3 properties in 12 months: where seller financing starts to look like lending

After the 2008 crisis, the Dodd-Frank Act changed how the law treats people who extend credit on residential property. The Consumer Financial Protection Bureau's Regulation Z, at 12 CFR 1026.36, defines who is a loan originator and who is not. It carves out limited exclusions for sellers who finance their own sales.

In short, a natural person, estate or trust that finances the sale of one property it owns can fall within one exclusion, with limits on loan features such as negative amortization. A wider exclusion covers up to three properties in a 12-month period, with extra conditions, including a good-faith determination that the buyer can repay. Entities such as LLCs are treated differently, and conditions apply, so read the regulation or ask counsel.

The SAFE Act and state licensing laws add their own layer. Some states regulate seller financing separately.

What it means for terms deals

If you buy a house on seller financing, these rules mostly concern the seller. If you later sell a house to a person who will live in it and you finance that sale, they can concern you. A person who does this repeatedly may be treated as a loan originator or creditor, which can mean licensing, disclosures and ability-to-repay duties. Sales to investors for business purposes are usually outside these consumer rules, but state laws and mixed-purpose cases vary.

Many experienced agents sell on terms only to investors, or work with a mortgage attorney and a licensed originator when a homebuyer is involved.

What to check

• How many seller-financed sales you plan in a year, and in whose name.
• Whether the buyer will live in the property.
• Your state's licensing rules for seller financing.

Sources

• 12 CFR 1026.36: https://www.ecfr.gov/current/title-12/chapter-X/part-1026/subpart-E/section-1026.36
• 12 CFR 1026.43: https://www.ecfr.gov/current/title-12/chapter-X/part-1026/subpart-E/section-1026.43
• SAFE Act, 12 U.S.C. 5101 and following; NMLS Resource Center: https://mortgage.nationwidelicensingsystem.org

This is general information, not legal or tax advice. Please check with a licensed professional in your state.