Are you confused about the SAFE Act and how it may affect the way seller financed transactions are handled in the future? Don’t feel alone, nobody seems to have a grasp on the relatively short (compared to the Dodd – Frank H.B.4173) National Safe Act model. The model for states to adopt was brought about, in my opinion, to provide relief to buyers of residential property from supposedly unscrupulous lenders and brokers. This relief is in the form of documented disclosure of sale terms, and oversight of qualification of a buyer’s ability to repay under the terms of the agreement. It is thought that this Act would, among other things, reduce potential defaults on residential property and restore property values to former levels, as well as inform borrowers of the details of the transaction (remember all the stacks of paperwork to sign – which no one reads?). The SAFE Act was implemented as a model uniform national code for auditing these transactions through the various state regulated Finance Code laws already in place. In most states this auditing is administered through licensing of individuals engaged in the activities of Residential Mortgage Originators for regulated loans. The SAFE Act adds seller financed transactions as a regulated transaction. Therefore, a person or entity that initiates a seller financed note on a residential property must be licensed as a Residential Mortgage Originator, just as the banks and wholesale mortgage lenders are required to be. The national SAFE Act law originally applied to sellers using this method of repayment for residential property for even a single transaction. This was later amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act, to exempt up to three transactions in a rolling year. It is questionable as to when the Dodd – Frank will be fully implemented. In the meantime the National model is now in effect and all States are required to follow the National model or an approved revision. Some states also may follow current de minimus exemptions already on the books until further determination or subsequent statutory amendment requires otherwise (a slippery slope!).
Based upon the questions and comments I receive as a licensed RMLO in the state of Texas, there seems to be three areas of confusion that I would like to address in this article and they are: Who has to be licensed? What transactions are covered under the act? How does the ACT affect seller financed transactions?
The SAFE Act national model, adopted by each State, goes to great length to set out licensing requirements as well as to set up a national registration for all RMLO’s. This national registration adds a national test that must be passed in order to become an RMLO that is in addition to specific state testing and education requirements. Obtaining an originators license is not as simple as it first appears. There are three basic aspects of licensure. First, the applicant must obtain the license. This involves a required number of hours of education and federal background and credit checks. Second, it involves obtaining the sponsorship of a Licensed Mortgage Broker to hold and supervise your license, maintenance of all records pertaining to each transaction and reporting and auditing by state regulatory agencies. Last, it involves the requirement for continuing education and license renewal. Additionally, a skill set must be obtained in the practical application of the mandatory process required by the originator in knowing, understanding and disclosing of the proper documents to the note maker. Traditionally, a licensed originator has been considered a full time occupation.
The key wording in the SAFE Act pertaining to licensure revolves around an individual performing the “acts” of an RMLO. Specifically, anyone engaged in the taking of an application, negotiating terms of the financing, advertising financing and proper disclosure to the buyer, must be licensed under the SAFE Act. There are exceptions to the rule to be mentioned later. The SAFE Act and the requirement for licensing is intended to make sure that every buyer receives every disclosure, and receives it from a licensed RMLO. It is the person performing the “acts” that must be licensed. There is no specific wording, as I can see, that says the lender has to be licensed (unless he performs the mentioned “acts”). In Texas, where the regulatory agency is the Department of Savings and Mortgage Lending, the Department interpretation is that a third party origination by a licensed loan originator is in compliance with the law. Other states may have made the same determination. One should check directly with the state regulatory agency to confirm.
The confusion surrounding the types of transactions that are covered under the act, stem mostly from the definition of “dwelling” set out in the Act. The SAFE Act specifically covers 1-4 unit residential dwellings (dwellings as defined in the Truth-in-Lending Act). This includes any property that is to be used by the buyer as his principal residence. Mobile homes are included as dwellings in the Truth in Lending Act (TILA). Land and lots specifically sold for the primary use as a residence, either now or in the future, are also included. So the exceptions to the Act occur when the sale of the property is to an “investor” who is not going to reside on the property or large tracts of land sold with no intention for a residence to be built on the property. There is also an exception for an individual who is selling his own home in which he currently resides. Commercial property is also exempt. Farms and ranches where there is a primary residential dwelling that is going to be occupied by the borrower, and had not previously been his primary residence, would be considered a regulated transaction.
The Dodd-Frank amendment to the SAFE Act raises the requirement for licensure from every transaction to those who engage in three or more transactions in any 12 month period. Along with that amendment are some exceptions to this exemption that require a license. These exceptions will certainly effect many seller financed transactions and include notes with balloon payments and rates that adjust within 5 years of inception. The Dodd – Frank also puts the burden of proof and documentation of the reasonable ability of the borrower to repay the loan directly upon the seller. The interpretation of the “reasonable ability to repay” is not defined in the amendment.
All of the laws, exceptions, lack of definition and the resulting confusion leave many to wonder about the fate of seller financed transactions. I, for one, do not believe the law is intended to outlaw or unreasonably restrict a seller from financing the sale of his residential property. However, since it is residential and represents a substantial investment to most buyers, appropriate disclosure by a licensed RMLO is required and I believe a reasonable analysis by a seller will reveal that the law is not too far removed from the intentions of the parties. Most sellers I speak with want to be sure the buyer is adequately informed and already provided some required disclosures as a normal course of business. The SAFE Act will affect real estate investors in that an additional step in closing a transaction will be added in the form of proper disclosure and licensing. Licensing and auditing includes the requirement to maintain an office open to the public, the keeping of transaction records for a specified period of time and annual continuing education and license renewal. Investors will find that title companies and attorneys will not complete transactions if the origination of the transactions is not by a licensed RMLO. In my research I have read that the institutional and large note buyers are or will require proof of licensed origination as an additional document in the note package. This, it seems, could make a note not originated properly less marketable or be subject to a larger discount to offset potential risk if the note were audited or if default occurred. At the present time, there is not a formal document that I am aware of that could become part of a file to evidence that the note was properly originated, and the SAFE Act does not contain a provision for one. In the transactions that we undertake, a certification is provided to the title company or settlement agent, as well as the seller financer, that the transaction was originated by a licensed originator. We provide our licensing information and the contact information of the regulating agency for verification. We are also required by state law to provide contact information for the filing of complaints against our company or license.
In the state of Texas, there has never been a complaint filed for a seller financed transaction and I suspect other states have the same record. However, this new law adds the element licensure that, even though troublesome, is probably something we all saw coming for quite some time.
