advise aconsumer on credit terms.

          OFFICIAL INTERPRETATION TO 36(a)(1)(i)(B)

          HIDE

        3. person that performs only real estate brokerage activities and is licensed or registered in accordance with applicable State law, unless such person is compensated by a creditor or loan originator or by any agent of suchcreditor or loan originator for a particular consumer credit transaction subject to this section.
        4. A seller financer that meets the criteria in paragraph (a)(4) or (a)(5) of this section, as applicable.
        5. A servicer or servicer’s employees, agents, and contractors who offer or negotiate terms for purposes of renegotiating, modifying, replacing, or subordinating principal of existing mortgages where consumers are behind in their payments, in default, or have a reasonable likelihood of defaulting or falling behind. This exception does not apply, however, to a servicer or servicer’s employees, agents, and contractors who offer or negotiate a transaction that constitutes a refinancing under § 1026.20(a) or obligates a different consumer on the existing debt.
      2. An “individual loan originator” is a natural person who meets the definition of “loan originator” in paragraph (a)(1)(i) of this section.
      3. A “loan originator organization” is any loan originator, as defined in paragraph (a)(1)(i) of this section, that is not an individual loan originator.
    2. MORTGAGE BROKER.For purposes of this section, a mortgage broker with respect to a particular transaction is any loan originator that is not an employee of the creditor.
    3. COMPENSATION.The term “compensation” includes salaries, commissions, and any financial or similar incentive.
    4. SELLER FINANCERS; THREE PROPERTIES.person (as defined in § 1026.2(a)(22)) that meets all of the following criteria is not a loan originator under paragraph (a)(1) of this section:
      1. The person provides seller financing for the sale of three or fewer properties in any 12-month period to purchasers of such properties, each of which is owned by the person and serves as security for the financing.
      2. The person has not constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of theperson.
      3. The person provides seller financing that meets the following requirements:
        1. The financing is fully amortizing.
        2. The financing is one that the person determines in good faith the consumerhas a reasonable ability to repay.
        3. The financing has a fixed rate or an adjustable rate that is adjustable after five or more years, subject to reasonable annual and lifetime limitations on interest rate increases. If the financing agreement has an adjustable rate, the rate is determined by the addition of a margin to an index rate and is subject to reasonable rate adjustment limitations. The index the adjustable rate is based on is a widely available index such as indices for U.S. Treasury securities or LIBOR.

      OFFICIAL INTERPRETATION TO 36(a)(4)

    5. SELLER FINANCERS; ONE PROPERTY.A natural person, estate, or trust that meets all of the following criteria is not aloan originator under paragraph (a)(1) of this section:
      1. The natural person, estate, or trust provides seller financing for the sale of only one property in any 12-month period to purchasers of such property, which is owned by the natural person, estate, or trust and serves as security for the financing.
      2. The natural person, estate, or trust has not constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of the person.
      3. The natural person, estate, or trust provides seller financing that meets the following requirements:
        1. The financing has a repayment schedule that does not result in negative amortization.
        2. The financing has a fixed rate or an adjustable rate that is adjustable after five or more years, subject to reasonable annual and lifetime limitations on interest rate increases. If the financing agreement has an adjustable rate, the rate is determined by the addition of a margin to an index rate and is subject to reasonable rate adjustment limitations. The index the adjustable rate is based on is a widely available index such as indices for U.S. Treasury securities or LIBOR.

      OFFICIAL INTERPRETATION TO 36(a)(5)

    6. CREDIT TERMS.For purposes of this section, the term “credit terms” includes rates, fees, and other costs. Credit terms are selected based on the consumer‘s financial characteristics when those terms are selected based on any factors that may influence a credit decision, such as debts, income, assets, or credit history.

    OFFICIAL INTERPRETATION TO 36(a)

