Seller financers that make six or more loans in the preceding calendar year or extend more than one high-cost mortgage (as determined by the Act) in any 12-month period are considered creditors, and must comply with the ability-to-repay requirements.

Residential and Owner Occupied Only. The requirements apply to consumer purpose credit transactions secured by a residence excluding home equity lines of credit, loans secured by timeshare interests, reverse mortgages, or bridge and construction loans with terms of 12 months or less.

General Requirements. A creditor may not make a loan to a consumer before it makes a reasonable and good faith determination that the borrower will have a reasonable ability to repay the loan. When making this determination, a creditor, at a minimum, must consider the following factors when conducting underwriting analysis:

• Current or reasonably expected income or assets.
• Current employment status.
• Monthly payments for the mortgage.
• Monthly payments on any simultaneous loan.
• Monthly payments for other mortgage-related expenses.
• Other debt obligations.
• Debt-to-income ratio or residual income.
• Credit history.

The creditor must verify the information described above by using reasonably reliable third-party records. The rules also establish protections from liability if loans granted to borrowers meet the standards for “qualified mortgages.” The Act specifies in detail how to determine whether or not a mortgage is a qualified mortgage for these purposes.

Loan Originator Compensation

If a seller financer is categorized as a “loan originator” under the Act, then such financer must satisfy numerous stringent qualification and compensation processes. Notwithstanding the foregoing, generally, a financer is excluded from the definition of loan originator unless the financier uses table funding (i.e. the creditor does not finance the transaction at consummation out of its own resources). The rules contain two additional express seller financer exclusions.

The first exclusion applies to a narrow group of seller financers limited to natural persons (including estates and trusts) if such seller financier: (1) provides financing for the sale of only one property in any 12-month period; (2) previously owned the property securing the financing, and (3) did not construct the residence. The seller financer must also meet the following requirements:

• the financing must not include a repayment schedule that results in negative amortization; and
• the financing must have either a fixed or an adjustable interest rate that resets after five or more years (rate adjustments may be subject to reasonable annual and lifetime limits).

The second exclusion applies to natural persons and entities to the extent that the financer provides financing for the sale of three or fewer properties during a 12-month period. To qualify for this exclusion, (1) the above-listed interest rate requirements for the first exclusion must be satisfied; (2) the financing must be fully amortizing; and (3) the financer must determine in good faith that the consumer has a reasonable ability to repay the loan.

The new rules mandate a careful study and evaluation with professional advisors and present a number of compliance challenges to credit providers given the number of overlapping and new regulatory requirements. Visit the Bureau of Consumer Financial Protection's website: http://www.consumerfinance.gov/ to learn more about the latest developments.

Michael C. Polentz is Co-Chair of the Real Estate & Land Use Practice Group at Manatt, Phelps & Phillips LLP, located in the Palo Alto office. Grace S. Yang is a senior associate in the Real Estate & Land Use Practice Group at Manatt, Phelps & Phillips LLP, located in the San Francisco office. The views expressed in this column are the author's own.