Clint Hinman, editor of NoteWorthy Newsletter, has done a great
job of explaining H.R. 1728:
HR 1728 - WHAT IT SAYS AND WHY IT WILL HURT CONSUMERS AND SMALL
The U.S. Senate will soon be considering a bill that will severely
restrict the property rights of millions of Americans and the way
you do business going forward.
WHAT ARE WE TALKING ABOUT?
HR 1728 was recently passed by the House of Representatives with
little fanfare and even less press coverage. Not until it was
referred to the Senate did it grow legs and start getting the
attention of everyone it will affect. The full text and status of
the bill is here: http://snipurl.com/hr1728
WHAT DOES IT SAY?
The proposed legislation focuses upon the predatory lending practices
of yesteryear and the resulting subprime debacle, imposing stringent
requirements on mortgage brokers, servicers, appraisers, etc.
Unfortunately, owner financing gets caught up in the dragnet, and the
impact could be devastating. The offending text of the bill is in
section 101(3)(e), which defines who is exempt from being a
'licensed mortgage originator':
'(E) does not include, with respect to a residential mortgage loan,
a person, estate, or trust that provides mortgage financing for the
sale of 1 property in any 36-month period, provided that such loan--
(i) is fully amortizing;
(ii) is with respect to a sale for which the seller determines in
good faith and documents that the buyer has a reasonable ability to
repay the loan;
(iii) has a fixed rate or an adjustable rate that is adjustable after
5 or more years, subject to reasonable annual and lifetime
on interest rate increases; and
(iv) meets any other criteria the Federal banking agencies may
WHAT DOES THIS MEAN?
As long as you provide owner financing on the sale of your property
no more than one time every three years, you will not be in violation
of the statute. Any individual who does sell more than one property
every three years via owner financing will be in violation unless
they are a 'licensed mortgage originator'. State laws vary, but
typically a 'licensed mortgage originator' must have a $25,000 to
$50,000 surety bond, three years mortgage origination experience, a
physical business office in the state in which the property is
located, and continuing education requirements. In other words, very
few, if any, Mom & Pop sellers will ever jump through the hoops to
become a 'licensed mortgage originator'.
WHAT KINDS OF TRANSACTIONS WILL BE COVERED?
Selling your own home using a land contract or owner-held mortgage
with the intent of getting a faster sale, a higher sales price, or
higher rate of interest than is available in other investments will
no longer be an option (unless that sale is limited to once every
three years). Carrying back second mortgages on investment
properties you sell will also be a violation of the law. In fact,
any kind of installment sale on residential properties (including
houses, condos, mobile homes, and residential land lots more than
once every three years will be subject to this legislation.
The original bill presented to the House didn't make any exceptions
to owner financing. The National Association of Realtors argued to
include the exception of one owner financed property every three
years. Without addressing owner financing, many in the House
contended owner financing would become the 'loophole' for
predatory lenders to continue their exploitative ways.
WHAT'S THE PROBLEM?
Owner financed notes are not loans. There is no transfer of money,
no points or closing costs, and no mortgage brokers involved. They
are not created with the intent of selling them off to
government-sponsored entities like Fannie Mae, Freddie Mac, or FHA.
They are INSTALLMENT SALES. The borrower receives no money that must
be repaid, only a property on which periodic (read: installment)
payments must be made.
Just as egregious is the loss of private property rights. The
government should have no power to legislate how property owners
dispense of their properties. If a property owner is willing to
finance the sale of a property to a buyer, whom is the government
trying to protect by making the transaction illegal? States already
have usury laws and servicing requirements that protect the
If passed by the Senate, this legislation will:
1. Severely limit the number of property owners who can legally
owner finance the sale of their properties.
2. Make violators out of everyday Americans who, unaware they
are breaking the law, are merely trying to sell their properties
and/or offering financing to prospective homeowners who cannot obtain
3. Require obscene amounts of due diligence on the part of note
investors to make sure all facets of this legislation have been
4. Give prospective homeowners even fewer options to realize the
American Dream of homeownership.
5. Cost the U.S. taxpayers over $400 million dollars to enforce.
WHAT CAN I DO?
Contact your senator via phone, fax, e-mail or snail mail. Implore
them to vote NO on the bill as it's currently written. You can get
your senator's contact information here. We have included some
sample letters assembled by Vena Cox-Jones that will assist you in
knowing what to say and how to say it. Additionally, we at
NoteWorthy have written a fourth letter for owner financed note
Please keep in mind that our best plan of action is to address how
this legislation will hurt 'the little guy', i.e. buyers and
sellers of properties. Even though we all consider ourselves 'the
little guy', the government has made it clear that anyone
associated with mortgages is 'the bad guy', and has little
interest in how this bill may affect your business, your family, or
your livelihood. Be civil, cordial, and intelligent in your
communications with your senators' offices. Remember you can catch
more flies with honey than with vinegar.