Despite the January 10, 2014, start date for the 2013 mortgage rules, lenders don’t have to use the new Loan Estimate (which replaces the Good Faith Estimate) for loan applications until August 1, 2015. Likewise, closings using the new Closing Disclosure Form (which replaces the HUD-1 Settlement Statement & the Truth-in-Lending) won’t go into effect until after lenders begin using the LE. (So if, for example, a loan app is taken in late July, 2015, the lender may use a GFE and the title or escrow company may close with a HUD-1.)
One of the new rules that went into effect on January 10, 2014, is the loan originator compensation/qualification rule. Under that rule, the definition of "loan originator" is very broad – so broad that seller financing transactions (i.e., seller carry-back loans, a/k/a purchase money mortgages, a/k/a conditional sales contracts) are included. This broad definition will affect any seller-financing transaction otherwise covered by the new rules unless the seller financer qualifies for one of two exemptions. These exemptions are paraphrased as follows:
a. The 3-Sale Rule [12 CFR Sec. 1026.36(a)(4)]:Because these seller financing rules are in effect now, sellers contemplating carry-back financing should seek legal counsel about the applicability of the new mortgage loan rules to them.
(1) Seller has 3 or fewer sales in any 12-month periodb. The 1-Sale Rule [12 CFR Sec. 1026.36(a)(5)]:
(2) Seller didn't construct the building or act as general contractor
(3) Financing must be:
(a) Fully amortizing (no balloon)
(b) Seller determines Buyer has ability to pay (how this is to be done is unclear)
(c) Fixed rate or ARM after 5 yrs with changes subject to specific rules for rate increases
(1) Seller is a natural person, estate, or trust and has no more than 1 sale in any 12-month period
(2) Seller didn't construct the building or act as general contractor
(3) Financing must be:(a) No negative amortization (apparently can be a balloon)
(b) Fixed rate or ARM after 5 yrs with changes subject to specific rules for rate increases
It is likely that settlement service providers such as TitlePlus! will issue notices and disclaimers regarding the obligations and qualifications of seller financers, as well as require seller financers to certify either that [i] they have complied with all requirements of a loan originator or [ii] are exempt from the requirements. In addition, settlement service providers may require seller financers and their borrowers to sign a disclaimer or release from liability pertaining to the seller-financing transaction.
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NOTE: the above information does not and is not intended to constitute legal advice. Rather, it is intended to inform interested parties of current and upcoming changes to the mortgage lending and closing and settlement processes. As always, parties should consult their own legal advisors for advice specific to them.
- From TitlePlus!, January 24, 2014
