As an investor, you are presumably familiar with Dodd-Frank, the 2010 legislation that placed the responsibility for regulating the finance industry into the hands of Congress. It wasn’t the first of its kind, but it certainly was the most far-reaching, in an attempt by the government to avoid risky banking practices and another recession. We covered what exactly Dodd-Frank meant for mortgage note financing in this post.
On February 3, 2017, the president signed an executive order to begin revisiting the policies laid out in Dodd-Frank, potentially in an attempt at a rollback or complete repeal. It should be noted that the language in the order was vague, and doesn’t carry the power to repeal the law. However, the order does place the issue before congress, and is certainly a significant step toward repeal and replace congressional action.
With all the political back and forth, it’s hard to know for sure what a rollback would mean. For instance, if only a partial rollback or even a rewording of the law is in order, legislators may touch some parts of the law, but not others.
Beyond that, even with a rollback, it’s likely that the issue will be making its rounds in committee before it ever reaches a vote in Congress, and change will be slow. After all, some aspects of Dodd-Frank still aren’t in effect, nearly seven years after its official implementation.
A complete repeal of Dodd-Frank would have far-reaching consequences for investors and layman alike, and while Congress bats the idea around, it may be some time before any real effects are seen. However, as investors, it is important to have at least half an eye on the future, and on what legislation (or its repeal) could mean for the future of one’s investments.
Seller financing and mortgage notes were only ever one small part of Dodd-Frank, which concerned itself more with larger investment firms and brokers. However, even in so small a part, there are things to be considered.
Keep in mind that Dodd-Frank has separate guidelines for separate groups of sellers, depending on various criteria. What regulations apply to you as an investor depends on whether you are an individual or part of a trust and how many properties you finance per year.
That said, a rollback would affect each group a little differently.
1. Individuals and Trusts that seller finance one property or less per year
This group would be affected least by a repeal. The seller would still not be required to determine a buyer’s ability to pay and would have the same amount of freedom to structure a loan so that it included a balloon payment. However, after a rollback, the seller would have more freedom to structure interest, rather than abiding by a requirement to align the interest rate on the loan with an index. The interest would also not be required to be fixed for the first five years. In simpler terms, this group would continue to benefit from already more flexible regulations, while adding additional flexibility in terms of interest rates.
2. Individuals and Trusts that seller finance one to three properties per year and an LLC, partnership or corporation that seller finances less than three properties per year
Under Dodd-Frank, this group was required to only write fully amortizing loans, and balloon payments were strictly disallowed unless the loan was qualified and originated by a licensed mortgage originator within the state in which the property is located. With a rollback, this would presumably be reversed, allowing private sellers to amortize notes in a way that fits the needs of the parties involved, which can be more appealing to some buyers, giving you as the seller more bargaining power and the potential ability to sell more quickly.
3. Any individual that seller finances more than three properties per year
If you don’t fall into one of the above two categories, then the rollback of Dodd-Frank holds the most benefit for you. You gain the aforementioned flexibility included in the other two above categories, in terms of full amortization loans vs shorter-term balloon loans. In addition, investors no longer have to deal with or be licensed as Mortgage loan originators, which have added substantial complications to the seller financing process.
Altogether, a much less complicated and potentially more fortuitous mortgage note industry is in store upon a repeal or rollback of Dodd-Frank. And while it may be some time before we see what is truly in store for the law, a repeal may promise a significantly less complicated process when it comes to trying to sell a mortgage note.