Why Investors doing Mortgage Assignments with Subject to Financing are breaking the law under the SAFE act
As a standard disclaimer, the following is not legal advice.
The federal Secure and Fair Enforcement (SAFE) for Mortgage Licensing Act of 2008 (SAFE Act) is the federal government’s minimum threshold of rights and protections.
How does this impact you….
The act establishes minimum requirements for obtaining a mortgage loan originator license, the process for obtaining such a license, who must obtain a license, and penalties for originating loans without a license..
Under the act, a Residential Mortgage Loan Originator (RMLO) is any individual who takes a mortgage loan application, or offers or negotiates the terms of a residential mortgage loan. There are several exceptions to the definition of an RMLO, but the two most relevant are:
* People who perform only administrative or clerical tasks for a licensed RMLO.
* A real estate broker or agent, unless he is compensated by a lender, mortgage broker, or other RMLO, or their agent.
A residential loan is a loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other security interest in a dwelling or residential real estate.
A dwelling has the same meaning as defined in the Truth in Lending Act, which is a residential structure or mobile home containing one to four family housing units, or individual units of condominiums or cooperatives. Residential real estate means real property on which a dwelling is – or is intended to be – constructed.
There are only a few classes of people exempt from having to be licensed when originating a residential mortgage loan. They are:
- An individual who offers or negotiates terms of a residential mortgage loan with or on behalf of an immediate family member of the individual
- A licensed attorney who negotiates the terms of a residential mortgage loan on behalf of a client as an ancillary matter to the attorney’s representation of the client, unless the attorney does both of the following two things: (a) The attorney takes a residential mortgage loan application, and (b) offers or negotiates the terms of a residential mortgage loan.
- An exclusive agent of a registered financial services company who is individually enrolled as a registered mortgage loan originator with the Nationwide Mortgage Licensing System and Registry.
- Someone who offers or negotiates terms of a residential mortgage of his own homestead property.
Becoming licensed as a RMLO requires classroom work and passing an exam. Some states also conduct a background check. The penalties for originating a residential mortgage loan application without a license are severe:
* Order restitution.
* Impose an administrative fine up to $25,000.
* Issue cease-and-desist orders, as well as immediate temporary orders if necessary.
The impact of owner-finance deals is significant. The definitions of residential loan, residential real estate, and RMLO are broad and extensive. We cannot imagine a scenario where the seller in an owner-finance deal would not discuss the terms of the loan with the buyer. Therefore, makes it practically impossible for investors who routinely enter into owner-finance transactions to do so without being licensed.
The net impact of SAFE is that almost all owner-finance sellers will have to use an RMLO to originate loans unless they fall into one of the extremely narrow exemptions. Unless any such seller is originating a loan for an immediate family member (defined as a spouse, child, sibling, parent, grandparent, or grandchild) or owner-financing the sale of their own homestead property, the seller will have to outsource the loan application to a registered RMLO.