1. What is the Dodd-Frank Act? It is a law passed in 2010 and named after Barney Frank, a former congressman from Massachusetts and Christopher Dodd, a former senator from Connecticut, who sponsored the law. The law’s primary purpose was to address the excesses in the marketplace which led to the real estate bubble and subsequent collapse, and specifically, to provide legislation that would eliminate the taxpayers bailing out “too big to fail” banks and financial institutions.
2. What is in the law? The scope of the law is enormous. The law itself is 848 pages and the regulations interpreting and enforcing the law are in excess of 14,000 pages. Congress was not only concerned about taxpayer bailouts but was also concerned with “predatory lending” to consumers. As a result, banks, financial institutions and even individuals who lend money to consumers and take as security a mortgage on a primary residence are covered by the law.
3. How does the law affect real estate locally? Banks and other financial institutions have huge regulatory burdens to overcome to assure that the loans which are made satisfy the criteria established in the law. Sanctions for violations of the law are extremely punitive and for the most part, banks will err on the side of caution when deciding whether to make a loan to a customer on a primary residence. The net result is higher bank fees and fewer loans made as a result of the regulatory costs and thresholds placed on banks.
4. How does the law affect individuals? Sellers financing the sale of their own property are covered under the rule. Thus, if you are representing an owner who is willing to hold the mortgage on the sale of his or her property, you must make sure the attorney or title company closing the transaction is aware of the regulations of Dodd-Frank. In short, one who owns property can finance the sale of 3 properties on any one 12 month period. However, the seller must not have constructed the home under contract, the financing must be fully amortizing (no balloon mortgages!) and the loan must have a fixed interest rate or an adjustable interest rate with “reasonable” lifetime limits on rate increases. The rule is better if the seller is only financing one home in a 12 month period as the mortgage can contain a balloon provision.
5. What if I want to finance the purchase of a residence from my child or other family member? You can’t do it. The type of financing is not allowed under Dodd-Frank.
6. What are the sanctions for a violation of Dodd-Frank? There are several but one is a $1,000,000.00 a day fine.
7. What are exemptions or ways to avoid Dodd-Frank? Forget about it-there aren’t any absent conventional financing, financing through a mortgage broker or complying with the limited owner financing rules mentioned above.
This Article was sponsored by the Bay Area Real Estate Council (BAREC) and written by Richard “Rick” A. Miller. Rick, a Board Certified Real Estate Lawyer, is a Board member of BAREC and a Managing Partner at Miller, Crosby & Miller, P.A., 2323 South Florida Avenue, Lakeland, FL 33803. Rick may be reached at (863) 688-7038.