Please explain the SAFE ACT!!!
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Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13yYes, it's comprehensive! It's consumer oriented, commercial loans are exempt. There is dry reading about two thirds through, it begins talking about originators and then contains the issues of seller financing and the standards of seller financed loans. There is specific reference to lease-options, land contracts or contract for deeds and then later defines any agreement taking a security interest in a covered property, those being 1-4 family dwellings. Vacant land is also included if a single family home may be built upon the land as well as any vacant lots intended for residential use. Mobile homes were included as a dwelling.
The Act is under the jurisdiction of HUD and each state may adopt their own version so long as any other version follows the spirit of the federal version. If there is any part found to be inconsistent, the federal law prevails. HUD is the final authority.
BTW, the CFPB is also jumping in working closely with other agencies. They too may take enforcement action.
Issues concerning loan terms have been strung out in the Act, limits balloon payments, 1/2 - 2/3s of the original amount needing to be paid down prior to any balloon, loans need to be fully amortized.
Prudent lending practices are expected, such is very vague for non-lenders, but they are following secondary market guidelines for the most part. Due diligence must be performed in order to assure a borrower will be able to qualify for any amount due at maturity, if any as well as for the payments as structured. Now, that can be an open door as there are compensating factors to underwriting.
The Act also covers servicing and requires a servicer to hold a license and is parallel to ALTA, HUD and other related regs. IMO, this is not an area for investors to get into at all without specific knowledge and sub-servicers are reasonable.
The education required appears to be similar in testing difficulty to an agent's license, not much and continuing education seems similar as well. They are to have basic origination experience prior, but that area is pretty limp. There is no way to learn seller financing from the aspect taken in my opinion as with seller financing you are looking into the future as to what needs to be accomplished to qualify rather than looking at qualifying issues as of today.
There are provisions for buyer/borrower consultation, this will be similar if not the same as the first time buyers programs with FHA or HUD grant programs. Non-profits are exempt from the regulations, specifically stating Habitat for Humanity or similar housing organizations.
There is an exemption for attorneys (of course, LOL) in the origination of such loans. There was a question about support and clerical or administrative office workers taking the application, no unless directly supervised, meaning you stand over them, so the attorney needs to take the application and interview them personally. The staff may process as in mailing out documents.
Originators need to be registered in the state of the secured property, if such is required by each state (they are to my knowledge).
Again, as to the Act, the good stuff for use is about 2/3s the way through, the rest is banking issues, servicing, and related professional aspects like appraisals, escrow and Realtors.
Now, Jerry, if you are interested in getting into notes or originations, be happy to talk to you. With your expertise you'd be up and running quickly, the hardest part for most are with the legal understandings required, the numbers are easy. This is a limited field with tons of opportunity for the right people.
That's a brief overview. :)
23 Replies
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Yes, it's comprehensive! It's consumer oriented, commercial loans are exempt. There is dry reading about two thirds through, it begins talking about originators and then contains the issues of seller financing and the standards of seller financed loans. There is specific reference to lease-options, land contracts or contract for deeds and then later defines any agreement taking a security interest in a covered property, those being 1-4 family dwellings. Vacant land is also included if a single family home may be built upon the land as well as any vacant lots intended for residential use. Mobile homes were included as a dwelling.
The Act is under the jurisdiction of HUD and each state may adopt their own version so long as any other version follows the spirit of the federal version. If there is any part found to be inconsistent, the federal law prevails. HUD is the final authority.
BTW, the CFPB is also jumping in working closely with other agencies. They too may take enforcement action.
Issues concerning loan terms have been strung out in the Act, limits balloon payments, 1/2 - 2/3s of the original amount needing to be paid down prior to any balloon, loans need to be fully amortized.
Prudent lending practices are expected, such is very vague for non-lenders, but they are following secondary market guidelines for the most part. Due diligence must be performed in order to assure a borrower will be able to qualify for any amount due at maturity, if any as well as for the payments as structured. Now, that can be an open door as there are compensating factors to underwriting.
The Act also covers servicing and requires a servicer to hold a license and is parallel to ALTA, HUD and other related regs. IMO, this is not an area for investors to get into at all without specific knowledge and sub-servicers are reasonable.
The education required appears to be similar in testing difficulty to an agent's license, not much and continuing education seems similar as well. They are to have basic origination experience prior, but that area is pretty limp. There is no way to learn seller financing from the aspect taken in my opinion as with seller financing you are looking into the future as to what needs to be accomplished to qualify rather than looking at qualifying issues as of today.
