On June 30, 2011 the Department of Housing and Urban Development released the Safe Act Final Rule. This
document clarifies many potential issues on seller financing and licensing and goes into effect on August
29, 2011. HUD is interpreting the issue of Brokers and seller financing transactions very broadly. Brokers
Should not be involved in these transactions without a licensed MLO to participate in drafting the
appropriate paperwork to ensure compliance and the retention of value of the note.
Offering or negotiating the terms of a loan, whether transferring legal or equitable title, will result in a
violation of the Safe Act without a MLO according to the final rule. According to the final rule, proposing
loan terms for acceptance by a prospective borrower and communicating with a borrower about
prospective loan terms is be the job of a MLO. The rule also states that merely presenting these options
for consideration of mortgage loan terms (meaning the offer doesn’t have to be accepted) will result in a
Safe Act violation as well.
This final rule covers all financing instruments, not just notes and deeds of trusts or mortgages.
Any intent to transfer legal or equitable title by alternative financing measures will require a MLO
endorsement. This is a very important clarification because there is a possibility that trusts can be
excluded as well if the intent is to transfer interest via an assignment of beneficial interest. The statute
covers chattel mortgages as well.
Another major issue that we’ve seen is whether a commission will be considered as compensation
under the Safe Act. The final rule states, verbatim, “the fact that the lender is the owner of the property
being sold and financed is not sufficient to fall under the exception for real estate brokerage activities
provided by the Safe Act”. The fact that the Broker is obtaining an offer of residential loan terms on
behalf of a potential borrower, negotiates terms of a residential mortgage loan, represents to the public
that they can perform seller financing transactions, and receives something of value (commission)
for arranging the credit make it impossible to circumvent the rule. HUD has even gone on to say that
offering to negotiate loan terms does not include “a seller who provides financing to a purchaser of
a dwelling owned by that seller in which the offer and negotiation of loan terms with the borrower is
conducted exclusively by a third party licensed loan originator”.
Seller financing is going to be the way to close transactions with banks denying loans. It’s definitely in
the best interest of the Broker to outsource this compliance nightmare to a third party to ensure that
the transaction is done correctly and in compliance with the spirit of the new laws!
The author Jamall Broussard is the Chief Financial Officer of Note Builders, Inc. a licensed mortgage loan
Originator MLO in California. NoteBuilders.com specializes in compliant seller financed transactions in
California.
Comments(1)