  2. 36(a)Definitions
    1. MEANING OF LOAN ORIGINATOR.
      1. General.
        1. Section 1026.36(a) defines the set of activities or services any one of which, if done for or in the expectation of compensation or gain, makes the person doing such activities or performing such services a loan originator, unless otherwise excluded. The scope of activities covered by the term loan originator includes:
          1. Referring a consumer to any person who participates in the origination process as a loan originator. Referring is an activity included under each of the activities of offering, arranging, or assisting a consumer in obtaining or applying to obtain an extension of credit. Referring includes any oral or written action directed to a consumerthat can affirmatively influence the consumer to select a particularloan originator or creditor to obtain an extension of credit when theconsumer will pay for such credit. See comment 36(a)-4 with respect to certain activities that do not constitute referring.
          2. Arranging a credit transaction, including initially contacting and orienting the consumer to a particular loan originator‘s or creditor‘s origination process or particular credit terms that are or may be available to that consumer selected based on the consumer‘s financial characteristics, assisting the consumer to apply for credit, taking an application, offering particular credit terms to the consumer selected based on the consumer‘s financial characteristics, negotiating credit terms, or otherwise obtaining or making an extension of credit.
          3. Assisting a consumer in obtaining or applying for consumer credit by advising on particular credit terms that are or may be available to that consumer based on the consumer‘s financial characteristics, filling out an application form, preparing application packages (such as acredit application or pre-approval application or supporting documentation), or collecting application and supporting information on behalf of the consumer to submit to a loan originator or creditor. Aperson who, acting on behalf of a loan originator or creditor, collects information or verifies information provided by the consumer, such as by asking the consumer for documentation to support the information the consumer provided or for the consumer‘s authorization to obtain supporting documents from third parties, is not collecting information on behalf of the consumer. See also comment 36(a)z4.i through iv with respect to application-related administrative and clerical tasks and comment 36(a)-1.v with respect to third-party advisors.
          4. Presenting particular credit terms for the consumer‘s consideration that are selected based on the consumer‘s financial characteristics, or communicating with a consumer for the purpose of reaching a mutual understanding about prospective credit terms.
    2. MEANING OF MORTGAGE BROKER.For purposes of § 1026.36, with respect to a particular transaction, the term “mortgage broker” refers to a loan originator who is not an employee of thecreditor. Accordingly, the term “mortgage broker” includes companies that engage in the activities described in § 1026.36(a) and also includes employees of such companies that engage in these activities. Section 1026.36(d) prohibits certain payments to a loan originator. These prohibitions apply to payments made to all loan originators, including payments made to mortgage brokers, and payments made by a company acting as a mortgage broker to its employees who are loan originators.
    3. MEANING OF CREDITOR.For purposes of § 1026.36(d) and (e), a creditor means a creditor that is not deemed to be a loan originator on the transaction under this section. Thus, aperson that closes a loan in its own name (but another person provides the funds for the transaction at consummation and receives an immediate assignment of the note, loan contract, or other evidence of the debt obligation) is deemed a loan originator, not a creditor, for purposes of § 1026.36. However, that person is still a creditor for all other purposes of Regulation Z.
    4. MANAGERS, ADMINISTRATIVE AND CLERICAL STAFF.For purposes of § 1026.36, managers, administrative and clerical staff, and similar individuals who are employed by (or contractor or agent of) a creditor orloan originator organization and take an application, offer, arrange, assist aconsumer in obtaining or applying to obtain, negotiate, or otherwise obtain or make a particular extension of credit for another person are loan originators. The following examples describe activities that, in the absence of any other activities, do not render a manager, administrative or clerical staff member, or similar employee a loan originator:
      1. APPLICATION-RELATED ADMINISTRATIVE AND CLERICAL TASKS.The definition of loan originator does not include a loan originator‘s orcreditor‘s employee who provides a credit application form from the entity for which the person works to the consumer for the consumer to complete or, without assisting the consumer in completing the credit application, processing or analyzing the information, or discussing particular credit termsthat are or may be available from a creditor or loan originator to thatconsumer selected based on the consumer‘s financial characteristics, delivers the credit application from a consumer to a loan originator or creditor. Aperson does not assist the consumer in completing the application if theperson explains to the consumer filling out the application the contents of the application or where particular consumer information is to be provided, or generally describes the credit application process to a consumer without discussing particular credit terms that are or may be available from acreditor or loan originator to that consumer selected based on the consumer‘s financial characteristics.
      2. RESPONDING TO CONSUMER INQUIRIES AND PROVIDING GENERAL INFORMATION.The definition of loan originator does not include persons who:
        1. Provide general explanations, information, or descriptions in response toconsumer queries, such as explaining credit terminology or lending policies or who confirm written offer terms already transmitted to theconsumer;
        2. As employees of a creditor or loan originator, provide loan originator orcreditor contact information of the loan originator or creditor entity for which he or she works, or of a person who works for that the same entity to a consumer, provided that the person does not discuss particular credit terms that are or may be available from a creditor or loan originator to that consumer selected based on the consumer‘s financial characteristics and does not direct the consumer, based on his or her assessment of theconsumer‘s financial characteristics, to a particular loan originator or particular creditor seeking to originate credit transactions to consumerswith those financial characteristics;
        3. Describe other product-related services (for example, persons who describe optional monthly payment methods via telephone or via automatic account withdrawals, the availability and features of online account access, the availability of 24-hour customer support, or free mobile applications to access account information); or
        4. Explain or describe the steps that a consumer would need to take to obtain an offer of credit, including providing general guidance on qualifications or criteria that would need to be met that is not specific to that consumer‘s circumstances.
      3. LOAN PROCESSING.The definition of loan originator does not include persons who, acting on behalf of a loan originator or a creditor:
        1. Compile and assemble credit application packages and supporting documentation;
        2. Verify information provided by the consumer in a credit application such as by asking the consumer for supporting documentation or theconsumer‘s authorization for the person to obtain supporting documentation from other persons;
        3. Coordinate consummation of the credit transaction or other aspects of thecredit transaction process, including by communicating with a consumerabout process deadlines and documents needed at consummation, provided that any communication that includes a discussion about credit terms available from a creditor to that consumer selected based on theconsumer‘s financial characteristics only confirms credit terms already agreed to by the consumer;
        4. Provide a consumer with information unrelated to credit terms, such as the best days of the month for scheduling consummation; or
        5. Communicate on behalf of a loan originator that a written credit offer has been sent to a consumer without providing any details of that offer.
      4. UNDERWRITING, CREDIT APPROVAL, AND CREDIT PRICING.The definition of loan originator does not include persons who:
        1. Receive and evaluate a consumer‘s information to make underwriting decisions on whether a consumer qualifies for an extension of credit and communicate decisions to a loan originator or creditor, provided that only a loan originator communicates such underwriting decisions to theconsumer;
        2. Approve particular credit terms or set particular credit terms available from a creditor to that consumer selected based on the consumer‘s financial characteristics in offer or counter-offer situations, provided that only a loan originator communicates to or with the consumer regarding these credit terms, an offer, or provides or engages in negotiation, a counter-offer, or approval conditions; or
        3. Establish credit pricing that the creditor offers generally to the public, viaadvertisements or other marketing or via other persons that are loan originators.
      5. PRODUCING MANAGERS.Managers that work for creditors or loan originator organizations sometimes engage themselves in loan origination activities, as set forth in the definition of loan originator in § 1026.36(a)(1)(i) (such managers are sometimes referred to as “producing managers”). The definition of loan originatorincludes persons, including managers, who are employed by a creditor or loan originator organization and take an application, offer, arrange, assist aconsumer with obtaining or applying to obtain, negotiate, or otherwise obtain or make a particular extension of credit for another person, even if such persons are also employed by the creditor or loan originator organization to perform duties that are not loan origination activities. Thus, such producing managers are loan originators.
    5. COMPENSATION.
      1. General. For purposes of § 1026.36compensation is defined in § 1026.36(a)(3) as salaries, commissions, and any financial or similar incentive. For example, the term “compensation” includes:
        1. An annual or other periodic bonus; or
        2. Awards of merchandise, services, trips, or similar prizes.
      2. NAME OF FEE.Compensation includes amounts the loan originator retains and is not dependent on the label or name of any fee imposed in connection with the transaction. For example, if a loan originator imposes a “processing fee” in connection with the transaction and retains such fee, it is compensation for purposes of § 1026.36, including § 1026.36(d) and (e), whether the originator expends the time to process the consumer‘s application or uses the fee for other expenses, such as overhead.
      3. AMOUNTS FOR THIRD-PARTY CHARGES.Compensation does not include amounts the loan originator receives as payment for bona fide and reasonable charges, such as credit reports, where those amounts are passed on to a third party that is not the creditor, itsaffiliate, or the affiliate of the loan originator. See comment 36(a)-5.v.
      4. AMOUNTS FOR CHARGES FOR SERVICES THAT ARE NOT LOAN ORIGINATION ACTIVITIES.
        1. Compensation does not include:
          1. A payment received by a loan originator organization for bona fide and reasonable charges for services it performs that are not loan origination activities;