There are provisions for buyer/borrower consultation, this will be similar if not the same as the first time buyers programs with FHA or HUD grant programs. Non-profits are exempt from the regulations, specifically stating Habitat for Humanity or similar housing organizations.
There is an exemption for attorneys (of course, LOL) in the origination of such loans. There was a question about support and clerical or administrative office workers taking the application, no unless directly supervised, meaning you stand over them, so the attorney needs to take the application and interview them personally. The staff may process as in mailing out documents.
Originators need to be registered in the state of the secured property, if such is required by each state (they are to my knowledge).
Again, as to the Act, the good stuff for use is about 2/3s the way through, the rest is banking issues, servicing, and related professional aspects like appraisals, escrow and Realtors.
Now, Jerry, if you are interested in getting into notes or originations, be happy to talk to you. With your expertise you'd be up and running quickly, the hardest part for most are with the legal understandings required, the numbers are easy. This is a limited field with tons of opportunity for the right people.
That's a brief overview. :)
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Forgot....the Act requires originators to be insured and bonded. Most will need to be under an institution due to asset requirements, but that can be in the form of a bond, I doubt it will apply to any attorney as you have already jumped through this and you're acting as legal counsel.
States may have educational requirements to be a broker who will oversee or sponsor an originator.
So, the level of sophistication and experience may well be dictated by insurance companies accepting the risk rather than a state determining qualification. :)
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes13y
Thanks for the response. I can't help but think this is going to drive up the cost of loans, it could double the amount of face time between bankers and borrowers or more.
I am concerned about whether or not it puts limits on the guy selling his house or rental to another buyer. Those loans are not made with the intent to sell the note, but they are merchantable.
This thing is going to be interesting to see how they attempt to enforce some of these vague areas.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
@Jerry W. Actually, to a large bank, the Act is a blip on the screen, compliance will be consumed in operations without much more expense, after the learning curve it will be minimal. Small banks will have a longer learner curve, depends on who does compliance and sets the operational tone.
Who gets hammered are brokers. It brings them on par with insured institutions as to net worth requirements, insurance and bonding, and the big one is that they are open to examinations. They have been placed in a ball and chain.
My personal opinion is that while seller financing and dealers have become regulated from bad business practices, investors and rip off deals the broker issues are more political. I certainly see the banks' points.
Loans are the profit center for banks. They are required to have deposit and loan reserves, be bonded, insured, under strict compliance and incur examination expenses. Examinations can cost thousands of dollars a day and a small bank will get billed for at least 3 days, medium size types a two week examination is common, large banks may have examiners underfoot for weeks. The super types can have someone there for ongoing compliance.
So, here are these brokers pulling out the same products in a community competing with hardly any expense in operations and no compliance issues. Okay, I admit I took advantage of that market advantage, but I see their point.
There is a much higher barrier to entry for brokers now and probably some unfair compensating factors like disclosure of premiums paid on loans, the amount the receive in points in a brokerage activity while banks can stay silent.
Face time with a borrower will probably remain just under an hour initially, processing time won't increase over what has been customary. Loan review and compliance time post closing may go up a tad.
When a deal has conventional financing with a seller carry back I don't see any more work than was originally required, the lender needs to review the seller financed note and consider it, approve the deal, but they aren't taking responsibility for that loan. They only approve the matter as to qualifications on their loan.
You're right, there is a great impact on selling to a tenant. These deals were the target due to past poor dealings by sellers. Lonnie Deals are described in the Act, name wasn't mentioned but was in some other writings from law makers......actually, what an honor to be recognized (LOL) not that all the deals were predatory but that some were. So, all investors will now suffer from the acts of a few acting badly.
I don't see anything in the Act that concerns itself with making a seller financed marketable, there seems to be no intent or concern with a portfolio held by an individual, no benefit there really.
You can certainly still do seller financing. Jerry, you're in a much better position than most other landlords, you can probably have another attorney work "with you" to accomplish the mission in some arrangement. Might swap skills so to speak with a mortgage originator.
The cost is really in compliance, paying an originator can be a significant expense, if you can find one. :)
I can't add much to Bill's great responses above, but I will say that the place the SAFE ACT has impacted me the most is in seller financing. While I don't generally seller finance properties, I had one last year that was perfect for this strategy. I called my local Banking and Finance Department (Georgia), who enforces the SAFE ACT in my state, and talked to the "expert" in this area.
He knew essentially nothing about the SAFE ACT requirements/restrictions for seller financing, and told me he'd get back to me. The next day he did...
Turns out that in Georgia, someone can seller finance with the restrictions laid out by Bill above...but only if the property is titled under the seller's personal name. If the property is titled under a business entity or trust, it cannot legally be seller financed.
