Over the past, the most common question I have heard is “what are you going to do about the Dodd-Frank Act”? And my common responses have been, “not worry about it” or “understand it and work around it”. So what is your response, and will you survive not that the dastardly bill that is now in full affect?
Many people are worried that this new law that has been in effect since January 10, 2014 will put them out of business. There are many new regulations pertaining to lending and one segment in particular that affects investors the most, especially in the coming years with our current economic situation and that is seller financing. People are worried that these new regulations will have a dramatic impact on our business, and I have heard several people predict that parts or all of the Dodd-Frank law will be repealed.
I don’t put a lot of faith in congress repealing anything these days. Look at Affordable Health Care for instance; does it look like that will be repealed? No, so why would you expect the Dodd-Frank Act to be any different? The Dodd-Frank Act was a response to the sub-prime mortgage meltdown crisis to put the blame on a segment of the economy that was politically acceptable and to repeal it now would be an admission to that fact. In an attempt not to offend certain political ideologies here, I will not get into the cause of the sub-prime mortgage meltdown crisis, or the political reasons for appealing the Dodd-Frank Act, but I will explain what it means to us as investors.
Here is the simple break down, as I understand it.
1) If you only do one seller financed deal per year, then Dodd-Frank doesn’t apply to you.
2) If you do more than 1 seller financed deal per year to an owner occupant in single family residential real estate, then you must follow these simple rules.
- Document borrows income and ability to make payments.
- 43% maximum DTI (Debt To Income) ratio.
- Cannot have a negative amortization.
- Cannot be amortized longer than 30 years.
- Cannot have a balloon payment.
- Must wait for the contract to be at least 120 delinquent before you can start the foreclosure process.
- Must engage the borrower in a loan modification or some other workout program before you can start the foreclosure process and you cannot file foreclosure while the modification or other workout program is pending.
- Interest rates must be tied to some kind of financial indicator, like the T-Bill or the LIBOR rate.
- Interest rates cannot raise more than 2% per year with a 6% cap and cannot surpass the local usury rate.
- Commercial and business to business (non-owner occupied) transactions are exempt.
So now that we know and understand the basics of the Dodd-Frank Act, what are you going to do? If you are going to sell more than one residential property to an owner occupant with seller financing, then you have no choice but to follow the rules of the Dodd-Frank Act or figure out how to work around them, as I am going to do.
One solution might be to sell everything on a Lease with the Option to Buy. However, the Dodd-Frank Act also covers financed down payments, so you can’t charge a rent credit that gets applied to the down payment without complying with the Dodd-Frank Act.
One option might be to incorporate some form of graduated payment plan regardless of the interest rate.
A more advanced solution would be to use and LLC or a Land Trust and sell the stocks of the LLC or the Beneficial Interest in the Land Trust on terms. Now your selling personal property rather than real property and the Dodd-Frank Act would not come into play for several reasons, but some of those reasons may fall into the grey area, so I recommend getting competent legal/financial advice from advisors that understand the Dodd-Frank Act and the implications of violating the law because I don’t have any more room to get into a lengthy debate about what is considered grey or not and partly because I need to figure out what strategies are going to work for me. When I get it fully worked out, you will be the first to know.