Everything you Need to Know about Dodd-Frank and the Consumer Protection Act

In 2010 the US government passed a monumental piece of legislation called the Dodd-Frank Wall Street Reform and Consumer Protection Act.

You may or may not know just how much this document affects the real estate investment world.

To save you from reading all 2,300 pages, here is an outline of the things you probably want to know…

What is it?

A huge piece of financial reform legislation that created more rigid standards for examining credit scores and underwriting.

Under Dodd-Frank, there are 8 factors that a lender must consider for each buyer, all of which must be underwritten in the loan:

1. Current income
2. Employment status
3. Current monthly loan payment
4. Any mortgage obligations
5. Alimony & child support obligations
6. Debt-to-income ratio
7. Residual income
8. Credit history

Why does Dodd-Frank exist?

After the financial crisis in 2008, the government wanted to protect the economy from facing another crash. Before Dodd-Frank got passed many borrowers were given loans they could not repay, which did some pretty serious damage to the housing market.

How does this affect you?

Dodd-Frank affects everyone dealing with residential real estate.

This includes anyone who is extending financing to a borrower for a residential property. It also greatly impacts those who use seller financing as an exit strategy.

There are hefty penalties if you don’t comply, so be sure you know the regulations.

Exceptions

• Dodd-Frank only applies to consumer loans, so if you’re going to be living in the house, the rules do not apply.
• All cash transactions are exempt from Dodd-Frank
• Anyone completing less than 5 transactions in a calendar period will be exempt
• Qualified loans do not fall under Dodd-Frank. Characteristics of a qualified loan are:
  • No negative amortization
  • No balloon payments 
  • Term does not exceed 30 years
  • Verified income

The Good News

Nothing has changed with loans as far as down-payments go. A common misconception about Dodd-Frank is that you will have to pay more up front than what used to be required. What changed is that there is a much more extensive process for loan applications.

The Dodd-Frank Wall Street Reform and Consumer Protection Act may add a little more work to the loan process, but as long as you’re familiar with its components, lending and borrowing shouldn’t be a problem.