Q: I'm selling a house and want to take back financing from a residential buyer. This makes me a lender. As a "lender," do I need a license and must I meet the Dodd Frank standards?
A: According to the Consumer Financial Protection Bureau, a "loan originator" is a "person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities: takes an application, offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person."
This sure sounds like a definition that includes a home seller who takes back a mortgage and therefore needs a license or registration, but the good news is that most home sellers — but not all — are excluded from the rule.
The final rule from the CFPB says the loan originator rule does not apply when a "natural person, estate, or trust provides seller financing for the sale of only one property in any 12-month period to purchasers of such property, which is owned by the natural person, estate, or trust and serves as security for the financing." However, there are some twists. For instance:
The loan must not allow negative amortization.
The financing has a fixed rate or an adjustable rate that is adjustable after five or more years, subject to reasonable annual and lifetime limitations on interest rate increases.
If the financing agreement has an adjustable rate, the rate is determined by the addition of a margin to an index rate and is subject to reasonable rate adjustment limitations. The index the adjustable rate is based on is a widely available index, such as indices for U.S. Treasury securities.
The ability-to-pay rule does not apply. You do not have to get a formal loan application from the buyer or verify income or credit, though that would be prudent.
The person has not constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of the person.
However, the reality is that if you are taking back a loan from the sale of your residence you have every reason to act like a lender. That means getting the documents necessary to assure that the borrower has the capacity and credit history to repay the loan, having the right documents for your jurisdiction, having documents in a form that is satisfactory to you, properly recording the debt, etc. There are many complexities lurking in this process — perhaps including state and local rules — and for this reason you should not agree to take back financing without first getting the assistance and approval of an experienced attorney who handles real estate matters.
You may be far better off requiring the buyer to finance the transaction through a mortgage lender. If the borrower cannot qualify for such financing then maybe taking back a loan for such a purchaser is not such a good idea.