What is a Seller Carryback Note Dodd-Frank Compliant? Why is it important?

A Seller Carryback Note Dodd-Frank compliant is a type of seller financing that is structured to comply with the regulations set forth by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in 2010 in response to the financial crisis.
Under the Dodd-Frank Act, certain seller financing transactions are subject to regulation to ensure that they are fair and transparent for both parties. Specifically, the Act sets limits on the amount of financing that a seller can provide, and requires that the seller verify the buyer’s ability to repay the loan.

To be Dodd-Frank compliant, a Seller Carryback Note must meet the following criteria:

  1. The note must have a fixed interest rate that is at or below market rates for comparable loans.
  2. The loan term must be no longer than 30 years.
  3. The seller must verify the buyer’s ability to repay the loan.
  4. The seller must not require a balloon payment (i.e. a large payment due at the end of the loan term).
  5. The seller must not charge a prepayment penalty.

It is important to note, however, that many institutional buyers cannot buy notes that are not Dodd-Frank compliant, which, for sure, impacts its attractiveness. But it does not mean it does not have a market for it. What it means is that usually, people will require a higher interest rate or a lower entry point in order to purchase it. It is very simple: if you are taking more risk, you want more return, because you can get stuck with it for a longer time than if you had a Dodd-Frank compliant note.

But there is no doubt that complying with Dodd-Frank regulations can also help to ensure that the transaction is fair and transparent for both parties, and can help to protect both the seller and the buyer from potential fraud or predatory lending practices.