If your seller carry is consumer-purpose, dwelling-secured, and the rate or points cross the §1026.32 threshold tests, Section 32 of Regulation Z applies. When it does, a three-business-day disclosure window, an ability-to-repay file, periodic statement obligations, and escrow analysis requirements attach and run for the life of the loan.

The questions below cover the regulatory decisions a seller-carry holder faces on every owner-occupied carry under Section 32. The answers identify the records and disciplines a state examiner, a note buyer, or borrower counsel 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 entirely, and the closing-table designation establishes that record.

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 separate level for a subordinate-lien loan. The Federal Financial Institutions Examination Council publishes the average prime offer rate table on a weekly basis.

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

The §1026.32(a)(1)(ii) test compares the points and fees defined under §1026.32(b)(1) to a statutory threshold. For loans above the statutory size cutoff, the threshold is expressed as a percentage of the total loan amount. For loans below the cutoff, a flat threshold applies. Either test crossing the line independently triggers Section 32 coverage.

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 belongs in the loan file from origination and must remain there for the life of the loan.

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

The disclosure must state that the loan is a high-cost mortgage, the APR, the regular monthly payment, the maximum monthly payment on any variable-rate structure, the total loan amount, and the consequences of default. It is a separate document from the §1026.18 truth-in-lending disclosure. Both belong in the file and both are subject to examiner review.

Loan Terms

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

Balloon payments are prohibited under §1026.32(d)(1). Narrow exceptions exist for certain short-term bridge loans and certain seasonal-income loans. Most seller-carry structures do not satisfy either exception. If a balloon clause appears in the note, coverage analysis must be completed before the loan closes.

Question seven – Are prepayment penalties allowed?

Prepayment penalties are prohibited on covered loans under §1026.32(d)(6). A note containing a prepayment penalty clause on a Section 32 owner-occupied loan violates the rule regardless of how the clause is labeled or structured in the agreement.

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 underwriting file supporting that determination, including income documentation and a debt-to-income calculation, must be retained for the life of the loan and produced on request.

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

No. The Dodd-Frank seller-financer exclusion addresses federal mortgage loan originator licensing under the SAFE Act. It does not touch the §1026.43 ability-to-repay framework, which applies to every consumer-purpose, dwelling-secured loan regardless of the originator’s licensing status or the number of carries the seller completes.

Licensing

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

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

Expert Take

Section 32 compliance breaks down at one of three moments: the closing table, where a three-business-day disclosure window is missed or the note contains a prohibited balloon or prepayment clause; the underwriting file, where income documentation is absent or unverified; and the servicing record, where periodic statements, escrow analyses, and trust account reconciliations are not maintained across the payment history. Each failure point is independently curable at origination. A licensed servicer engaged at closing absorbs all three and creates the examination-ready record the seller cannot practically maintain alone.

Servicing

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

A covered loan carries the §1026.41 periodic statement obligation, the §1024.17 annual escrow analysis requirement, the §1024.33 servicing transfer notice on any transfer, and the §1024.38 general servicing duties. The §1026.32(c) disclosure record attaches from closing and travels with the loan file. A licensed servicer engaged at origination absorbs the full duty set and maintains it across the payment history.

Question twelve – What records does an examiner request?

An examiner typically requests the §1026.32 coverage workpaper, the signed §1026.32(c) disclosure with its delivery date, the §1026.18 truth-in-lending disclosure, the §1026.43 ability-to-repay file, the §1026.41 statement history, the §1024.17 escrow analyses, trust account reconciliations, and the borrower sub-ledger across the life of the loan. Any missing record creates examination exposure that falls on the note holder directly.

Three Operational Answers

What is the 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 entirely. This is a structural decision made before the note is signed, not a correctable one afterward.

When should the seller engage legal counsel?

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 question. Consult qualified legal counsel on the rule’s application in each specific matter before the loan closes.

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 maintains the Regulation Z disclosure timeline, the §1026.43 underwriting file, the §1024.17 escrow analyses, and the §1026.41 statement record. The seller holds the note and collects the payment stream without managing the regulatory file that protects that stream.

Sources

• Truth in Lending Act (TILA), 15 U.S.C. §1601 et seq. Cornell Legal Information Institute.
• Regulation Z, 12 C.F.R. §§1026.32, 1026.34, 1026.43. Consumer Financial Protection Bureau.
• SAFE Mortgage Licensing Act, 12 U.S.C. §5101 et seq. Cornell Legal Information Institute.
• Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203. U.S. Government Publishing Office.
• Federal Financial Institutions Examination Council – Average Prime Offer Rate. FFIEC.

Related Topics

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• 7 Mandatory Disclosures for Private Mortgage Lenders
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• Why Self-Servicing a Seller Carry Is the Most Expensive Mistake
• Escrow Account Setup for Private Mortgage Notes