Hence, I basically cannot seller finance properties as a business model under my company (in Georgia)...
- 13yDawn AnastasiPro MemberRental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
Wisconsin provides these guidelines:
When a seller provides seller financing to the purchaser of a 1-4 family property, and the financing is "primarily for personal, family or household use" (for instance, the buyer will owner occupy), then the seller may need a mortgage loan originator license and so may the agents negotiating the transaction. There is an exception, however, for homeowners selling their own homes. If the seller financing is for business or investment purposes, then no license is needed for seller or agent.
- CA · Member since 2011 · 762 posts · 182 votes13y
Originally posted by Bill Gulley:
There is an exemption for attorneys (of course, LOL) in the origination of such loans.Lawyers designed the ACT so of course they exempted themselves!
I heard one attorney speak a while back that has made a business out of this exemption. Investors can do as many seller financing deals as they want without a license or broker involvement, just have him do the closing representing you. Easy way around the SAFE ACT and completely legal, or so he says.
I'm wondering what your take is on that @Bill Gulley ?
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
@Scott J. , did you consider selling to yourself Sub-2 then selling individually or just taking title in your name and selling the next day, next week?
Yes, this would be a method to circumvent the Act but it could be done for taxes or estate matters and if you own the company and the property, it might be an option, but see your attorney. Often if you have a valid reason for taking some action other than playing games, they'll likely buy it, depends on how good your initial reason was or is, especially if there is no harm and done well. :)
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Originally posted by David C.:
Originally posted by Bill Gulley:
There is an exemption for attorneys (of course, LOL) in the origination of such loans.Lawyers designed the ACT so of course they exempted themselves!
I heard one attorney speak a while back that has made a business out of this exemption. Investors can do as many seller financing deals as they want without a license or broker involvement, just have him do the closing representing you. Easy way around the SAFE ACT and completely legal, or so he says.
I'm wondering what your take is on that @Bill Gulley ?
No, he can't just do the closing, he has to have the loan processing and origination as well. If he takes a haphazard attitude and a deal falls apart and doesn't know the prudent lending aspects he may be doing something else. But if he is willing to take it on, by all means, you're off the hook I'd say. :)
- CA · Member since 2011 · 762 posts · 182 votes13y
He has it pretty well thought out. Seller has very specific things he can and can't say, does not take application etc ... all the normal loan negotiation, application, processing and closing is done in the attorneys office. The idea is you buy sub2, resell on a wrap, rinse and repeat. After a couple hundred of these trouble free cash cows you are on easy street.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
LOL....where have I heard that before?
Rinse and repeat? If you mean the same property I guarantee there will be problems. :)
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
@Jerry W.
You would think enforcement would be difficult and I'll bet no one will be searching filings for such deals, but they don't have to. Most will eventually surface on their own.
The ones most likely to get by will will be fully amortized loans that never go to default and never have some life event that brings attention to it.
Issues that cause these deals to surface might be;
The borrower attempting to refinance
Loan default
Foreclosure
Death and estate issues
Divorce
Bankruptcy
Suits against either party
Tax liens or other liens
Insured losses
Realtors, family or friends that urge the borrower to see an attorney over any RE issue. Some Realtors may pick up on issues as well.
The risk is with the deal being in the light of day and discovered. When non-compliance is found it's not the borrower over the fire it's the lender. Now, if you had an illegally conceived note that was unenforceable where would you take it? Penalties can be the balance remaining, damages as well as fines. As a lender you're putting a lot of trust in a borrower that they won't change their mind and attempt to profit.
If someone is found to have done say 20 deals and in the business, there are other risks.
So, it's not like regulators will be looking in the bushes, most issues will arise eventually one way or another. :)
- Dallas, TX · Member since 2013 · 4k+ posts · 744 votes13y
I agree it is same as the shady banks doing robo signing and thought they could get away with it.
Joe Gore
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
@Jerry W.
The Feds forced this on the states and all the states had to comply, this was in 2009/2010. It only applies to 1-4 units, owner occupied mortgages. It does not apply to commercial mortgages for 5+ units, commercial or industrial property. It does apply to land and land, that could be used for residential purposes...pretty vague.
Many of the states have written exemptions into their version of the SAFE ACT to excluded some small volume per year, like some are 3 mortgages originated per year. It would apply to seller financing. I've seen where some non-licensed lenders (think private) are requiring that the borrow not live in the property as a condition of granting a mortgage. Whether that would hold up is for the courts to decide.
The biggest impact are on small lender and serial seller financing, and private lending.
