If your note is secured by a home the borrower lives in, buyers will ask whether it was made in line with the federal rules that came out of the Dodd-Frank Act and with the SAFE Act’s licensing rules. A note with clear answers keeps the most buyers bidding. One with open questions can still sell, but to fewer buyers and at a lower price.
This page is general information about how these rules affect what a note is worth. It is not legal advice and cannot tell you whether your own note complies. That is a question for a real estate attorney in the property’s state.
Which notes the rules reach
The federal rules discussed here are aimed at consumer credit secured by a dwelling: a loan to a person, for personal or household purposes, secured by a home. In seller financing that usually means you sold a house to someone who moved in. A note on vacant land, a rental sold to an investor, a commercial building or a business is generally treated as business-purpose credit and falls outside most of these rules, though state law can still apply. That split is why owner-occupied and investment property notes are priced differently.
What Dodd-Frank changed for seller financing
The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Truth in Lending Act, and the Consumer Financial Protection Bureau wrote the detailed rules into Regulation Z. Two parts matter most to a note holder.
Loan originator rules and the seller-financer exclusions
Regulation Z sets rules for loan originators, the people who arrange or negotiate home loans. A seller who finances the sale of their own property can fall outside the definition through one of two exclusions, commonly called the one-property and the three-property exclusions. In broad terms they are limited by how many properties the seller finances in a year, and they come with conditions on the loan itself, such as limits on balloon payments, adjustable rates and payments that do not cover the interest. The three-property exclusion also expects the seller to have made a good-faith determination that the buyer could repay. The exact conditions are in the rule, and an attorney should check them against your note.
Ability to repay
Regulation Z also has an ability-to-repay rule: a lender covered by it must make a reasonable, good-faith judgment, based on verified information, that the borrower can repay. The rule applies to “creditors” as the regulation defines them, and someone who finances only an occasional sale may not meet that definition. Whether it reached your sale depends on your facts, which is one reason buyers ask what was checked at the time. Loans made for a business purpose, such as most hard money lending on investment property, generally fall outside these consumer rules.
What the SAFE Act adds
The Secure and Fair Enforcement for Mortgage Licensing Act, known as the SAFE Act, requires residential mortgage loan originators to be licensed or registered through the Nationwide Multistate Licensing System, often shortened to NMLS. Each state carries it out through its own licensing law, and states differ on whether an individual who finances the sale of their own home needs a license. Many holders hired a licensed originator, often called an RMLO, to handle the loan so the question did not arise. When one was used, their name and NMLS number usually appear on the loan documents.
Why a buyer cares
When you sell, the buyer steps into your shoes. Some defenses a borrower could raise against you, for example in a foreclosure, can also be raised against a later owner of the note. A buyer that cannot rule those out has to price them in or walk away. Some buyers will not touch an owner-occupied note with unanswered origination questions, others will at a higher yield, and a few specialize in them.
Yield is the yearly return a buyer needs on the money it pays you. A higher yield means a lower price for the same payments.
What buyers look for in the file
- Does the borrower live in the property?
- Who prepared the note and the mortgage or deed of trust: an attorney, a title company, a licensed originator, or the parties themselves?
- Is an RMLO named on the documents, with an NMLS number?
- Is there a record of the borrower’s income, debts and credit at the time of the sale?
- Does the note have a balloon, an adjustable rate, or payments that do not cover the interest?
- How many properties did you seller-finance in the same year?
- Were any required disclosures given, and are they in the file?
How it shows up in the price
| What the file shows | Likely effect |
|---|---|
| Business-purpose loan, or owner-occupied with an RMLO, ability-to-repay records and conforming terms | The widest group of buyers and the best pricing for the note’s other qualities |
| Owner-occupied, terms look conforming, but no record of who checked what | Fewer buyers and a higher yield to cover the doubt |
| Owner-occupied with a feature the exclusions restrict, such as a short balloon | Specialist buyers only, at a deeper discount, or no offer |
Illustrative example. Round numbers, not a quote.
A note has $100,000 owed at 7% with 240 monthly payments of about $775. A buyer satisfied with the origination file prices it at a 10% yield, about $80,300. The same buyer, missing any record of an ability-to-repay review, asks 12% instead, which brings the price to about $70,400. The payments did not change. The missing paperwork cost roughly $9,900.
If your note already exists
The terms your note was written under are fixed. What you can do is tell a buyer clearly what happened at the time.
- Gather everything from the original closing: the settlement statement, the borrower’s application if there was one, and any disclosures.
- Ask the attorney or title company that closed the sale for their file.
- Write down whether the borrower lives in the property and how many properties you financed that year.
- Have a real estate attorney review the note if any of the questions above raise a concern.
Be careful about changing the note’s terms to “fix” it. A modification can create questions of its own, and it should only be done with an attorney’s advice. The wider picture of seller-financing law is in our plain-English overview of seller financing rules, and how paperwork quality affects your note’s value covers the rest of the file.
When you send us a note to price, these are among the first questions we ask, because the answers decide which buyers we take it to. A note with origination questions is not unsellable, and knowing early which buyers will look at it saves weeks. For the full list of what is checked before funding, see due diligence before a buyer funds.
Related questions
Does Dodd-Frank apply to my seller-financed note?
The federal rules mainly reach consumer credit secured by a home the borrower lives in. Notes on land, rentals sold to investors and commercial property are usually outside them. Whether your note was covered is a question for a real estate attorney.
What is an RMLO and did I need one?
A residential mortgage loan originator is licensed or registered under the SAFE Act to arrange home loans. Whether a seller financing their own home needed one depends on the state, and many sellers used one so the question did not arise.
Can I still sell a note that may not comply?
Often yes, to fewer buyers and at a lower price. Some buyers specialize in notes with origination questions. Gather the closing file and have an attorney review it before you sell.
Should I modify my note to fix a compliance problem?
Not without an attorney. A modification can raise questions of its own and change how buyers see the note.