Co-author: Peter G. Sotiropoulos
Part I: Owner Carry Financing under the SAFE Act
Few people dispute that overzealous lending contributed to the financial crisis of the late 2000’s. Through the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), Congress sought to tamp down on irresponsible lending by creating a new regime of rules and regulations to govern the mortgage loan industry.
This article addresses the effect of this new regulatory regime on the legality of seller carry financing at the federal and state levels. Owner carry financing occurs when a property owner sells property and carries back mortgage financing. Seller carry financing is an especially important tool in an era when many borrowers and properties are ineligible for institutional financing; for some homeowners, it may be the only way to sell their homes.
The SAFE Act and the Federal Rule
The SAFE Act was enacted July 30, 2008 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 the nationwide mortgage licensing system and registry (“NMLSR”) database of residential mortgage loan originators.”
The SAFE Act requires the states to prohibit individuals from “engaging in the business of a loan originator” with respect to any dwelling or residential real estate unless the individual registers as a loan originator with the NMLSR and obtains a valid loan originator license from his state.
Although there is not an explicit registration exemption for owner carry financing, the federal rule provides that, generally speaking, an individual who acts as a loan originator in providing financing for the sale of a property owned by that individual is not likely to be considered engaging in the business of a loan originator as long as he or she is not doing so “with habitualness.” Although “habitualness” is undefined in the rule, the National Association of Realtors advises that federal agencies will defer to “reasonable state laws on the number of seller financing transactions that would require licensing.”
Treatment at the State Level
In the context of the loan originator licensing requirement, owner carry financing is treated differently among the states. Some states have no exemption for owner carry financing, some states exempt all owner carry financing, and other states exempt owner carry financing up to a certain number of sales in a given time period.
Colorado’s Owner Carry Exemption
Colorado has created an exemption for those who provide owner carry financing for no more than three properties in any twelve-month period. Pursuant to CRS § 12-61-904(1)(b), “[w]ith respect to a residential mortgage loan, a person, estate, or trust that provides mortgage financing for the sale of no more than three properties in any twelve-month period to purchasers of such properties, each of which is owned by such person, estate, or trust and serves as security for the loan” is generally exempt from the requirements of a mortgage loan originator. For the purpose of this statute, “person” means “a natural person, corporation, company, LLC, partnership, firm, association, or other legal entity.”
Those who meet Colorado’s owner carry exemption, among other things, are not required to register as mortgage loan originators even if they fit the basic definition of a mortgage loan originator. It is worth noting, however, that even mortgage loan originators who meet the exemption are still subject to CRS § 12-61-911, which prohibits mortgage loan originators from committing fraud or making misrepresentations.
Ultimately, the SAFE Act and corresponding Colorado laws allow owner carry financing with certain restrictions. If you provide owner carry financing for no more than three properties in any twelve-month period, you may do so without registering as a mortgage loan originator. If you wish to finance more than three properties in any twelve-month period through owner carry mortgages on residential mortgage loans, you have two options: either register with the state as a mortgage loan originator or hire someone who is already licensed as a mortgage loan originator to carry out your owner carry transactions.
This article discusses owner carry financing under the SAFE Act. Part II addresses prepayment penalties under the Dodd-Frank Act.