Dodd-Frank Hijacks Owner Financing

This article appeared in the December, 2010 PAPER SOURCE JOURNAL.  For information on subscribing, click here.

By Ric Thom, President, Security Escrow, Inc.

Private property owners have been swept into the regulations of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act which was signed into law in July 2010. Owner financing will be regulated in Title XIV Section 1401(2) (E) Mortgage Loan Origination Standards. The law restricts private property owners who want to sell their own property using owner financing (installment sale). These are some of the consequences.

Homeowners die before they receive all of their equity under the Dodd-Frank Act
The act requires any homeowner who sells their property using an installment sale, known as owner financing, to fully amortize the installment sale note. It does not allow any balloons to be negotiated between buyer and seller in the note. This means if you are 55 or older there is a good chance you will die before that 30 year note pays out.
Part of the purpose of the Dodd-Frank Act is to protect seniors who use or invest in financial products. The Federal government chastises insurance companies for the deplorable practice of selling seniors 30 year annuities because Ma and Pa will die before they receive their money. Yet, the Dodd-Frank act does the same thing when it mandates that you cannot receive all of your equity for 30 years. Just shortening the amortization period does not help either. How many buyers can afford the monthly payments on a ten or fifteen year amortization?

The Dodd-Frank Act strips homeowners of their equity
Part of the rationale for the act is to protect homeowners from having their equity stripped from them by unscrupulous lenders. Yet, the Act which mandates that an installment sale note be fully amortized over 30 years with no balloons does just that. Ma and Pa who use owner financing when they sell their property receive a note for their equity. They have the right and the ability to sell that note in the future. Anyone who purchases that note takes into consideration the time value of money. Just like bonds these notes are sold at a discount. The longer it takes for the note to pay out, the more of a discount the note holder has to take. So, if Ma and Pa need to sell that note in the future they are going to have to sell at a 30-35% discount as opposed to a 5-10% discount if it had a balloon. So, you can see that by the government mandating no balloons they have potentially stripped Ma and Pa’s equity by 20-30%. I can see the reason behind not allowing these installment sale notes to negatively amortize or to be interest only, but I don’t think allowing a balloon in 8 to 10 years is unreasonable or predatory. That gives the new buyer ample time to refinance or sell the property before the note becomes due. It is not reasonable to require Ma and Pa to wait 30 years to receive their equity, unless that is what they wish to do.

An Installment Sale is Not a Loan
Thirteen states have exempted owner financing to some degree from their Mortgage Loan Originator Act in 2009. They did this because they realize owner financing is not a loan; it is an installment sale. There is no third party lender; no points or origination fees are charged. In spite of this, Congress included owner financing in the Dodd-Frank Bill with additional regulations. Owner financing is not predatory. The seller has 100% skin in the game. Ma and Pa simply want to receive their equity over time with a reasonable interest rate. They don’t want to receive cash. They don’t want to invest in 1% CDs or in a stock market that lost 40% of its value in recent history. The sellers do not want the property back; they simply want a decent return on their money. That’s why they sold it in the first place. Today’s buyer using owner financing will most likely be tomorrow’s seller using owner financing.

The IRS does not recognize the installment sale as a loan. They view it more as a trade. The property owner is trading the property for a note, which represents the seller’s equity. The IRS only taxes the seller as they receive payments.
Yet, Ma and Pa who might have only one property which they want to sell using the installment sale method are penalized, scrutinized and regulated.

This act regulates the sale of your personal residence, your cabin in the mountains, the vacant lot next door, a rental house, a duplex, triplex and four-plex. How many of the millions of property owners are going to know that if they use owner financing they are going to have to fully amortize the note, verify and document that the buyer can qualify, and that the interest rate is supposed to be fixed for the first five years? If they sell their property and don’t comply with these restrictions, they could be fined up to $25,000 and a possible felony charge simply because they did not know of the restrictions and requirements. The 13 states which exempted owner financing realized it would be a regulatory nightmare trying to keep track of every residential transaction that property owners enter into, not to mention the cost associated with that regulation. 99% of the people who use owner financing do not make a business of selling their property using the installment sale method. It is most likely they would only sell property using on installment sale a few times during their life. But that one time might involve trying to sell four properties at the same time.

