Owner Financing has been practically eliminated by the S.A.F.E. Act.
July 29th, 2010 § 3 Comments
Now that the real estate market is trying to rebound in many areas the problem we, as real estate brokers, are experiencing, is many lenders have established new lending regulations that is making it very difficult if not impossible to obtain financing for buyers that just a couple of years ago would have been labeled a “Grade A” loan.
If you’ve been around long enough to remember the last big real estate crunch of the early 80’s, many people turned to owner financing to sell and or purchase real estate when financing was not available or was extremely difficult in order to qualify for.
Now that the real estate market is trying to rebound and buyers are wanting to buy, many owners have revisited the owner financing boom of the early ‘80’s as a way to move some real estate by financing all or part of the purchase price as a way to make their property “saleable” or, more attractive than the competition that requires buyers to get third party financing.
Unfortunately, Congress, in it’s “hurry up and clean up this mess” attitude established legislation that required states to establish laws regarding mortgage lending. Thus, we now have the S.A.F.E Act.
The SAFE Act applies to “residential” properties up to and including a 4-plex. The SAFE Act requires the establishment of a national tracking system, and requires states to adopt statutes meeting certain minimum standards for registration, for continuing education, for criminal background checks and the like. Under the SAFE Act, all states must implement licensing systems that require Mortgage Loan Originators, private lenders and seller’s willing to carry financing to:
- Provide fingerprints for an FBI criminal history background check;
- Provide authorization for Nationwide Mortgage Licensing System and Registry (NMLS&R) to obtain a credit report;
- Input and maintain their personal Mortgage Loan Originator record in NMLS&R as their license in each state in which they wish to conduct loan origination activity;
- Pass a national mortgage test;
- Take 20 hours of pre-licensure education courses approved by NMLS&R.
The Act allows for fines of between $1,000 and $25,000 for violations.
There are a few exceptions to Kentucky’s S.A.F.E. Act. The exceptions are as follows:
1. A natural person (i.e. a real human being, not an LLC or Land Trust) may make a residential loan to an immediate family member (i.e. spouse, child, sibling, parent, grandparent, grandchild). However, the person cannot be compensated by a mortgage loan officer, broker or originator.
2. A seller who is a natural person may originate a mortgage loan secured by a dwelling that served as the natural person’s residence. However, the seller cannot be compensated in connection with that transaction by a mortgage loan company, mortgage loan broker, or other mortgage loan originator, or by an agent of such company, broker, or other originator.”
If the seller is selling a personal residence, the transaction will be exempt from the SAFE Act. However, the exemption is very narrow in that it states that the dwelling must be the person’s residence. There is not an exemption for an individual offering owner financing or selling under land contract that is not his/her residence. Therefore, investors or builders may not carry the financing on the sale of any of their real estate, provided it is not the investor or builder’s primary residence of the buyer is not immediate family.
In their “ move at a snails pace” attitude, HUD has not issued its regulations regarding the S.A.F.E. Act, and therefore, we do not know the answers to many questions such as the definition of personal residence. Does it mean that a seller must have occupied the property immediately before closing or the IRS version of occupied the property 2 of the last 5 years? HUD is not expected to issue the regulations until possibly July of 2011.
I understand the intent of the law. There were a few unscrupulous lenders who created instances that were shown in a spotlight when the housing market took its down turn. Unfortunately, the law was drafted so narrowly that it now prevents most owner financing or private financing on residential properties, despite the fact that this type of financing is not what the law was targeting.
There is a push both on the state level and on the federal level to change this law. However, in the meantime, it is important that owners of residential properties are aware of the law and its implications.
UPDATE: July 2011 – S.A.F.E Act implementation Update
This blog post should not be used or considered legal advice and is only for informational purposes. Please consult an attorney for your particular situation.
I enjoyed reading your article! The effects of the S.A.F.E Act on owner financing in Kentucky are very unsettled. It appears that the statute does not apply to “installment contracts,” which the most common form of owner financing. We’ll have to wait and see how the courts interpret the new statute. For a slightly different take on this issue read my article at http://ow.ly/2voHt or visit http://CasaLaw.com.
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This law is unamerican.