How Does the Dodd Frank Act Affect Seller Financing for Investors?
Tara Mastroeni
Published: June 11, 2015 | Updated: April 30, 2025
If you’re in the real estate industry, then you are probably familiar with the Dodd Frank legislation that went into effect on January 10, 2014. Dodd Frank and the Consumer Financial Protection Bureau were enacted to protect consumers from the predatory loan practices of institutions and lenders. While seller financing is only a small fraction of the legislation, it has greatly impacted investors who turn to seller financing and selling real estate notes as an exit strategy. Short-term seller financing is a vital part of many investment businesses, and the new legislation has impacted the way investors must structure those kinds of deals.
Investors face significant changes to seller financing
The Dodd-Frank restrictions on seller financing have been most limiting for investors who finance multiple properties per year. Here are some of the major changes to seller financing brought on by Dodd Frank (with exceptions):
1. Lenders must consider the borrower’s ability to repay the loan
2. Lenders must consider at least 8 factors applied against reasonable underwriting guidelines
3. The lender must write a qualified loan
4. Lenders must wait at least 120 days of delinquency before foreclosing
5. Prohibits builders from selling with owner financing
6. Eliminates balloons and negative amortizing loans and requires fixed rates for 5 years with no prepayment penalties
7. Combined with the SAFE Act in several states, Frank Dodd requires seller finance transactions to be originated by Residential Mortgage Loan Originator (licensed in that state in which the property is located)
8. Forced arbitration clauses are not allowed in the buyer’s note
Three owner-occupant groups under Dodd Frank
The Dodd Frank law separates sellers into three separate groups and has specific guidelines for each group. These guidelines only apply to seller financing to an owner-occupant in a 1-4 family property. They do not apply to lending a commercial property or to an investor who is not going to occupy the property over 1-4 family units.
1. Individuals and Trusts that seller finance one property or less per year
Under this group, the note can contain a balloon payment, and the seller does not have to prove the buyer’s ability to pay. The interest rate has to be based on the index and be fixed for the first 5 years. After the first 5 years, the interest rate can only change 2 points per year to a maximum of 6 points above the original rate.
2. Individuals and Trusts that seller finance one to three properties per year and a LLC, partnership or corporation that seller finances less than three properties per year
Under this group, the note cannot contain a balloon payment, which can be problematic for investors who don’t want to hold the note over the whole amortization schedule. The seller has to prove the borrower’s ability to pay. The interest rate must be based on an index and be fixed for the first 5 years. After the first 5 years, the interest rate can only change 2 points per year to a maximum of 6 points above the original rate.
3. Any individual or entity that seller finances more than three properties per year
The loan requirements for this category are the same as the previous group, but a Mortgage Loan Originator is required to be involved to complete the transaction.
To make sure you are adhering to the new Dodd Frank regulations, it’s smart to consult a good lawyer and/or mortgage loan originator to oversee your deals before brokering or purchasing a loan on the secondary mortgage market.
When Does the Dodd-Frank Act Apply to Residential Mortgage Loans?
The Dodd-Frank Wall Street Reform and Consumer Protection Act applies to seller-financed residential mortgage loans when the buyer intends to live on the property—specifically, when the loan involves a 1–4 unit dwelling used as a primary residence. In these cases, seller financers must follow Truth-in-Lending Act rules and meet the disclosure requirements and underwriting standards outlined by the Consumer Financial Protection Bureau.
This means the seller must determine in good faith that the buyer has the reasonable ability to repay. The loan must follow specific credit terms: it must be a fixed rate or an adjustable rate that is fixed for five or more years, and any interest rate increase must be subject to reasonable annual and lifetime limits—typically no more than a rate increase of 2 points annually and a maximum increase of 6 points over the original rate.
These Dodd-Frank requirements do not apply if the buyer is purchasing for investment purposes, or the property is not intended for personal residence. In addition, exemptions apply to sellers who provide financing for only one property per 12-month period, though even then, the loan must meet certain structural standards, like avoiding negative amortization.
If you’re a seller financer providing financing to a buyer who will live in the home, the Dodd-Frank Act likely applies. To ensure full compliance with these federal lending act rules, work with a licensed mortgage originator or qualified legal professional.
Cited article sources
- CFPB Consumer Laws and Regulations SAFE Act. Retrieved from:
How do you find an RMLO
We have been doing this for a long time now and the process is cumbersome at best. An RMLO would help a great deal, but we have searched our area to no avail…
Dave – what state are you operating within?
Dave:
Here is a highly recommended RMLO sortis.com
It says servicers (those involved with federally related mortgage loans) must wait 120 days to foreclose but I don’t see where seller-held mortgages must wait 120 days
Hi Mark:
Thanks for the comment. The reason that 120 days is required is due to the fact that it is a consumer loan. In the wake of the 2008 market crash, there were many documented instances of lenders foreclosing on people that did not deserve it or give them enough time to fight back under the law. So the law was changed. The speed of such foreclosures can leave borrowers with inadequate time to request and receive assistance that might help them stay in the home. Throw into the mix frequent errors by loan servicers which can cause the process to be even more chaotic. This is the primary thought process on this piece of the law. Of course, this only pertains to consumer mortgage loan (meaning the roof over you and your family’s head). It does not pertain to second homes or investment properties. I hope this helps.
Can a seller financing charge a prepayment on a non owner property. 1-4 units?? If so for how long and for what amount?
Hi Sharon:
Thank you for your question. The simple answer to your first question is yes. You can charge a prepayment penalty.
The only loans that are NOT allowed to have prepayments penalties that we know of are FHA home loans, for owner-occupied properties.
If the loan is for an owner occupied, one to four (1-4) family properties, the maximum amount of time you can charge is three (3) years, to our knowledge.
As long as the property is non-owner occupied and the loan is for investment use only (not consumer use like a home loan), then you should be fine to charge a prepayment penalty. The definition for investment-use property in this case is: a property that is NOT the borrower’s primary residence.
As far as your second question – How much should you charge, there are two ways to look at this.
The most common way is a percentage of the loan amount. So if you have a $100,000 loan amount and you charge a two (2%) prepayment penalty, the amount you would receive in the case of an early payoff is $2,000. The typical percentages from our experience range from 2% to 5%.
Another option is to charge a flat fee. Most flat fee prepayment penalties are associated with a Home Equity Line of Credit structure (HELOC) that we know have seen in our experience. You could charge a flat fee equivalent to the amount that you desire in the case of early payoff. How much is up to you, your lawyer and the borrower.
This is a guideline and should not be considered legal advice. Please double check with a lawyer to make sure there are no caveats in the area in which the property is located (city, county, state, etc.).
I hope this helps.
If providing Seller Financing (3 or less per year), on properties that we own, are we required to provide the 40+ disclosures and documents that are required by conventional lenders on O/O residential properties? Or, is there a Disclosure Summary Form that is utilized, and the 40+ disclosures that we would otherwise be required to provide and maintain are not required (we receive an exception?)? Any insight greatly appreciated
Hi David
Thank you for your question. I want to preface this by saying we are not attorneys and this should not be substituted for legal advice.
It is our understanding that if you are originating three/3 (owner-occupied / consumer) loans or less per year on homes that you own, you are not viewed a a lender and are not subject to submitting disclosures.
I hope that answers your question.
Can a person just create multiple LLC’s and only sell one property per year per LLC in order to skirt Dodd Frank and Safe Acts in Georgia?