I am a real estate agent and have recently heard that the revised Truth-in-Lending Act requires me, as a real estate agent, to furnish a truth-in-lending statement when a seller client assists in financing the transaction for a buyer. Does this law apply to the real estate industry, and if so when did it take effect?
A: As a real estate professional--whether agent or broker--you can breathe a temporary sigh of relief. Recently, the Federal Reserve Board decided to defer the question of whether real estate professionals who arrange financing of home sales would be required to give the truth-in-lending disclosure statement.
When a prospective home buyer goes to a savings and loan association or a mortgage banker for a loan, that lending institution is required under the truth-in-lending law to make certain disclosures. The congressional intent behind the truth-in-lending law was to enable the consumer to shop around for the best loan--once they had the truth-in-lending disclosures on such items as the annual percentage rate and the finance charges.
When Congress amended the Truth-in-Lending Act in 1980 (generally referred to as the Simplified Truth-in-Lending law), a provision was added for the first time mandating that people who arrange financing that is extended by a nonprofessional credit lender have disclosure responsibilities. Under the old truth-in-lending law, a real estate professional who arranged for the seller to finance a home purchase had no responsibility for disclosure because the seller was not a professional creditor. Under the new law, it is possible to interpret the real estate broker as "arranger of credit" who would is responsible for the disclosures.
Clearly, in an economy where the bulk of all real estate sales involve some type of seller take-back arrangement, this could put a heavy burden on the real estate agents if they were required to give purchasers the same kind of truth-in-lending disclosure statements that savings and loan associations, for example, are required to give.
The Federal Reserve Board, the federal agency responsible for the implementation of truth-in-lending, proposed last October to require disclosure where a person regularly develops or negotiates the credit terms, assists in completing credit documents containing the binding credit terms (such as the promisory note) and the person extending the credit is not in the business of extending credit--i.e., the home seller.
This proposal would have required many real estate agents and brokers to prepare truth-in-lending statements for prospective purchasers.
But the real estate industry mounted a major campaign to put the Fed proposal on ice. Indeed, many legislative proposals were introduced in Congress which, if enacted, would have exempted real estate professionals from the disclosure requirements.
In February, as a result of industry pressure, the Fed temporarily exempted from the disclosure law real estate brokers who arrange financing of home sales. The Fed decided, however, to reconsider the matter if Congress has not acted by early next year on the pending bills.
Thus, for the time being, the real estate industry is not required to give buyers disclosure statements.
During the consideration of the Fed proposal, many real estate agents argued that the disclosure requirement would be the death knell of their business.
Consumer groups countered that first-time buyers needed the disclosures to determine whether they were getting a good deal from the seller.
There are merits on both sides. Clearly, the average real estate broker or agent would be significantly hampered if he or she had to gear up to the preparation of a complicated truth-in-lending statment each time that a client was prepared to offer seller take-back financing.
On the other hand, the first-time buyer--or any home buyer, for that matter--should be fully informed of the terms and conditions of the seller-financing. Not all of this type of financing will be simple. There may be variable rates, partial curtailments of the principal or balloon notes that should be called to the buyer's attention.
Here's a suggestion for the conscientious real estate agent or broker. While you currently are not obligated to give truth-in-lending disclosures, it certainly makes sense to comply with the law as best you can.
Since seller financing is developing as a major form of mortgage financing, with significant potential risks to consumers, the real estate industry also should have an obligation to take the lead in assisting home buyers to thoroughly understand the nature of this new creative financing.
After all, the home buyer today may be tomorrow's seller. A friendly and cooperative agent who has gone out of his or her way to assist the buyer in understanding the complexities of the financing arrangement will long be remembered by that buyer.