How do you do Seller Financing/Sub2 and comply with Dodd Frank/Safe Act ?

[Eric N.]

There are a lot of investors who do seller financing and I would like to sell some of the properties I acquire under my own financing terms as well. My question is: how do you do that and comply with Dodd Frank, which imposes numerous regulations if you finance more than 3 properties per year to consumers who will reside in those properties? 

[Dan Deppen]

This is a big topic with many sub-components, so there is no way I can address it all in one post. But I'll try to break it down a little.

Whether you are doing 1 consumer loan or 100 there are certain rules you still need to follow. Depending on the state there may be max interest rates you can have on the loan (people violate this all the time..) You need to send Loan Estimates and Closing Disclosures on the appropriate timelines so the borrower has the opportunity to review everything before closing. You need to avoid certain high risk features, which include balloon payments within 5 years, excessive fees, validate that the borrower has the ability to repay the loan, make sure they are likely to repay the loan based on their credit history, excessive late fees, long loan terms, etc, etc. 

If you are originating more than 3 per year, then an RMLO should be involved.

Debt collection and following other consumer laws after the loan is created are other topics. As Chris mentioned, use a licensed servicer and let them handle it. 

The situation you are ultimately trying to avoid is the one where: the borrower defaults, you start foreclosure, the borrower fights the foreclosure and says they didn't understand the loan / could never afford to pay it / you didn't follow the consumer rules, etc, then the judge asks if you followed those rules and you can't show that.... 

As you mentioned, many people have been originating loans for decades and not following any of the rules, just letting it rip like its still 1980 or something... There's another set of people who go to pains to cross every T and dot every I. There are a lot of investors who land somewhere in the middle. Then some people are frozen with fear of regulation and who don't do any deals or stick to investor loans.

It's not actually difficult or scary to get it right. You just hire the right vendors and attorneys to make sure you are compliant with the federal laws, not violating any state specific rules, and have a borrower who is going to repay the loan, and are servicing the loan properly. A lot of people cut corners out of cheapness, but most of the costs can be passed on to the borrower, and if you do it right, your new loan will be more valuable should you decide to sell it.