S.A.F.E Act Effects Owner Financing Significantly

On July 30, 2008 the Federal S.A.F.E. Act  (Secure and Fair Enforcement for Mortgage Licensing Act of 2008) was signed into law. The federal SAFE Act is a law that gave the states one year to enact their own legislation for the licensing of residential loan officers, including private lenders and sellers willing to give a “mortgage loan” (i.e. carry the financing for the buyer, including contracts for deed). On June 25, 2009, Kentucky enacted our version of the S.A.F.E. Act.

 Congress’ concern when enacting this legislation was that even if states identified a “bad actor” mortgage broker, he or she could just pull up stakes and move to another state.  Congress observed that, without a national registration system, the states found it difficult to track such bad actors and put them out of business permanently.

 The SAFE Act only applies to “residential” properties (defined by the Truth In Lending Act as up to and including a 4-plex, therefore, anything larger than a 4-plex does not apply).  The thinking was that most residential purchasers (unlike commercial purchasers) are not “professional” buyers and therefore, they need protection against bad loans, whereas “professional” buyers were savvy enough to protect themselves from bad loans and therefore don’t need protection.   

Unfortunately, there is no exception for “professional” buyers if they are buying “residential” properties under the Kentucky S.A.F.E. Act.  Therefore, these “professional” buyers (i.e. real estate investors) also are unable to buy with owner financing or private financing unless the owner or private lender is either exempt from the rules or is a licensed loan officer.  It appears that Congress intended to exempt “professional” buyers from the Act, however, when HUD wrote the Model Act (designed to give states guidance on how to draft their version of the law) which was subsequently adopted by most states, this exemption was not included in the Model Act, and thus it was not included in Kentucky’s version.

 The SAFE Act requires the establishment of a national tracking system, and requires states to adopt statutes meeting certain minimum standards for registration, for continuing education, for criminal background checks and the like.  Under the SAFE Act, all states must implement licensing systems that require Mortgage Loan Originators (including private lenders and seller’s willing to carry financing) to:

– Provide fingerprints for an FBI criminal history background check;

– Provide authorization for Nationwide Mortgage Licensing System and Registry (NMLS&R) to obtain a credit report;

– Input and maintain their personal Mortgage Loan Originator record in NMLS&R as their license in each state in which they wish to conduct loan origination activity;

– Pass a national mortgage test;

– Take 20 hours of pre-licensure education courses approved by NMLS&R.

The Act allows for fines of between $1,000 and $25,000 for violations.

There are a few very strict exceptions to Kentucky’s S.A.F.E. Act.  The exceptions are as follows: 

1. A natural person (i.e. a real human being, not an LLC or Land Trust) may make a residential loan to an immediate family member (i.e. spouse, child, sibling, parent, grandparent, grandchild).  However, the person cannot be compensated by a mortgage loan officer, broker or originator. 

2.  A seller who is a natural person may originate a mortgage loan secured by a dwelling that served as the natural person’s residence.  However, the seller cannot be compensated in connection with that transaction by a mortgage loan company, mortgage loan broker, or other mortgage loan originator, or by an agent of such company, broker, or other originator.” 

Therefore, if the seller is selling his/her residence, the transaction will be exempt from the SAFE Act.  However, the exemption is very narrow – it clearly states that the dwelling must be the person’s residence.  Consequently, there is not an exemption for a person financing the sale of a property that is not his/her residence.  Therefore, investors or builders may not carry the financing on the sale of any of their residential real estate, provided it is not the investor or builder’s primary residence of the buyer is not immediate family.

Technically, there are other exceptions, but frankly, these exceptions are not very helpful.  One such exception is for “Other natural persons making mortgage loans from their own funds for investment without intent to resell.” However, the statute still requires these individuals to be licensed with the Kentucky Department of Financial Institutions (“DFI”).  Therefore, they still must register with DFI, have 20 hours of pre-licensing education, pay the fees, etc.  Realistically, this will prevent most investors and builders from being able to carry financing on their sales.

The other exception is the “attorney” exception.  While there is an attorney exception, this merely exempts attorneys from having to be licensed.  It does NOT allow attorneys to negotiate loans with otherwise non-exempt lenders.  Therefore, this exemption also has very little benefit to investors, builders and REALTORS®.

Unfortunately, HUD has not issued its regulations regarding the S.A.F.E. Act, and therefore, we do not know the answers to many questions (such as “did I have to occupy the house immediately before closing?  What if I moved out 3 months ago, do I still qualify?”).  HUD is not expected to issue the regulations until possibly July of 2011. 

The intent of the law has merit.  Unfortunately, the law was drafted so narrowly that it now prevents most owner financing or private financing on residential properties, despite the fact that this type of financing is not what the law was targeting.

 There is a push both on the state level and on the federal level to change this law.  However, in the meantime, it is important that REALTORS® are aware of the law and its implications to your business.

This article was written by Harry Borders, a residential real estate attorney in Louisville, KY.

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One Response

  1. It is one thing to have regulations, but to dictate (and I don’t mean that nicely) that one cannot finance their own property or only to a family membe unless licensed. Please. What next?

    If I get the license so I can offer owner financing ~ will I have a duty to make sure the property appraises for the sale price and if it does not can the buyer purchase the property anyway? What is I get the license just to sell my own inventory, but I choose not to shop for the buyer. Do I have some sort of obligation to the borrower and am I breaking some sort of code of ethics.

    I’m not attorney, but this seems like it would violate personal property rights and is a way to make it such that only banks and very large investment companies end up carrying loans.

    Are mortgage originators popping up and agreeing to handle owner financed loans for a fee?

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