Co-Author: Jordan J. Bunch, Esq.
Question: It is not uncommon for first time homebuyers to get a second mortgage loan from their parents. Does this lending of money to their children make the parents mortgage loan originators such that they must be licensed?
Quick Answer: The definition of Mortgage Loan Originator in Colorado is so expansive that it appears to regulate mortgage loans that parents make to their children.
Federal and Colorado law both regulate mortgage loan originators. Both laws prohibit anyone from acting as a mortgage loan originator without a license. The federal law defines mortgage loan originators in section 12 U.S.C. 5102(A). In order for a person to be a mortgage loan originator under the federal statute he or she must meet two requirements: the person must be someone who takes a residential mortgage loan application and offers or negotiates terms of a residential mortgage loan for compensation or gain. A person is only a mortgage loan originator under this definition if they fulfill both of those requirements. The hypothetical parents in this situation would not be taking a loan application and as such are not required to be licensed under federal law.
The Colorado definition is different from the federal one in a very important way. In section 12-61-902(6)(a) Colorado defines a mortgage loan originator to be someone who takes residential mortgage loan applications or offers or negotiates terms of a residential mortgage loan. A person is a mortgage loan originator under the Colorado definition if they fulfill either of the requirements.
Some parents may take the position that if they present all of the terms to their child at once in a take-it-or-leave-it approach they are not negotiating a loan and therefore are not mortgage loan originators. This position is not likely to prevail. If the parents present all the terms in a take-it-or-leave-it offer, they are offering terms of a residential mortgage loan.
There is not an exception in the statute for parent to children loans. The statute is designed to regulate a person’s behavior, not a person’s status. The statute does not exempt those who loan their own money or those who are not regularly engaged in the business of making loans.
While there is no exemption for parent to child loans, it is arguable that another exemption in the statute may allow the parents to make the loan without being licensed as mortgage loan originators. Section 12-61-904 of the Colorado law lists people who are exempt from the registration requirements. Section 12-61-904(d) exempts an attorney who is licensed in Colorado and who is not primarily engaged in the business of negotiation residential mortgage loans. Section 12-61-904(f) exempts a person who: funds a residential mortgage loan that has been originated and processed by a licensed or exempt person, does not solicit borrowers in Colorado for the purpose of making loans, and does not participate in the negotiation of the loan with the borrower except for setting the terms by which a person may buy or fund a residential mortgage loan originated by a licensed or exempt person. In essence, this provision could mean that the parents can make the loan without being licensed as mortgage loan originators so long as they go through an attorney or someone who is already licensed as a mortgage loan originator. Although the statute specifically states, in section 12-61-902(6)(b)(II), that real estate brokers are not mortgage loan originators, they have a different status than the exempt attorneys. Therefore, the parents cannot use a real estate broker to offer the loan.
The foregoing analysis is only a possible interpretation of section 12-61-904(f). There are no court decisions interpreting this exemption and the Colorado Division of Real Estate has not enacted a rule or issued a position statement that clarifies its meaning. Even if the foregoing analysis of the exception is correct, there are two potential issues that could arise for parents making mortgage loans to children. The first is that there is a risk that the attorney may not in fact be exempt. Section 12-61-904(d) exempts “an attorney who renders services in the course of practice, who is licensed in Colorado, and who is not primarily engaged in the business of negotiating residential mortgage loans.” There are no official interpretations of the terms used in this definition; therefore, there is a risk that the attorney the parents chose would not be exempt. The second risk is that the parents may be more involved in the negotiation of the loan than the exemption allows. Parents cannot “participate in the negotiation of residential mortgage loans with the borrower, except for setting the terms under which a person may buy or fund a residential mortgage loan.” Given the dynamics of parent-child relationships, it is possible that many parents would negotiate some aspects of the loan with their children, even if it is only minor details, and therefore fall outside of this exemption.
It is at least possible that parents can continue to make mortgage loans to their children without becoming licensed as mortgage loan originators so long as they work with an attorney or someone who is licensed as a mortgage loan originator. However, parents should be aware both that there are risks involved with utilizing this exemption.