Dodd Frank overlaps the federal S.A.F.E. Act (implemented in Texas in 2009). The intent of the S.A.F.E. Act is to achieve better consumer protection by regulating certain lending practices that were significantly abused in the past. In particular, the Act places a licensing requirement (RMLO) on certain types of owner financing provided by professional investors. Excluded from the licensing requirement are sales of the seller’s homestead and sales to immediate family members.
Dodd-Frank and the S.A.F.E. Act should be considered alongside the 2005 amendments to Chapter 5 of the Texas Property Code. These amendments include extensive regulations upon all forms of “executory contracts,” including contracts for deed and Austin lease to own. Penalties for violations are severe.
These federal and state laws combined have forever altered the status of Texas as a haven for owner financed transactions.
Summary of Dodd-Frank
Dodd Frank requires that a seller/lender in an owner financed transaction involving a residence to determine at the time credit is extended that the buyer/borrower has the ability to repay the loan. Seller is obligated to investigate Buyer’s credit history, current and expected income, current obligations, debt-to-income ratio, employment status, and the like in order to make this determination. This law provides for a de minimus exception for persons doing not more than three owner financed transactions per year (so long as the seller/lender is not in the building business).
Loans must be fully amortizing (i.e., balloons are not permitted); prepayment penalties are banned; and an owner financed note must have a fixed rate or, if adjustable, must adjust only after five or more years and be subject to reasonable annual and lifetime limitations on interest rate increases.
Additionally, the practice by some refinance lenders of encouraging default on an existing loan before extending a new loan is banned.
Conclusion
Owner finance, more limited and regulated than ever before, is now a precarious venture in Texas. Consult Forte Properties BEFORE entering into a sales contract calling for owner finance and NEVER use forms off the internet to set up such a transaction. Liability under the new federal and state statutes is just too great to take the risk.