Q: You've been giving classes to real-estate agents on the implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act on private real-estate transactions. What is the primary issue you talk about?
A: The Dodd-Frank Financial Reform Act is a huge law with 2,400 pages. It was signed into law July 2010, then the rule-making process began. I'm told there are 20 federal agencies considering 387 different rules, looking at them and fine-tuning the law. Hidden away in the section on mortgage reform is a relatively unknown clause that affects individual, private sellers carrying land-sales contracts and financing the sale of their own property. I found out about it, researching other matters into how Dodd-Frank would affect private borrowers and lenders. I read it and reread it two, three times and said, "No, that can't be right."
Q: How do the reform provisions change things?
A: If I'm selling you my little property, and we have agreed on the deal, I can no longer have a balloon payment. Most private sales have a balloon written into them at some point. This means the loan has to be fully amortized. So if there is a 75-year-old homeowner selling on a contract, it means you could have a 15-year, fully amortized loan or a five-year, fully amortized loan, but no balloons.
Q: What other provisions in the act could hamper transactions?
A: You have to fully qualify your borrower for their ability to repay. It's not like the old days, when I could say, "You know what the price is; you've got a job, and I think you can make the payments." It means the seller basically has to underwrite the loan like we would a conventional loan, with a credit report, pay stubs, calculating debt-to-income ratios and have all of that verified through reliable third parties. You can't take someone's word on their income; you have to have a pay stub, you have to see tax returns and you have to have a credit report and keep it in a file. Depending on an interest rate, the buyer has to attend a HUD-approved class on home ownership, and you have to have certificate of completion in the seller's file.
Q: What are the potential pitfalls for people selling property?
A: A lot of people are going to say, "I'm not going to get caught; I will just do the contract." Here is the problem. If you have to go to court to enforce your contract and have not done sufficient research and documentation on their ability to pay: a) you won't be able to foreclose and b) you are subject to penalties that are actual costs (legal fees) for the borrower and twice the finance charge. So if there was a $1,000 monthly interest payment for 60 months, you'd be subject to a penalty of up to twice that much.
Q: How soon will this potentially take effect?
A: This provision is not in effect as of today, but I think it will be by the end of the year. The comment period (was) scheduled to end July 22. When it would actually take effect, and if takes form as written, no one knows. I think it could be by the year's end.
Q: Do you anticipate the rules will be adopted as written, or will they be truncated in some fashion?
A: Bankers have a tremendous lobby and don't care about it; private sellers have no lobby. Unless someone is pushing it to the forefront of Congress, it's not going to happen. Down the road, after people are complaining, it could be rewritten. I could be wrong, but I don't see them being materially altered before the rules are implemented. It is not retroactive though, so if a deal is closed prior to implementation, the old rules would still be in place.
Q: How much of the local real-estate market involves private sales without a third-party lender?
A: There are so few conventional financing options available and no subprime options available. So seller-financing has certainly increased in the last few years. The change is going to impact more people today than if the rules would have come out 10 years ago. I'm concerned about sellers who are unaware of the new rules or who don't have professional guidance running into people who are aware of the rules. They are going to get tripped on this and not even know why. It's not something that has been publicized. I can certainly see borrowers finding out and finding a seller without such knowledge and then set up a normal contract like we use to do it. If the buyer took the seller to court, the consequences could certainly be grave for the seller.
Q: What can sellers do to equip themselves?
A: I would write their congressmen and express concern. Before I started giving classes to real-estate agents in the valley, no one I had talked to had ever heard about (it).
A link to the full Title XIV rules can be found at http://blogs.esouthernoregon.com/southern-oregon-business-economy/2011/07/27/dodd-frank-financial-reform-data/