Every workshop I teach lately has at least 10 investors who ask me if I am familiar with the SAFE Act (Secure and Fair Enforcement Mortgage Licensing Act) enacted by the Department of Housing and Urban Development (HUD) and does it spell the end of seller financing. Many of you know that in today’s market selling real estate for full price is difficult especially with the amount of bank inventory making its way into the system and the financing restrictions banks have imposed upon would be borrowers. Thus, you can understand why investors, seeking to forego traditional financing arrangements and instead finance the purchase themselves (carryback financing), in order to entice potential buyers to buy, have expressed grave concern over the impact of this Act. Many have even proclaimed that seller financing is dead.
This notion is completely false.
Background on the SAFE Act
The SAFE Act was emplaced in order to aid in the recovery and revitalization of our residential housing market. HUD’s regulations state that "the SAFE Act strives to enhance consumer protection and reduce fraud by directing States to adopt minimum uniform standards for the licensing and registration of residential mortgage loan originators and to participate in a nationwide mortgage licensing system and registry database of residential mortgage loan originators. It sets forth a nationwide minimum standard for the licensing and registration of state-licensed mortgage loan originators." This language is straight forward in its directive to regulate mortgage loan originators and not investors. In fact, a mortgage loan originator is defined in Section 1503 (3)(A)(i) of the SAFE Act as "an individual who takes a residential mortgage loan application; and offers or negotiates terms of a residential mortgage loan for compensation or gain." This definition is the cause of much of the confusion amongst investors who think that they can no longer sell real estate and finance the purchase themselves without a license from their state. Again, I think their fear is misplaced.
In carryback financing, the seller acts in place of the bank however, a seller does not receive "compensation or gain" from negotiating loans with buyers. Seller’s compensation is derived from the sale of real estate. To classify this gain as compensation from negotiating a loan is clearly outside the intent of the parties. An interesting thought does occur and that has to do with points charged on the loan. If a seller charges points for the financing then I believe a case could be made for inclusion of the transaction under the SAFE Act guidelines.
Obviously HUD will need to issue further clarification regarding specific transaction to ease the concern of many investors; however, I believe their intent is not to disallow owners of real estate to personally finance their sales. In fact, the HUD has already taken steps to address some concerns by placing a caveat in the SAFE Act specifically for residential homeowners. In situations such as when providing financing to a buyer for the purchase of a homeowner’s residence, a license is not required.
Essentially, as long as you are selling your residential real estate (defined as real estate consisting of 4 units or less), you should not be deemed a mortgage loan originator. One final point, the SAFE Act does not apply to land — that is crystal clear.