CAN THE FEDERAL GOVERNMENT RESTRICT SELLER FINANCING?

Last year’s passage of the SAFE Act and the Dodd-Frank Financial Reform Act both contain restrictions on Seller Financing.  But the real question is, “Should we be concerned with these restrictions?”

If the Buyer and Seller and the property are located within the same state (and thus, an intrastate transaction), my answer is a resounding NO. The source of my opinion is the U.S. Constitution. The specific sections of the Constitution that I believe limit the power of the Federal government to regulate Seller Financing in intrastate transactions are:The Constitution

  • Article I, Section 8: This portion of the Constitution specifically enumerates the powers of Congress, and empowers Congress – “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;”.  Clearly this language does empower Congress to regulate interstate commerce, but its ability to exercise authority not specifically granted in the Constitution is limited by the next section.
  • Amendment X, states – “The powers not delegated to the United States by the Constitution, nor prohibited to it by the States, are reserved to the States respectively, or to the people.”

Based upon my belief that the Constitution really means what it says, rather than some of the convoluted interpretations used by politicians, it is clear to me that the Constitution does not allow the Federal Government to regulate Seller Financing transactions when all parties and the property are located within one state!

But, before you go forth and rely upon my opinion, I must make several disclosures:

  1. I am not a judge and am not even an attorney.
  2. Politically, I call myself a Constitutional Libertarian and therefore have great reverence for the literal reading of our Constitution.
  3. Your state may enact legislation that could limit Seller Financing.

 

The best authoritative article that I have read on this topic is by attorney and real estate investor Clint Coons in his blog on BiggerPockets.com, entitled, “Are You Safe to Sell Under the SAFE Act?”.  Clint makes the argument that since the Act regulates mortgage loan originators, and not investors, it is not applicable.  Please read this article and reader comments to make you own judgment.

In my presentation in the Cash Flow Depot Teleseminar on March 15th, I mentioned this particular article and Clint’s website.  Clint often blogs on BiggerPockets.com which is one of the websites that I recommend.  However, not all of his blogs are published there so you may want to subscribe to his personal blog at ALGLaw.com.