I reported in THE PAPER SOURCE JOURNAL, and in this blog recently, that US Rep. Barney Frank, chairman of the House Committee on Financial Services, and Sen. Chris Dodd, chairman of the Senate Banking Committee, signed off on allowing three carrybacks per year under the SAFE Act without a license.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (PL-111-203), signed into law July 21, 2010, allows up to three residential seller carrybacks a year ( a.k.a. seller financing, cash flow notes, seller-held mortgages, owner financing, etc.) without a mortgage originators license. This voids the HUD interpretation of the SAFE Mortgage Act, which did not allow ANY seller residential carrybacks without a license except if sold to close family.
The section of the Act reads:
“Mortgage originators…does not include…a residential mortgage loan, a person, estate, or trust that provides mortgage financing for the sale of 3 properties in any 12-month period to purchasers of such properties, each of which is owned by such person, estate, or trust and serves as security for the loan, provided that such loan—
‘‘(i) is not made by a person, estate, or trust that has constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of such person, estate, or trust;
‘‘(ii) is fully amortizing;
‘‘(iii) is with respect to a sale for which the seller determines in good faith and documents that the buyer has a reasonable ability to repay the loan;
‘‘(iv) has a fixed rate or an adjustable rate that is adjustable after 5 or more years, subject to reasonable annual and lifetime limitations on interest rate increases; and
‘‘(v) meets any other criteria the Board may prescribe;”
The “Board” is the new Consumer Advisory Board, under the new Bureau of Consumer Financial Protection, established within the Federal Reserve.
For the cash flow note business, the Dodd-Frank law is at least better than the HUD interpretation of the SAFE Mortgage Act, which would have made it impossible for real estate investors to carry back mortgages without being licensed. Some notes will be created by investors vs. none. But limiting it to just three a year is still awful, however, and there is absolutely no reason to limit it. No one has ever tried to argue that the problems in the mortgage industry have anything to do with the actions of sellers who take back notes. For example, do you know how many consumer complaints the Texas Department of Savings & Mortgage Lending has ever had — ever — about seller-held note transactions? NONE. ZERO.