The questions below cover the regulatory decisions a seller-carry holder makes on every owner-occupied carry under Section 32 of Regulation Z. The answers point to the records and disciplines a state examiner, a note buyer, or a borrower-counsel review will request.

Coverage

Question one — Does Section 32 apply to my seller carry?

Section 32 applies where the loan is consumer-purpose, dwelling-secured, and the pricing crosses the §1026.32(a)(1) APR spread test or the points-and-fees test. An owner-occupied carry runs the analysis at closing; an investor-owned business-purpose carry sits outside the rule.

Question two — What is the APR spread test?

The §1026.32(a)(1)(i) test compares the loan APR to the average prime offer rate for a comparable transaction. The threshold runs at one level for a first-lien loan above the statutory size cutoff, a higher level for a first-lien loan below the cutoff, and a different level for a subordinate-lien loan.

Question three — What is the points-and-fees test?

The §1026.32(a)(1)(ii) test compares the points and fees under §1026.32(b)(1) to a threshold. The threshold is expressed as a share of the total loan amount for loans above the statutory size cutoff and as a dollar threshold for loans below it.

Disclosures

Question four — When does the §1026.32(c) disclosure deliver?

At least three business days before closing on a covered high-cost loan. The closing cannot occur inside the three-business-day window. The signed disclosure with the delivery date sits in the loan file.

Question five — What does the §1026.32(c) disclosure include?

A statement that the loan is a high-cost mortgage, the APR, the regular monthly payment, the maximum monthly payment on a variable-rate loan, the total loan amount, and a description of the consequences of default. The form is separate from the §1026.18 truth-in-lending disclosure.

Loan terms

Question six — Are balloon payments allowed on a covered loan?

Balloon payments are prohibited under §1026.32(d)(1) with narrow exceptions for certain short-term bridge loans and certain seasonal-income loans. Most seller-carry structures do not fit either exception.

Question seven — Are prepayment penalties allowed?

Prepayment penalties are prohibited on covered loans under §1026.32(d)(6). The note cannot include a prepayment penalty clause on a Section 32 owner-occupied loan.

Underwriting

Question eight — What does §1026.43 require?

The §1026.43 ability-to-repay framework requires the lender to make a reasonable, good-faith determination, based on verified information, that the borrower has the ability to repay the loan. The lender retains the underwriting file — income documentation, debt-to-income calculation, credit report — for the life of the loan.

Question nine — Does the seller-financer exclusion remove §1026.43?

No. The Dodd-Frank seller-financer exclusion under the SAFE Act addresses federal mortgage loan originator licensing. The §1026.43 ability-to-repay framework runs on every consumer-purpose dwelling-secured loan regardless of the licensing analysis.

Licensing

Question ten — Does the seller need a mortgage originator license?

The federal SAFE Act licensing question runs separately from Section 32. The Dodd-Frank seller-financer exclusion removes the federal licensing requirement for a small number of carries per year under specified conditions. State licensing layers on top and varies by state. Consult qualified legal counsel on the licensing analysis in the seller’s state.

Servicing

Question eleven — What servicing duties apply to a covered loan?

The §1026.41 periodic statement duty, the §1024.17 annual escrow analysis duty, the §1024.33 servicing transfer notice on any transfer, the §1024.38 general servicing duties, and the §1026.32(c) disclosure record. A licensed servicer engaged at closing absorbs the duty set across the life of the loan.

Question twelve — What records does an examiner request?

The §1026.32 coverage workpaper, the signed §1026.32(c) disclosure, the §1026.18 truth-in-lending disclosure, the §1026.43 ability-to-repay file, the §1026.41 statement history, the §1024.17 escrow analyses, the trust account reconciliations, and the borrower sub-ledger across the life of the loan.

Frequently Asked Questions

What is the single best way to stay outside Section 32?

Carry only on investor-purpose properties where the loan is business-purpose and Regulation Z does not apply. The closing-table designation establishes the business-purpose record and removes the federal disclosure and recordkeeping overlay.

When should the seller engage legal counsel on a Section 32 question?

At the closing of every owner-occupied carry where the rate prices above the average prime offer rate the seller is comfortable charging, on any borderline occupancy fact set, on any borderline business-purpose designation, and on any state licensing analysis. Consult qualified legal counsel on the rule application in each specific matter.

What is the single best operational answer to all twelve questions?

A licensed-servicer engagement at the closing of every owner-occupied carry. The servicer absorbs the Regulation Z disclosure timeline, the §1026.43 underwriting file, the §1024.17 escrow analyses, the §1026.41 statements, and the examination response. The seller holds the note and collects the payment stream.

Sources

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