Ft. Wayne title insurance company owner Joseph Garretson seemed the epitome of success: $700,000 home, Cadillac Escalade, and country club membership. Garretson, however, didn’t pay off his customer’s original loans when he refinanced their mortgages. Instead, he pocketed $3.4 million in loan proceeds. Eventually, the scheme unraveled. In June, he was sentenced to 11 years in prison for his crimes.
In response to mortgage fraud and crimes like Garretson’s, Congress passed the Secure and Fair Enforcement Mortgage Licensing Act of 2008 (SAFE Act) to establish a nation-wide mortgage licensing system and registry for the residential mortgage industry. The SAFE Act requires all 50 states to set minimum standards for mortgage loan originators and licensure. These new standards require mortgage loan originators to submit to an FBI background check, receive 20 hours of education, take an examination, and obtain a unique identifier for a national database of mortgage loan originators. All states were required to pass legislation and rules to comply with the SAFE Act by July 31, 2010; however, a few states have requested extensions through the first quarter of 2011 to complete the rule-making process. HUD issued proposed rules in 2009, but final rules have not been issued as this article goes to publication.
Compliance with state SAFE acts will be easy for a state to monitor because closing agents – title companies, attorneys, etc. – must submit the mortgage loan originator’s unique identifier for each transaction. Violating the SAFE Act can result in a felony conviction.
The following are frequently asked questions about who is impacted by the SAFE Act. However, this is a dynamic environment and keeping up to date as new regulations are released by HUD and the states will be critical to ensuring SAFE Act compliance.
Who is required to obtain a mortgage loan originator license?
Answer: Anyone who is in the business of mortgage loan origination, defined as: “an individual who for compensation or gain . . . engages in taking a mortgage application or offering or negotiating terms of a mortgage transaction.”
How does the SAFE Act affect seller financing?
Answer: Seller financing of one to four unit, residential properties that are used by the debtor for primarily personal uses will require the seller to obtain a mortgage loan originator license. Several exceptions exist, including the circumstance where the property was the seller’s individual residence, or the seller was negotiating loan terms for an immediate family member.
How does the SAFE Act affect land contracts?
Answer: The SAFE Act seems to require a seller offering to sell land on contract to acquire a mortgage loan originator license, though this is far from a certainty. The effects of the SAFE Act and accompanying regulations on land sale contracts are ambiguous. Keeping up to date with final HUD regulations are released could be critical to being SAFE Act compliant. The SAFE Act legislation, however, will not affect properties with more than four units or non-personal use properties.
How does the SAFE Act affect real estate agents or attorneys who represent buyers in a seller financed or land contract transaction?
Answer: Real estate agents or attorneys who are compensated by lenders are required to obtain a mortgage loan originator license. In a seller-financed or land contract transaction the seller is the lender. So, the law, as written, seems to require real estate agents and attorneys to obtain a mortgage loan originator license if they will be representing seller financers. HUD regulations could clear this confusion up, so keep a close eye on regulatory changes.
Could sellers offer leases instead of seller financing or land contracts to avoid SAFE Act licensing requirements?
Answer: The SAFE Act does not require property owners to obtain a mortgage loan originator’s license to lease property. The concern, however, would be if a lease is really seller financing or a land contract in disguise. A court could look past the language of the lease to its substance and determine that the SAFE Act applied. Once again it will be critical to watch how the law is interpreted by the courts and regulations.
This year will be a challenging time for investors looking to offer seller financing or land contracts. Keeping up to date with regulatory changes will keep you SAFE Act compliant.