Regulations from the CFPB issued in late 2014 finally acknowledged that Congress did not consider seller financed transactions to be a systemic risk to the economy when they passed the Dodd Frank legislation. (Those regulations carved out a narrow servicing exemption for certain seller financed transactions.) While this acknowledgement was much later than desirable for previous rulemaking it marks a very important shift in their focus for seller financed transactions. At year-end 2014 the important thing to remember is that more relief is to come in 2015 for seller financed transactions in general.
Given the servicing focus of the regulations just mentioned it is important to understand the coverage rules. Most federal rulemaking impacting seller financed transactions are under very technical and narrowly drawn in regulations under the Truth in Lending Act (TILA). Those regulations are called Reg. Z and seller financers are affected by a number of provisions including loan originator compensation and ability to repay rules and servicing coverage.
The servicer coverage however still relates back to previous coverage under the Real Estate Settlement Procedures Act (RESPA) and thus does not necessarily cover those who build their own portfolios.
“Servicer” defined in the rules means:
Federally related; which in turn means
- First or subordinate lien on 1-4 family residential property AND the maker is within the RESPA definition when originated.
- Maker in this context means creditor (more than 5 in 12 month period) who does more than 1 Million in face value of credit extended (meaning installment contract amount to be paid/face of note) in that 12 month period.
Both elements have to be met under RESPA to be covered.
So if an individual has gradually (less than 6 a year) acquired their own portfolio from their own seller financed installment deals then the servicer definition would not apply. BUT OTHERWISE the whole portfolio has to be analyzed back to origination and if any meets the definition of federally related above, then the person doing the servicing is a “servicer” whether they are the creditor or they are doing it for another creditor or assignee (note purchaser). Thus a single purchased note in one’s portfolio could make you a servicer!
Art Davis, firstname.lastname@example.org
Counsel to Coalition to Save Seller Financing