For it to become an issue, somebody would have to complain. Obviously the lender will not complain, but a disgruntled borrower could. Say you finance a property and the deal goes sideways and you have a default situation. The borrow gets an attorney and the first question out the attorney's mouth is "Mr. Lender, I see that you lent my client money for the purchase of his home. Can I see your mortgage licensing paperwork?"
It could give the defaulting buyer an upper hand in any negotiations if the other side has broken certain laws. See where this goes? Thank your reps in DC for this protection of your interests.
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes13y
This thing has probably made a decent impact on hard money lenders. It would seem having the borrower sign a document saying he is not residing on the property would get most of them by. The unclean hands doctrine would at least prevent the borrower from going after the lender if things went south. For a regulator to attack the affidavit of non use as a home it would require some pretty direct evidence of intentional fraud before they could take action. It would appear seller financing to a home buyer is the hardest hit area. Nearly every private fiance to a home buyer would be affected.
@Bill Gulley I was going to say I don't do notes, but I got to thinking and I actually am involved in two. My first thought was I don't know enough about them. In one my dad had a property he sold on a deed /w mortgage back and the guy wasn't paying and my dad needed the money. My brother and I got a loan and bought the note from him and hired an attorney in that state to foreclose on it. (I am not licensed in AZ) The guy caught up the payments. About once a year we have to file paperwork to initiate a foreclosure and he catches up. The interest rate is 10% and the borrower has to pay the attorney fees each time. The other deal was a nonperforming note where the owner needed to foreclose but the borrower was a friend of the family. We took the note and met with the borrower, we lowered the payment and he has been pretty timely ever since.
In both cases we thought we were buying notes that would have to be foreclosed and we figured the property would be worth the price and hassle. In each case we have getting decent returns without the hassle of a foreclosure.
Thank you so much for the response everyone. Due to some strange political events I have only been doing about 1/4 of the real estate work I used to do and have not had time to go to training on the latest real estate changes. I guess I need to fit some in somewhere.
- Dallas, TX · Member since 2013 · 4k+ posts · 744 votes13yJerry,
A lot of people will try to scare people from buying notes because of all the laws out there. I had a lady a few years ago said her lawyer would poke holes in my foreclosure, and I said very polite see you in court, and her lawyer called me wanted me to give her walking money, and I told her lawyer very polite she would not get a dime from me, that I had a surprise for her when we get to court, and the surprise is she used someone's else SSN and provide fraudulent income information on a credit application. She move out. Most note buyers never skip trace the home owner or borrower.
Joe Gore
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Jerry, I bet, unless something happens to your borrower on your dad's note, that you will see every dime. The borrower wants the property clearly as he has caught up twice paying fees to boot. These slow pay notes are great financially paying late fees. I push these types slightly as if you push them hard in collection they may get frustrated and walk, but I don't mind starting the foreclosure process showing it's business. I'd say you're handling it perfectly.
The other is common too, a note between family or friends where a borrower takes advantage of the relationship, perhaps driven to a choice and that was the easier path for them financially, get that turned over to another non-related party and modify it if necessary, problem solved.
Joe, how did a wrong name/ssn ever get past a credit report when making that loan? I've had many where the ssn was off, numbers reversed, some mix up as many don't know their ssn, not really a fraud issue. You're right, don't be intimidated into losing money. :)
- 13yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
I don't think we need to talk about "opinions" or "interpretations" of law, as they can vary with each attorney or laymen, and nobody is correct or incorrect until case law resolves the issue.
Now back to SAFE act. I am not into residential or consumer lending, commercial only, so I am not directly affected, except for the fact that almost all residential hard money lenders have now entered the commercial space, so there is more competition.
If I was lending residential, I would be more concerned with the administrative ruling by the Consumer Financial Protection Bureau. Many of their administrative regulations are nebulous, and they seem willing to let legal issues to be fought out in court. With no case law to rely on, I would not want to be the "trail balloon".
For example, for a mortgage that is non standard, i.e not 30 year amortized, the lender must make a determination that the borrower can afford to make the payments. However no specific "safe harbors" are provided for criteria to use. So the lender making this kind of loan is left wondering if the criteria he used will be sufficient to stand up in court should it come to that. I just don't know how a lender could risk his money in this situation.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
@Jerry W. , Thank you for the compliment and vote of confidence. I as well as all serious BP members certainly appreciate your input, your knowledge and professional approach in counseling members in various topics. Actually, I wasn't aware we had any difference of opinions, I don't recall that, but if we were drilling down into legal theories I would certainly yield to your judgment. RE is very much like politics, it's local.
