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Federal (and State) regulation of mortgages can become a double edged sword.
On one hand, consumer’s can be confident that lenders are not taking advantage of them (hopefully). On the other hand, however, stricter regulations mean lenders may be less willing to lend on solvent and worthy borrowers who may have one or two things in their credit history that push them into a different category.
Examples of these factors may be a real estate investor or contractor who was hit very hard by the market downturn and was forced to file bankruptcy, or otherwise fell behind on debt, several years ago. Now, with an improving economy, those same individuals have learned valuable lessons, have saved some cash and have steady cash-flow, yet they remain unable to purchase the house that they want.
Likewise, people after divorces, self-employed individuals, and people whose salary is irregular due to commission schedules may have a hard time purchasing a home that they most certainly can afford, but for which they cannot get a loan.
Fortunately, for these types of prospective homeowners, other avenues have existed. Specifically, these cash or asset rich, yet credit poor borrowers could use seller financed options like lease options, land sale contracts, and even more traditional looking seller-carry notes. Unfortunately, the Dodd-Frank reforms have even put these real estate acquisition strategies into question.
As you may have heard, Dodd-Frank and the CFPB dealt a heavy blow to the traditional seller-carry notes. A seller who performs more than a couple seller-carried transactions, must comply with most, if not all, of the lending requirements of institutional lenders – evaluating credit risk, the ability to repay, the prohibitions on balloon payments, etc. – for this reason, this model is less used.
Further, regulators and judges across the country have started looking at lease options very closely. The rationale being, if it looks like a mortgage, they’ll treat it as one. As a result, the installment land sale contract (i.e., where the buyer makes payments to the seller, and the seller maintains the deed to the property until the last payment has been made) remained a fairly viable option in the eyes of many real estate investors.
Unfortunately, this isn’t the case.
The CFPB has issued statements that specifically include installment sales contracts, land contracts, or contracts for deeds as “federally related mortgage loans” and therefore these instruments must comply with RESPA, TILA, and the other federal statutes amended by Dodd-Frank. The problem, however, has been valuing or evaluating these types of contracts. The CFPB has therefore begun taking a closer look at how these instruments work.
Though it is still early, it is worth noting that the CFPB is actively investigating some of the larger real estate investment firms and their use of the land sale contract. It appears that the regulators are leaning towards finding these arrangements as being high-interest loans and therefore in violation of the Dodd-Frank guidelines, thereby subjecting these sellers to significant risk. It is only a matter of time before regulators develop regulations that more accurately control these types of arrangements and this will have a lasting impact on every seller’s ability to market a property to a person who, by necessity, requires some of the more creative financing options available.