Lending Regulations Apply to "Owner-Carry" Sales
by William Bronchick
Few investors realize that when they sell a property on an owner-carry basis, they may be acting as a "lender" within the law. Keep in mind that selling a property is an extension of credit. In addition to state consumer and lending laws, you may need to comply with Federal regulations.
The first law you need to become familiar with is "Truth-in-Lending." Truth in lending, also called "Regulation Z", applies to anyone who "regularly" extends credit. Litigation of this definition has come up with a liberal definition; if you are selling properties on an owner-carry basis more than a few times a year, you are lender within the statute.
Truth in lending applies to all consumer loans, not just home loans. Under the law, a lender must disclose certain financing terms, such as the Annual percentage rate, amount financed, total interest paid. A sample form with explanations can be found by clicking here.
If you extend credit exceeding $1,000,000 per year secured by real estate used for the borrower's residence, you must comply with the Real Estate Settlement Procedures Act ("RESPA"). RESPA is one of the most complicated and confusing Laws ever created, is constantly changing and few lenders are ever in strict Compliance with the law. Nevertheless, you should at least make an attempt at "core" compliance, which involves:
Giving the borrower/buyer a "good faith estimate" of closing costs within 3 days of the accepting a loan application (or signing of a purchase contract, in the case of an owner-carry sale).
Preparing a HUD-1 Settlement Statement at Closing (usually done by the title company or escrow agent at closing).
Disclosing what percentage of loans you sell vs. keep
Disclosing what amounts, if any, you are escrowing up front for property taxes and hazard insurance
RESPA does have a nice loophole; it does not apply to "short-term" financing. RESPA does not apply if the loan has a balloon or less than 2 years, with no promise to extend. I have always recommended a 2 year balloon on land contract sales for the purposes of control. Now there's another good reason!