Section 32 of Regulation Z reshapes the rules on a seller-carry note when the property is the borrower’s primary residence. The seven mistakes below recur in seller-carry files brought to a licensed servicer for review after a borrower complaint or a state inquiry.

Mistake one — treating Regulation Z as inapplicable to a private carry

The seller assumes the rule applies to bank loans and not to a private note between two people. Regulation Z draws a line on the loan type and the purpose, not on the identity of the lender. A consumer-purpose dwelling-secured loan triggers Regulation Z whether the lender is a bank or a seller. The cure is running the Section 32 coverage analysis at every owner-occupied closing.

Mistake two — skipping the occupancy designation analysis

The seller marks the loan as investor-purpose without the records to back the designation. The borrower’s identification shows the subject-property address, the insurance binder is an owner-occupied homeowner policy, and the deed records as homestead. A state examiner reads the records as owner-occupied, and the Regulation Z exposure runs the full life of the note. The cure is a signed occupancy affidavit and a record set that matches the designation.

Mistake three — closing without running the APR spread test

The seller sets a rate at the closing table without comparing the loan APR to the average prime offer rate the FFIEC publishes for a comparable transaction. The pricing crosses the §1026.32(a)(1)(i) threshold without anyone noticing. The loan is a Section 32 loan and the seller did not deliver the high-cost mortgage disclosure. The cure is pulling the APOR for the loan term and running the spread analysis before the rate is set.

Mistake four — undercounting points and fees

The seller treats the origination fee and prepaid interest as outside the §1026.32(b)(1) points-and-fees calculation. The calculation under the rule sweeps in most upfront charges the borrower pays at closing, and the threshold in §1026.32(a)(1)(ii) sits lower than sellers expect. The cure is running the points-and-fees calculation under the rule, not the seller’s informal estimate.

Mistake five — drafting a balloon into a covered carry

The seller wants a balloon payment in year five to refinance or sell the note. Section 32 prohibits balloons on covered loans under §1026.32(d)(1) with narrow exceptions that do not fit a typical seller-carry. The balloon clause violates the rule on day one. The cure is restructuring the loan as a fully amortizing note or structuring the carry to stay outside Section 32.

Mistake six — confusing the seller-financer exclusion with a Regulation Z carve-out

The seller reads the Dodd-Frank seller-financer exclusion under the SAFE Act and concludes the loan is exempt from Regulation Z. The exclusion addresses federal mortgage loan originator licensing — it does not address Regulation Z. The Section 32 analysis runs on every owner-occupied consumer-purpose carry regardless of the licensing analysis. The cure is treating the two rules as separate questions.

Mistake seven — self-servicing a covered Section 32 loan

The seller closes a covered Section 32 loan and self-services through year one. The §1026.41 periodic statement duty, the §1024.17 annual escrow analysis duty, and the §1026.43 ability-to-repay file all sit on the seller. A state examiner request lands and the seller has none of the three. The cure is engaging a licensed servicer at the closing table on any covered loan.

Frequently Asked Questions

Which Section 32 mistake is the most expensive to fix at month twelve?

The drafted-in balloon clause, because the borrower has paid into the schedule for a year and the cure requires restructuring the loan terms or rescinding the loan under §1026.32(a)(3). The closing-table fix is a clause rewrite at no cost.

Does Regulation Z apply where the borrower lives in the property part-time?

The Regulation Z occupancy analysis turns on whether the borrower’s primary residence is the subject property. A part-time use combined with a separate primary residence falls outside Regulation Z in most cases. Consult qualified legal counsel on borderline occupancy facts.

Is the points-and-fees test calculated on the financed amount or the sale price?

The §1026.32(b)(4) total-loan-amount calculation runs on the principal of the loan, with adjustments under the rule. The sale price of the property is not the base for the test. The calculation is a Regulation Z definition, not a real-estate transaction term.

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

• Section 32 and Owner-Occupied Seller Carries
• The First 60 Days of a New Seller Carry
• Trust Accounting for Seller-Carried Notes
• The Seller Carry Holder’s Year-End Tax Checklist
• Why Self-Servicing a Seller Carry Is the Most Expensive Mistake
• Usury and State-Level Rules: A Private Lender’s Compliance Guide