The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-2013, 124 Stat. 1376 (July 21, 2010) was passed by the federal government to address perceived issues with unqualified buyers receiving loans to secure owner-occupied housing. It is intended to work with other laws such as The SAFE Act, RESPA, the Truth-in-Lending Act, and Regulation Z to protect borrowers for taking out improper loans.
A contractor seller may be selling or considering selling residential properties they have improved to buyers who intend to occupy the homes, and the sellers may wish to finance the sale of the property.
If a seller-builder wishes to finance the sale of the property, and to avoid violating Dodd-Frank, it appears that a seller-builder is required to use a licensed independent loan originator, such as a mortgage broker. To avoid potential liability under Dodd-Frank, the broker should insure that all relevant federal and state lending guidelines are properly followed, and that only qualified, bonafide buyers obtain loans.
Under Dodd-Frank, a loan originator is a person who for direct or indirect compensation or gain takes a residential loan application or offers or negotiates the terms of residential mortgage loan. Such a person must be a licensed mortgage broker in compliance with all laws.
Transactions excepted from coverage by Dodd-Frank include:
1) Sales of vacant land, commercial properties, rental properties, or properties used for investment purposes;
2) Sales to non-consumer buyers such as corporations, limited liability companies, and partnerships;
3) Certain other exceptions not applicable to seller-builders.
Punishment for violating Dodd-Frank and related laws are harsh. Depending on which lending law is violated, the violator could be liable for attorneys’ fees and costs incurred in prosecuting the violator, penalties of up to $4,000 per day at a minimum, $25,000 for reckless violations, and $1,000,000 per day for knowing violations. Other remedies available could include rescission and reformation of the contract, refund of borrower costs, return of interest paid, return of real property, restitution, disgorgement or compensation for unjust enrichment, private damages, other monetary relief, and other relief not yet defined.
I believe that a seller-builder should not attempt to sell a residential property to a buyer who intends to occupy the property, that a member has constructed, and to carry back financing from the buyer, without using a licensed loan broker. Some ways that sellers may attempt to structure a transaction to avoid prohibition by Dodd-Frank include the following:
1) Attempting to sell a property to individuals who form a corporation to own the property;
2) To use a lease purchase with some or all of the lease payments going to pay for purchase of the property;
3) Using a double closing, where the seller and buyer use two closings to effect the transfer of the property;
Use of one of these stratagems or some other mechanism which seems to avoid coverage by Dodd-Frank could backfire. They may appear to be attempts to violate the spirit or purpose of Dodd-Frank, and the seller could still be held liable and incur the substantial penalties under Dodd-Frank or other related lending laws.
Since Dodd-Frank is a new law, there is uncertainty about how it and its terms will be applied and interpreted. Wording of the law is broad, complicated and vague, and may be
inconsistent with other federal laws and regulations. As the courts review and interpret the statute, a better understanding of the applicability of the law will be obtained which could help seller-builders in the future determine a way to finance the sale of a residential property without violating Dodd-Frank or other similar laws.