          2. A payment received by an affiliate of a loan originator organization for bona fide and reasonable charges for services it performs that are not loan origination activities; or
          3. A payment received by a loan originator organization for bona fide and reasonable charges for services that are not loan origination activities where those amounts are not retained by the loan originator but are paid to the creditor, its affiliate, or the affiliate of the loan originator organization. See comment 36(a)-5.v.
        2. Compensation includes any salaries, commissions, and any financial or similar incentive to an individual loan originator, regardless of whether it is labeled as payment for services that are not loan origination activities.
        3. Loan origination activities for purposes of this comment means activities described in § 1026.36(a)(1)(i) (e.g., taking an application, offering, arranging, negotiating, or otherwise obtaining an extension of consumer credit for another person) that would make a person performing those activities for compensation a loan originator as defined in § 1026.36(a)(1)(i).
      5. AMOUNTS THAT EXCEED THE ACTUAL CHARGE FOR A SERVICE.In some cases, amounts received by the loan originator organization for payment for third-party charges described in comment 36(a)-5.iii or payment for services to the creditor, its affiliates, or the affiliates of the loan originator organization described in comment 36(a)-5.iv.A. 3 may exceed the actual charge because, for example, the loan originator organization cannot determine with accuracy what the actual charge will be when it is imposed and instead uses average charge pricing (in accordance with the Real Estate Settlement Procedures Act). In such a case, the difference retained by theloan originator organization is not compensation if the charge imposed on theconsumer or collected from a person other than the consumer was bona fide and reasonable and also complies with State and other applicable law. On the other hand, if the loan originator organization marks up the charge (a practice known as “upcharging”), and the originator retains the difference between the actual charge and the marked-up charge, the amount retained iscompensation for purposes of § 1026.36, including § 1026.36(d) and (e). For example:
        1. Assume a loan originator organization receives compensation directly from either a consumer or a creditor. Further assume the loan originator organization uses average charge pricing in accordance with the Real Estate Settlement Procedures Act and, based on its past average cost forcredit reports, charges the consumer $25 for a credit report provided by a third party. Under the loan originator organization‘s agreement with the consumer reporting agency, the cost of the credit report is to be paid in a month-end bill and will vary between $15 and $35 depending on how many credit reports the originator obtains that month. Assume the $25 for the credit report is paid by the consumer or is paid by the creditorwith proceeds from a rebate. At the end of the month, the cost for the credit report is determined to be $15 for this consumer‘s transaction, based on the loan originator organization‘s credit report volume that month. In this case, the $10 difference between the $25 credit report fee imposed on the consumer and the actual $15 cost for the credit report is not compensation for purposes of § 1026.36, even though the $10 is retained by the loan originator organization.
        2. Using the same example as in comment 36(a)-5.v.A, the $10 difference would be compensation for purposes of § 1026.36 if the price for a credit report varies between $10 and $15.
      6. RETURNS ON EQUITY INTERESTS AND DIVIDENDS ON EQUITY HOLDINGS.The term “compensation” for purposes of § 1026.36(d) and (e) also includes, for example, awards of stock, stock options and equity interests. Thus, the awarding of stock, stock options, or equity interests to loan originators is subject to the restrictions in § 1026.36(d) and (e). For example, a personmay not award additional stock or a preferable type of equity interest to aloan originator based on the terms of a consumer credit transaction subject to § 1026.36 originated by that loan originator. However, bona fide returns or dividends paid on stock or other equity holdings, including those paid to owners or shareholders of a loan originator organization who own such stock or equity interests, are not compensation for purposes of § 1026.36(d) and(e). Bona fide returns or dividends are those returns and dividends that are paid pursuant to documented ownership or equity interests and that are not functionally equivalent to compensation. Ownership and equity interests must be bona fide. Bona fide ownership and equity interests are allocated according to a loan originator‘s respective capital contribution where the allocation is not a mere subterfuge for the payment of compensation based on terms of a transaction. Ownership and equity interests also are not bona fide if the formation or maintenance of the business from which returns or dividends are paid is a mere subterfuge for the payment of compensationbased on the terms of a transaction. For example, assume that threeindividual loan originators form a loan originator organization that is a limited liability company (LLC). The three individual loan originators are members of the LLC, and the LLC agreement governing the loan originator organization‘s structure calls for regular distributions based on the members’ respective equity interests. If the members’ respective equity interests are allocated based on the members’ terms of transactions, rather than according to their respective capital contributions, then distributions based on such equity interests are not bona fide and, thus, are compensation for purposes of § 1026.36(d) and (e).

    See this interpretation in Supplement I

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