New Dodd-Frank Law Allows 3 Seller Carrybacks Per Year — With Strings

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.

15 thoughts on “New Dodd-Frank Law Allows 3 Seller Carrybacks Per Year — With Strings”

  1. True. Also, no change in the interest rate in the first 5 years, then after that the adjustments must be “reasonable,” a word that has no meaning. And the note “must meet any other criteria the Board may prescribe,” which means if the Board can void your note if it feels like it.

    What the government has done is first to say, “No seller carrybacks for investors” (the HUD interpretation of the SAFE Act). When the industry howled, they said, “OK, we’ll show you we’re reasonable. We’ll let you have three a year.” And we’re supposed to thank them.

    The government has no Constitutional right to tell anyone they cannot take back a note on their own property or limit the number of times. This is tyranny pure and simple.

  2. W.J. – Thanks for the update! Anyway you could provide a link to the actual Bill that you quoted from?

    which laws we would need to conform to – Federal vs. State (my gut says we are supposed to comply with the most restrictive, but wanted to ask for your thoughts).

  3. Bill,
    The fully-amortizing portion of the provision will be a hindrance to most seller financed transactions since notes with balloon payments would require licensure.
    Whether one, three or five (Texas), a licensed third party can be used to be in compliance with the law. To use a third party injects another fee into the equation, but certainly that is better than the having to go through the licensing process . I suspect that every state will have a few licensed originators willing to take this on for a reasonable compensation. Attorneys fees, title fees and other due diligence fees add up, but the sooner this latest twist and fee is absorbed into the process, the sooner everyone can get on to making money again. It does add an element of security to the maker of a note and this could be used as a sales tool at the time of note inception.

  4. Fred Hobbs is the president of Texas Mortgage Capital Corp. I discovered him a few months ago and interviewed him about the SAFE Act and other laws in the August PAPER SOURCE JOURNAL.

    If someone buys or sells Texas notes and/or real estate, Texas Mortgage Capital Corp. offers a service to make you compliant with the SAFE Act and related laws without your having to obtain a mortgage originators license. And the fee is VERY reasonable. Contact him at or

  5. Fred,
    Are you saying that the Dodd-Frank reform requires Sellers that owner carry with a Balloon payment in the note must be licensed? In other words, if we are not licensed, we can’t charge interest or can’t have a balloon?

    Any ideas on how we can structure the deal to have the same benefits as a balloon, but not have to get a license or licensee involved? (Could we structure 2 notes: 1 being fulling amortized and 2 having no payments until the due date; that would operate similar to a balloon?)

    Thanks in advance for your thoughts!

  6. Tom,
    The Dodd-Frank has within it an amendment to the SAFE act that increases the number of allowable nonlicensed owner carrybacks to three per year. Those notes with balloon payments or have rates that adjust sooner than 5 years from inception are not included in the allowable transactions. Those must be licensed, even for one.

    As far as the structure you suggest, 2 notes, I don’t see how that will accomplish what you want. The fully amortizing note would still be in force. The idea of a balloon note is for the entire amount to be paid off. Secondly, a note with no payments may not be amortizing. I have no alternative, perhaps some of the other subscribers to this site may have a suggestion or comment.
    2 notes, might work, but the legal fees to draw two notes would be close to the same as just having an originatior do the transaction for you so you can do whatever you want without confusing the buyer and potentially making the note(s) difiicult to sell.

  7. Doug Foster, Commissioner of the Texas Department of Savings and Mortgage Lending, offered a clarification on the Texas de minimis exemtion on August 17, 2010 that should be of interest.

    In connection with the above notice concerning the de minimis exemption for seller financed transactions issued on August 12, 2010, this notice is issued to clarify questions which have risen concerning compliance with federal regulations.
    The position expressed in the notice is that an individual who engages in no more than five mortgage loans in a rolling twelve month period is exempt from the Department’s licensing requirements. The Department holds the position that exemption from licensing does not relieve that individual from complying with all applicable laws and rules pertaining to disclosures required by RESPA, new GFE, TILA, APR, new HOEPA, High Priced Loans, etc and the timing of each disclosure and rules.
    __________________________ August 17, 2010
    Douglas B. Foster

  8. We’ve been trying to find creative solutions to the fully amortizing requirement. Any thoughts on making the loan fully amortizing but also giving the payer a financial incentive to payoff early?

    For example, the payer has the option (but not the obligation) to payoff during the fifth year and receive a $10,000 reduction to the balance due (or whatever works for that deal).

    Additionally, starting in the sixth year the interest rate would increase. This also creates a financial disincentive and helps offset the need for sellers to carry the note longer.

    While this could impact pricing when going to sell a note, we are finding many note investors are already pricing deals based on a full amortization. They understandably have concerns that “marginal” buyers will have trouble refinancing and making the balloon payment.

    This seems to meet the standards of the law and still create a win/win for both buyers and sellers using owner financing.

  9. On the acquisition side…

    Does the Dodd-Frank Act alter the original language in the SAFE Act that allows for Owner Occupants to Sell their houses with Seller Financing?

    More specifically, are Owner Occupant Sellers required to have a fully amortized loan with no balloon ? And are they still exempt to having to get an MLO license for selling their primary residence?

  10. Does any know the regulations that apply to the state of California?
    Would this amendment to the SAFE Act give older note’s more value then before since the restrictions do not apply?

  11. In my study of the SAFE Act and the Dodd-Frank Bill that contains an amendment to the SAFE Act, those individuals seller financing their primary residence are exempt from the act in all things.

    I do not know for sure, but I doubt that California has any language that alters the national model of the SAFE Act or Dodd-Frank amendment regarding the exemption of a seller to finance one’s own primary rsidence.

    It is going to be interesting to see if there is any effect to the value of a note based upon time of origination. I believe that every note will be evaluated with the SAFE Act in mind.

  12. Tracy,

    Those are good ideas to get around the need for complying with the law, but may over complicate the note (in terms of an investor interested in the reliability of the income stream).

    I probably am sounding like a broken record, but why potentially devalue a note just to circumvent the regulations. You should be able to find a third party originator wherever you are that would keep you in compliance for less cost than the potential loss on the sale of the note.

  13. “‘(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;”

    Unless I’m misinterpreting the language, the amendment seems to prohibit seller-financed purchases of residential property, if the property were constructed as an speculative project by the seller?

    I am sitting on 9 newly constructed condos. I have 2 very interested, but very nervous potential homebuyers who would prefer to rent at $1200 per month, however, for $950 I can finance the sale myself. My lender supports this idea, we all want to do it, but there is a question of whether or not I am allowed to due to the fact i served as I am the original investor of the development.

    1) Is this prohibited?
    2) does a “person, estate, or trust” mean that authorized companies, LLC’s and other non-entities are excluded from the prohibition and can go forward w/ the 3 mortgage notes?
    3) is much of this up to my state laws?

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