The Whole Land, Nothing but the Land, So Help Me… Are land only loans covered by the Dodd-Frank changes?

Wednesday, March 26, 2014 9:43:00 AM

“What if I only owner-finance the land and not the home?” 

I have received this question from multiple members in the past few weeks.  The lead-in to the above question is, “Does all this Dodd-Frank ‘stuff’ apply if…”

First, we have to know what “stuff” members are asking about.  Dodd-Frank did much more than create the CFPB as the federal regulatory authority over all things consumer finance.  However, in the context of the question regarding “stuff” members are asking about the CFPB and the regulations under their authority. 

Let’s breakdown “stuff” into the following sections:

  1. Truth-in-Lending – Regulation Z (Reg. Z)
  2. Equal Credit Opportunity Act – Regulation B (Reg. B)
  3. Real Estate Settlement Procedures Act – Regulation X (Reg. X)
  4. Privacy of Consumer Financial Information – Regulation P (Reg. P)
  5. Mortgage Acts and Practices – Advertising – Regulation N (Reg. N)

Reg. Z

The provisions of Reg. Z are probably the most associated with Dodd-Frank “stuff.”  Reg. Z contains the Dodd-Frank changes on ability-to-repay and qualified mortgages.  Reg. Z is also responsible for both high-priced and high-cost mortgage regulations that contain the various APR and points and fees threshold tests used in determining loan classification.  Finally, Reg. Z is responsible for the new loan originator compensation regulations.

The answer to whether  the provisions of Reg. Z on Ability to Repay apply to a land only financed sale turns on if a land only (no home) transaction is a “covered transaction” under Reg. Z's Ability to Repay rules.  If the transaction is covered, then the Ability to Repay rules will apply.  Further, if the transaction is considered a "consumer credit" transaction, then the gambit of Reg. Z will apply.

Is a land only financed transaction a “covered transaction" under the Ability to Repay rules? Answer: No.
A covered transaction means a consumer credit transaction that is secured by a dwelling, including any real property attached to a dwelling.  The operative condition is “secured by a dwelling.”  When real property has a dwelling attached and is sold in a credit transaction, then it would be a covered transaction. 

This is further clarified in the Small Entity Guide published by the CFPB on the Ability-to-Repay rule.  Under Section III in the guide the CFPB provides a list of categories of loans excluded from the rule, which includes under the final bullet, ”Consumer credit transactions secured by vacant land.” (http://files.consumerfinance.gov/f/201401_cfpb_atr-qm_small-entity-compliance-guide.pdf)

However, even where only land is sold and financed without a dwelling, then Reg. Z may still apply.  Reg. Z applies to consumer credit.  Consumer credit means credit offered or extended to a consumer primarily for personal, family, or household purposes.  An extension of credit is secured by any real property, or by personal property used or expected to be used as the principal dwelling of the consumer.  In determining whether credit to finance an acquisition is primarily for a consumer purpose, a determination can be made by reviewing certain factors.  However, if a loan is used for personal purposes, prudence dictates that it be treated as consumer credit and TILA disclosures be provided to the borrower, even if the Ability to Repay requirements do not apply.

Reg. B

Under Reg. B as revised by the Dodd-Frank Act and CFPB regulations, lenders must now provide to borrowers a copy of an appraisals and other written valuations used in a credit transaction secured by a dwelling.  If a lender is making a loan only upon and secured by land, then no dwelling will be involved and the Reg. B valuation disclosures should not apply.    However, if the loan will cover both the land and a manufactured home, or the lender will make a separate loan secured by a manufactured home, the Reg. B valuation disclosure will apply.

And, similar to Reg. Z, other provisions can apply more broadly to other types of credit, even if a dwelling is not involved. under Reg. B credit means the right granted by a creditor to an applicant to defer payment of a debt, incur debt and defer its payment, or purchase property or services and defer payment therefor.  Consumer credit means credit extended to a natural person primarily for personal, family, or household purposes.  So, Reg. B does apply to consumer credit, however, unlike Reg. Z, Reg. B can and does apply to business purposes credit, even if the loan is secured only by land. Thus, lenders will need to follow certain provisions of Reg. B, including its prohibitions against discriminating on a "prohibited basis", and the provisions of certain notices (such as adverse action notices for those lenders involved in other than "incidental credit") even if only loan is involved.   Incidental credit for purposes of Reg. B means consumer credit that is not subject to a finance charge, or consumer credit that is not payable in more than four installments.

And, a prohibited basis means race, color, religion, national origin, sex, marital status, or age (provided that the applicant has the capacity to enter into a binding contract); the fact that all or part of the applicant's income derives from any public assistance program; or the fact that the applicant has in good faith exercised any right under the federal Consumer Credit Protection Act (which includes TILA and ECOA) or any similar state law upon which an exemption has been granted by the Bureau.