Each state has its own version of owner financing; some states use notes and mortgages, some use deeds of trust or contract for deed. Each state already has case law and state statues that set the standards for owner financing and provide the protections for buyer and seller. The Dodd-Frank Act simply adds another, conflicting layer of complexity to the simple act of selling your private property on an installment sale. The states should remain in control of owner financing.

Trying to apply the same rules and regulations and licensing requirements for banks and professional mortgage loan originators to Ma and Pa on Main Street is counterproductive. It is only going to drive owner financing underground. Buyers and sellers will still use it, but they won’t use Realtors® or title companies which creates opportunity for abuse where there wasn’t any before.

Is your credit good enough to sell your home?
The Act does allow a balloon in the installment sale note — if Ma and Pa become mortgage loan originators. The Dodd-Frank Act restricts you to only three real estate transactions in a 12 month period where you offer owner financing terms. If you want a balloon or you want to sell a 4th property within a 12 month period using the installment sale you have to become a mortgage loan originator, which means: you have to have good credit, put up a surety bond, take 20 hours of classes on Federal and State mortgage laws, pass a national test, and take continuing education courses. 30% of mortgage brokers were unable to become mortgage loan originators because they either had poor credit or were unable to pass the test. Ma and Pa are sure to experience the same thing. Requiring a seller to take a test and have a certain credit score to transfer their private property is a slippery slope. It is an erosion of our private property rights.

This act, which is over 2000 pages and requires over 500 new rules to be written by 40 different agencies by July 2011, was meant to regulate Wall Street and protect consumers from the predatory lending practices of mortgage brokers, but has over-reached into Main Street and into the lives of Ma and Pa. Selling your own property using the installment sale method did not create the financial crisis. Including it in the Dodd-Frank Wall Street Reform and Consumer Protection Act is inappropriate. An installment sale is not a loan. This act is a limitation of the rights of property owners which will be virtually impossible to regulate. We need to ask our congressional representatives to exempt all owner-financing and return it’s regulation to the states or at the very least, to remove the draconian restrictions, in the Dodd-Frank Act.

The Act is just the framework. The consumer financial Protection Bureau has the authority to relax or expand the rules and regulations in the bill. They are in the process of reviewing the rules and regulations that do not go into effect until July 2011. Until then, it is my understanding that everyone will be following the laws of their state, but that could change come July 2011. Please write your congressional representatives, write your local board of Realtors, and the National Association of Realtors or anyone else that might get the word out for Ma and Pa.

For the complete list of e-mail addresses and fax numbers for the US Congress and Governors go to

To find your local board of Realtors® go to:

To contact the National Association of Realtors®:
Anthony Hutchinson
Sr. Policy Representative – Financial Services
National Association of REALTORS®
(202) 383-1120

Sam Whitfield
National Association of REALTORS®
500 New Jersey Ave. NW
Washington, DC 20001
(202) 383-1131 (direct)

Ric Thom is president of Security Escrow, Albuquerque, NM. Phone (505) 266-3487

This article appeared in the December, 2010 PAPER SOURCE JOURNAL.  For information on subscribing, click here.

1 thought on “Dodd-Frank Hijacks Owner Financing”

  1. I believe the law excludes the licensure for mom and pop who lived in their home and then sold it using owner financing, balloon or not. In other instances of seller/owner financing, a third party originator can be engaged that has very little cost and impact on the transaction. Most sellers want the buyer to be fully disclosed so that there are so misunderstandings and potential lawsuits. A seller would not think of selling the home without an attorney preparing the paperwork, whyshould they worry about the origination (read proper disclosure) of the buyer.
    Another point to consider: If the buyer were to go out and get a traditional mortgage, conventional or government, he would have to pay an origination fee to the lender or originator. Should a buyer enjoy the benefits of obtaining a loan without an origination fee and at the same time enjoy the somewhat relaxed credit and underwriting standards all because an owner wanted to receive payments instead of a lump sum at closiing? In my experience since this law went into effect, most seller financed transactions occur because the buyer can not obtain a conventional loan due to credit history, income stability or some other factor. Should they enjoy fewer fees and scrunity than others who go the traditional route?
    There is nothing to prevent someone from seller financing their home, or an investor from selling 1,00’s of them. The law simply provides for proper disclosure conducted under a licensed program. Let’s get on with this creative way to beat the banks at their game.

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