HR 1728: The Restriction on Seller Financing and The Impact on Real Estate

[Pedro Gonzalez]

As you may know, Congress passed HR 1728 under the name of “Mortgage Reform and Anti-Predatory Lending Act”. Now without getting into a conversation about finger pointing who is responsible about the current financial crisis we are in, regulations towards better and safer lending and the protection of consumers are needed. I know the government is concerned about predatory practices, but shouldn’t the local district attorney be a more effective tool to regulate these activities? Does our government want to take over the lending business?

I think that HR 1728, 1) is over-reaching and 2) has a negative effect for real estate. In summary HR 1728 limits you as an individual to sell real property using seller financing to only once every 3 years (HR 1728 Sec 101 Definition (3)(E)). Seller financing is where the buyer and seller negotiate a price, a payment plan, and interest rate. Seller financing is an installment sale where the buyer pays the seller monthly and the buyer gets the use of the property. This is a frequently used method of buying and selling real estate especially in this economy of tight money and it can be used as a tax strategy.

Due to the restrictions we are facing right now from the lending industry, seller financing is an alternative available for real estate investors and property owners to sell their properties in this economy. Here is a simple scenario I see how this HR 1728 could negatively affect a real estate investor:

Let’s say you are an investor and have reached your retirement age. Let’s assume you have as part of your retirement plan six rental houses that you own free and clear. Your plan consisted on selling these properties using seller financing with a 6% interest rate providing a nice, monthly income. You decided that you don’t want cash because CDs only pay 2% AND as part of your tax planning you want to defer the impact of taxes on the sale of the properties over a period of time. The bad news is that under this act your retirement plans are affected since you can only sell one property every 3 years using seller financing.

What will be next, consider private money lending illegal? Or Limit FSBOs or require a homeowner to get a real estate license to sell his/her house?

Our founders did not intend for the Government to restrict landowners from being able to sell their land. The Founders were pretty clear on this. This bill takes away our right to use seller financing as we see fit. House Bill HR 1728 should exempt anyone who offers or negotiates terms of a real property sale financed in whole or in part by the seller and secured by the seller’s real property.

Even though the proposed legislation offers some significant changes to the lending industry, most of them are common sense (like a mortgage broker should not offer a loan to someone that is not capable of paying back), it is hugely detrimental to the overall real estate marketplace, and will create severe financial damage to our economy.

Please act now and contact your representatives and senators. Exempt Seller Financing From HR 1728. Please forward this to anyone you think should know about this issue.

"Give me control of a nation's money and I care not who makes it's laws" — Mayer Amschel Bauer Rothschild

"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety."
- Ben Franklin