Reg. X

The provisions of Reg. X apply to all federally related mortgage loans.  However, Reg. X also has some specific exclusions.  Under the list of exclusions in 1024.5(b)(4) is the specific exemption for vacant land.  The exclusion states Reg. X does not apply to:

Vacant land. Any loan secured by vacant or unimproved property, unless within two years from the date of the settlement of the loan, a structure or a manufactured home will be constructed or placed on the real property using the loan proceeds. If a loan for a structure or manufactured home to be placed on vacant or unimproved property will be secured by a lien on that property, the transaction is covered by this part.

It is clear Reg. X does not apply if a person owner-finances only vacant land. 

One should be mindful of the condition of the exemption that within two years from the land only loan closing a structure or manufactured home cannot be constructed or placed on the real property using the loan proceeds.  This means for the exclusion to apply an owner-financier cannot lend a person money in an amount that will cover both the land price and also the price of a manufactured home that will be placed on the land within two years.

Reg. P

Reg. P governs the treatment of nonpublic personal information about consumers by financial institutions. Unlike the requirements in both Reg. X  and parts of Reg. Z, which exclude land only loans because they are not secured by a dwelling, Reg. P is a more broad regulation.  As a result, Reg. P does apply to a person providing owner financing to land only.

The reason Reg. P applies is because it applies to nonpublic personal information about individuals who obtain financial products or services primarily for personal, family, or household purposes from the financial institutions and other persons for which the CFPB has rulemaking authority pursuant to section 504(a)(1)(A) of the Gramm-Leach-Bliley Act (GLB Act) (12 U.S.C. 6804(a)(1)(A)). 

Per 12 U.S.C. 6804(a)(1)(A), the CFPB has rule making authority with respect to financial institutions and other persons subject to their respective jurisdiction under section 505.  Section 505(a)(8) includes the category of CFPB enforcement authority under subtitle E of the Consumer Financial Protection Act of 2010, in the case of any financial institution and other covered person or service provider that is subject to the jurisdiction of the CFPB.

In the instance of an owner-financed land only sales and lending transaction, the question becomes if such an owner-finance lender is a “covered person.” 
A “covered person” is defined broadly to include, “(A) any person that engages in offering or providing a consumer financial product or service; and (B) any affiliate of a person described in subparagraph (A) if such affiliate acts as a service provider to such person.” 

This then leads to if an offering of financing on land only is a “financial product or service?” 

The law provides eleven categories of what constitutes a “financial product or service.”  The first category under the definition is: “extending credit and servicing loans, including acquiring, purchasing, selling, brokering, or other extensions of credit (other than solely extending commercial credit to a person who originates consumer credit transactions).”

Here is the chain of references one must follow to arrive at the answer: Reg. P GLB Act section 504(a)(1)(A)GLB Act Section 505GLB Act Subsection 505(a)(8)Subtitle E of the Consumer Financial Protection Act (which is Title X of Dodd-Frank)definition of ”covered person”definition of a covered person offering a “financial product or service”

Reg. P does not apply to individuals who obtain financial products or services for business, commercial or agricultural purposes.
Therefore, a land only owner-financed transaction to an individual who purchases the land for personal purposes falls within the Reg. P provisions. 

Reg. N

Reg. N is also enforced by the CFPB and outlines prohibited advertising activities related to “mortgage credit products.”  The definition of a “mortgage credit product” is determinative as to if an owner-financed transaction for a land only loan is subject to Reg. N.

The definition of a mortgage credit product, “means any form of credit that is secured by real property or a dwelling and that is offered or extended to a consumer primarily for personal, family, or household purposes.”

The definition specifically includes a loan secured by real property.  This definition differs from other definitions in Reg. X that requires a dwelling to be secured by the loan. 

Therefore, Reg. N will apply to owner-financed land only loans.

Other Laws Under the Federal "Alphabet Soup"

Given the lettering of the federal regulations (i.e., Reg. Z, Reg. B, Reg. X, Reg. P, and Reg. N), federal rules and regulations governing mortgage and consumer lending are sometimes referred to as the "alphabet soup."  

While a complete summary of the alphabet soup is beyond the scope of this article, readers should know that there are other federal laws that apply to lending, and some of those other laws include the Fair Credit Reporting Act (if you will pull and use a consumer report on a consumer in your lending decision); and the OFAC requirements (which require you to check your borrowers' names against a federal list to assure that your are not doing business with terrorists).

Summary of Applicable Regulations for Owner-Financed Land Only Transaction

  1. Truth-in-Lending – Reg. Z:   ATR Does Not Apply; Other Parts of Reg. Z Do Apply
  2. Equal Credit Opportunity Act – Reg. B:    Does Apply
  3. Real Estate Settlement Procedures Act – Reg. X:   Does Not Apply*
  4. Privacy of Consumer Financial Information – Reg. P: Does Apply
  5. Mortgage Acts and Practices – Advertising – Reg. N:  Does Apply

*Conditioned that a structure or manufactured home is not placed on the property out of the loan proceeds for the land within two years of the purchase.