Don makes a very good point concerning the CFPB. They seem to be the "Homeland Security" of for consumers with far reaching authority. As a federal agency they partner with the alphabet soup of law enforcement and regulatory agencies in their efforts. One case I read about involved the FBI, the Postal Inspectors, HUD, SEC and the Treasury Department, bringing incredible assets to bear for prosecution of related violations.
The "safe harbors" you mentioned Don are "prudent lending practices".
Any lender who has never made a bad loan hasn't made enough loans, it will happen and is just part of the business. What will set off any regulatory red flags will be getting away from prudence, accepted practice and lack of judgment.
I see the SAFE Act and the CFPB as an attempt to bring private financing dealings inline with convention thinking as to underwriting and fairness.
If I were still brokering or originating for the public I really wouldn't have a problem with much of all this, some issues, but generally the compliance in this aspect is not difficult. I think most experienced conventional lenders would feel the same way.
Fairness is rather easy to address, ensuring neither party isn't in some adverse position. It's not just an opinion but showing that the agreements are usual and customary in similar transactions.
Underwriting is more difficult. The regulatory beings have no base line to access mortgage lending other than to conventional guidelines. Conventional also includes "sub-prime" loans, sort of a third mortgage market for those that can't make secondary guidelines. Anyone can read secondary market guidelines but that's only half of it, there is the application of compensating factors in a prudent manner and judgment that can be defended.
As an example, say a borrower has a total debt ratio of 47%, outside most guidelines, but if a debt is dropping off in 8 months (6 months is the limit to disregard the debt) and the ration will then drop to 34%, I would justify that if there were other strong factors of income and credit was decent along with good employment history. Another example might be considering additional income of an investor who has not had 12 months experience with a property but has good cash flow, they may be at 9 months, so there is a compensating factor.
Any lender, especially private lenders or those doing any type of financing transactions who rely on "creative" means will probably have issues if they get too far out of the box with the SAFE Act and the CFPB. It's not black and white. Experience based underwriting, the chicken or the egg thing,
It is unfortunate that the regulators have not come up with any loan policy guideline, every institutional lender has one. I do see why they don't as it may impede lenders with more compliance which is probably seen as unnecessary.
Overall, there are aspects of the Act that I see as necessary, but I don't see it as good legislation. One of the first exemptions I would make would be with agricultural properties, a farmer selling off 20 acres to a neighbor, this has been done since there was dirt I guess and now, if a home can be built on that parcel, the Act applies. I'd say investor to investor (with qualifying measures) should be better defined to be exempt among other things. But they didn't ask me to write the regulations, LOL.... :)
I know this is an older thread but you seem to know this topic well and I didn't want to start a new one. I want to sell my owner occupied home eventually with seller financing and based on what I've because I'm only doing this one this year I am only required to have a fully amortized loan and a fixed interest rate(or variable which I wouldn't do). Is that correct? And I know you're all snowed in down there so I expect a lengthy response :)
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes12y
You not only have to contend and comply with the Safe Act, starting in January you also have to comply with Dodd Frank.
If I were seller my personal residence I'd want not to sell owner financed but would want the buyer to get a new mortgage and cash me out. But if I didn't get my first choice, I'd look to having a mortgage broker intercede and make sure it was done legally.
The fully amortized fixed rate seller financing could be a problem on two counts. First of all I wouldn't want to wait 30 years to get my money. And who knows what future interest rates would be, Remember mortgage rates were around 18% fixed for 30 years in 1981. History repeats itself?
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
If you're selling your owner occupied home you're most likely exempt under state law which an allowed exemption under the SAFE Act. You need to get a "mortgage servicer" (google that) select one (call and shop for their services).
While you are probably exempt you should still get with a mortgage originator, you should at least have the buyer qualified and document their qualification.
I'd suggest that you put proof of your occupancy in that loan file as well, the declarations page of your homeowner's policy, copy of a tax receipt with the envelope mailed to you at that address or utility bill mailed to you. Otherwise there is no way to show you exemption from the ASFE Act as being owner occupied.
Don't really understand what you've written, but a one year balloon isn't a good idea unless there are compensating factors, like the sale of the buyer's house that is marketable and will provide funds for a payoff. If they basically qualify for a mortgage and will have say 20% equity from the sale price and you're doing seller financing for some other reason then that might be considered it really needs to pass the mortgage originator's test. I'd try not to veer off too far from the required standards even if you are exempt as the issue of predatory lending will still be the reality and the SAFE Act will be the base line from which it will be judged.
You need to speak to an attorney there, be careful not to do anything that is not customary. :)
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