I regret to inform you that the landscape regarding seller financing of homes has changed drastically. I have been contacted by numerous people over the past two years who insist that they are able to use lease and option contracts to sell homes. I also have argued with potential clients who insist that they can take a seller carry-back mortgage when selling a home. Many times, the people tell me about how they have done it in the past.
I remind them that now isn't the past. "The past" was before the SAFE act and Dodd/Frank. For reasons that are not clear, those two pieces of legislation included regulation of seller-carry financing.
Land contracts are clearly implicated by the SAFE Act as I have noted previously.
/seller-financing-of-homes-requires.html In many cases, a person selling a home cannot lawfully use a land contract or even a seller mortgage note. Whether and when these tools can be used depends entirely on the facts. One cannot assume that one of these techniques is permissible simply because it was permitted in the past.
Likewise, lease/option contracts for homes may be impermissible in many cases by virtue of the Dodd/Frank Act. The text of the Dodd/Frank act can be located at: /PLAW-111publ203/html/PLAW-111publ203.htm
Note the following definition:
A) In general.--The term ``financial product or service''
means--
(i) extending credit and servicing
loans, including acquiring, purchasing, selling, brokering, or other extensions
of credit (other than solely extending commercial credit to a person who originates consumer credit transactions);
(ii) extending or brokering leases
of personal or real property that are the functional equivalent of purchase finance arrangements,
if—
(I) the lease is
on a non-operating basis;
(II)
the initial term of the lease is at least 90 days; and
(III)
in the case of a lease involving real
property, at the inception of the initial lease, the transaction is intended to
result in ownership of the leased property to be transferred to the lessee,
subject to standards prescribed by the Bureau;
The implications of offering a financial product of service are substantial. The financial service provider must comply with a myriad of regulations set by the consumer financial protection bureau. Compliance costs alone are prohibitive. Further, many commonly used elements of a lease option may be prohibited.
For example, a typical lease and option arrangement provides that a potential buyer will have an option to purchase a home for a period of 3 years for a stipulated price. The potential buyer also will have the right to occupy the home by virtue of a lease. If this arrangement is determined to be a financial product regulated by CFPB, it is conceivable that these two transactions in concert could be construed as non-amortizing financing in violation of the Dodd/Frank Act.
Until litigation establishes the parameters of these regulations, it is unclear whether a landlord can safely grant an option to purchase (or perhaps even an offer to purchase) to a residential tenant.
