Dodd-Frank Act Qualified Mortgage Rule Impacting Seller Carry Back Financing

UPDATE: This information was updated on February 7. To read the most current information, read the article on AAR’s website:

The Consumer Financial Protection Bureau Issues Additional Regulations Pertaining to Seller Carryback Financing

Original Article Posted on January 14, 2013:
On July 21, 2010, President Barak Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protections Act (the “Dodd-Frank Act”), which generally requires all residential mortgage loans, including seller carry back financing, to be offered and negotiated by licensed loan mortgage originators.

Critical to the Dodd-Frank Act is Title XIV, which creates stringent consumer protections designed to shield borrowers against predatory lending practices. While the term “mortgage originator” is defined broadly under the Act, an exemption exists whereby under certain circumstances, property owners offering seller carry back financing are excluded from having to obtain a loan originator’s license provided that the property owner provides mortgage financing for less than a pre-determined amount of properties in any 12 month period. In order to additionally qualify for this Title XIV exemption, the following five requirements must be satisfied:

  1. The seller did not construct the home to which the financing is being applied.
  2.  The loan is fully amortizing, meaning no balloon mortgages are permitted.
  3. The seller determines in good faith and documents that the buyer has a reasonable ability to pay back the loan.
  4. The loan has a fixed rate or is adjustable after five or more years, subject to reasonable annual and lifetime caps.
  5.  The loan meets other criteria set by the Federal Reserve Board.

In the event of deviation from these requirements, the buyer has up to three years to rescind the sale and demand a return of all money paid.

On January 10, 2013, the Consumer Financial Protection Bureau implemented an “ability-to-repay rule” that provides guidance to lenders and consumers seeking to comply with the above-referenced Dodd-Frank provisions. The Consumer Financial Protection Bureau’s final rule addressing a consumers’ ability to repay mortgage loans takes effect on January 10, 2014. Pursuant to the rule, all lenders, including seller carry back lenders, must consider and verify, at a minimum, the following eight underwriting standards:

  1. Current income or assets;
  2. Current employment status;
  3. Credit history;
  4. The monthly payment for the mortgage;
  5. The monthly payments on any other loans associated with the property;
  6. The monthly payment for other mortgage related obligations (such as property taxes);
  7. Other debt obligations; and
  8. The monthly debt-to-income ratio or residual income the borrower would be taking on with the mortgage.

The seller carry back lender must also consider the borrower’s ability to repay both the principal and interest over the long term, not just during a teaser rate period. AAR will keep members abreast of information as it becomes available throughout the year.

To Read NAR’s Summary of the Rule, go to http://www.ksefocus.com/billdatabase/clientfiles/172/4/1714.pdf.

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