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New Federal Regulations Complicate Seller Carry Back Financing in Colorado

Posted on 1/21/2014 by Chad Lee
Glenwood Springs real estate lawyers are preparing for an increase in seller carry back transactions, not due to ongoing tepid residential real estate recovery, but because new federal regulations complicate the legal landscape for seller financing. On January 10, new regulations from the Consumer Financial Protection Bureau (CFPB) require all lenders (including sellers carrying back a note), to comply with a complicated list of new regulations intended to protect borrowers.

One of the CFPB’s regulations is the “Ability to Repay” rule (ATR), which requires lenders to confirm and verify a debtor’s ability to repay the loan on residential mortgages, based on a good faith determination supported by documentation. There are stiff penalties for parties who do not comply with ATR. Sellers who plan to carry back financing on their home are required to comply with ATR unless they meet the exemption. The exemption is narrow and, in general, requires: (1) that the Seller be a natural person; (2) that the Seller carry back financing only once during a 12 month period; (3) that the Seller not act as a general contractor on the home, or similar (i.e. – the exemption probably does not apply to “spec” homes); (4) that the loan not result in “negative amortization;” and (5) that the interest rate be fixed, or adjustable after five or more years subject to limitations on annual rate increases. This is a general overview of the criteria. Sellers and their realtors should seek the advice of a real estate attorney to determine whether the exemption applies and to draft appropriate documentation.

The 2014 Colorado Real Estate Commission standard contract now advises all parties to seek the advice of an attorney in seller carry back situations. Sellers and realtors should heed this advice, because they can both be hit with large penalties for failing to comply with ATR and other Dodd-Frank regulations. Critics have alleged that Dodd-Frank regulations are responsible for the lack of available credit for qualified buyers in today’s real estate market, and banks may be wary to lend given the harsh penalties for violating one of the many regulations, such as ATR. Seller carry back financing, however, provides another viable option for sellers and buyers.

Seller carry back financing remains a viable option in the Glenwood Springs’ real estate market. It provides a collaborative option for buyers who may not otherwise be able to obtain financing given the current lending market, and a long term source of cash flow for sellers. If structured properly, it can provide certain tax benefits, such as recognition of only a percentage of the overall capital gain in any one tax year. Sellers and realtors interested in structuring deals with seller carry back financing should consult a real estate lawyer to ensure the transaction complies with the ATR and applicable Colorado law as well.

Chad J. Lee is a partner at Balcomb & Green, P.C.. He focuses his practice on real estate development, purchases, and sales in and around Glenwood Springs, Colorado.

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Balcomb & Green, P.C. Locations
Glenwood Springs Office

818 Colorado Ave
Glenwood Springs, CO 81601
Office: (970) 945-6546 / (800) 836-5928 Fax: 970.945.8902
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133 Prospector Rd, Suite 4102E
Aspen, CO 81611
Office: (970) 945-6546 / (800) 836-5928
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211 Midland Ave, Suite 201
Basalt, CO 81621
Office: (970) 927-0456

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Balcomb & Green, P.C., 818 Colorado Avenue, Glenwood Springs, CO, 81601 - Related Phrases: attorney Glenwood Springs CO, lawyer Glenwood Springs CO, attorney Glenwood Springs CO, (970) 945-9377,, 11/21/2017