Posted by Levi on July 01, 2010 at 09:36:02:
Its not “illegal” to do 0% interest loans. The IRS will just tell you that you have to pay tax on the interest you should have received.
Safe Act - Posted by David Krulac
Posted by David Krulac on June 28, 2010 at 19:09:45:
SAFE ACT
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The Safe Act is Federal legislation, that has already passed both houses of Congress and has been signed by the President into law. It takes effect for all 50 states and territories by July 31, 2010.
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The intention of the law is Consumer Protection and reduction of mortgage fraud.
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The unintended consequence is that almost all seller financing, private financing and hard money lending is now illegal.
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The law requires fingerprinting and criminal background checks for all mortgage originators. If you are a criminal then you can not be a mortgage lender. It also requires 20 hours of pre-licensing courses to be taken, licensing test to be passed with at least a 75% score, state licensing and 8 hours of continuing education annually. By the definition in the law any individual who provides a note, mortgage, trust deed or any financing for residential real estate must be licensed as a mortgage broker.
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The law applies to ALL residential mortgages for 1-4 units and even for vacant land that is intended or could possibly have a residence constructed on it. There is NO exception for owner occupants, there is NO exception even if you only lend one mortgage a year, even if you lend a small second mortgage on your personal residence, it is not excepted.
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If you violate this Federal law, you are subject to fine of $25,000 for each act. Having an attorney do the settlement does nothing to shield you as the fines are levied against the lender, not the closing agent.
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There are exceptions that do not require a license, including commercial property, industrial property, recreation property, as long as there is no residential use. So, that cabin in the woods, ski chalet or beach home still falls under the jurisdiction of the law. There is a residential exception for properties with 5 or more unit. So if you are selling a multi-unit with 5 or more units, you can still legally finance the property to your buyer, or secure private financing or hard money lending from un-licensed sources…
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There is the well established legal principle of substance over form. What that means in laymen?s terms is that if it quacks like a duck, walks like a duck and looks like a duck then it?s a duck. You can call seller financing by various terms, contract for deed, land contract, lease purchase, Lonnie deal or whatever. But if it?s a sale and financing of a residential property in any way, shape or form, then it?s a illegal transaction under this law, unless the individual lender is licensed.
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It has been reported that the Federal government currently has a 93% share of all residential mortgages. Only part of the remaining 7% of lending is private financed. What percentage of mortgages are seller financed now, maybe as low as 1% or 2 %.
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There is no strong objection to the Safe Act and no strong lobby to oppose it. Mortgage lenders, banks and credit unions are not opposed, as the law eliminates un-licensed competition. Some real estate agents and home builders are opposed, but seemingly only a small number.
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There are two basic legitimate circumstances that need seller financing:
a. The property does not conform to FNMA standards and therefore can not be financed by lenders who sell their mortgages on the secondary market.
b. The buyer can not meet the institution lenders minimum requirement for a mortgage. Often times the buyer has a bankruptcy, a foreclosure, job loss or divorce that prevent them from getting a conventional/FHA/VA mortgage. But they may have sufficient income to buy a house and if not are going to be paying rent on some home.
There are other reasons for seller financing such as the seller wanting to get a better return on their investment that the current low bank CD rates. For many senior citizens the extra income from a mortgage paid to them goes to pay for necessities not luxury items. And today that is a more critical issue as bank CDs are paying only around 1%. The current economy has been particularly devastating for senior citizens. Perhaps AARP should mount opposition to the law as currently written -
Habitat for Humanity sells homes and mortgages the home for zero down payment and zero interest rate. This law makes Habitat for Humanity a criminal enterprise. And since they do it nationwide would make their criminal enterprises subject to the RICO act and anti-racketeering laws. Habitat could possibly be another opposing force for the new law.
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The Realtors could also be another organization that could possibly provide opposition. Though the number of sales involving private or seller financing is low, the law does represent an obstacle to recovery in the current economic recession.
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Personally, I would like to see a de minimis, written into an amendment to the law allowing seller financing of owner occupied homes as well as some number say five private mortgages allowed to be written per year per person without a license.
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If you want to read the Safe Act yourself, its only 22 pages long and can be found by an internet search of:
TITLE V?S.A.F.E. MORTGAGE LICENSING ACT
Re: Safe Act - Posted by Woody
Posted by Woody on June 29, 2010 at 21:07:07:
I think this is a huge blow to RE investors.
What can we do?
…Everyone… - Posted by acw
Posted by acw on June 29, 2010 at 11:39:28:
With this new government we have…everyone is now a criminal.
This government is OUT-OF-CONTROL!
Buying and selling of existing mtgs - Posted by JT-IN
Posted by JT-IN on June 29, 2010 at 09:35:19:
David:
What is your take on how the enterprise of buying and/or selling of an existing mtg would be affected by the Safe Act.
Kind of an unusual name for a law, especially one that will lead to anything but SAFETY, IMO.
Re: Safe Act - WHOA?!? - Posted by cramdown
Posted by cramdown on June 29, 2010 at 01:41:23:
This is almost 100% contrary to the information provided in the post “S.A.F.E.TY Valve? Land Trusts!” made by long-time CREO Cash Flow Forum moderator David Butler on April 08, 2010, and the links he provided in that discussion including the cross-reference table published by the CONFERENCE OF STATE BANK SUPERVISORS and AMERICAN ASSOCIATION OF RESIDENTIAL MORTGAGE REGULATORS; and the narrative discussion from HUD’s Homes and Communities website, which includes copy of the SAFE Mortgage Licensing Act???
What did you see, and where specifically, that led you to come up with such a conflicting conclusion??? Thanks.
Re: Safe Act - Posted by Edwin
Posted by Edwin on June 28, 2010 at 21:34:47:
I have no intention of complying with this absurd law. Once again, our brainless politicians have passed a law that throws out the baby with the bath water.
Re: Buying and selling of existing mtgs - Posted by Kristine-CA
Posted by Kristine-CA on June 29, 2010 at 23:42:24:
Hi JT. In my reading I didn’t see anything in either the federal or CA
bill that addresses the buying and selling of notes.
The federal bill is absolutely silent on seller financing, as is the CA bill.
Both are loud and clear on mortgage originators and compensation,
though. The language says that anyone who arranges a loan AND who
stands to “gain” or is compensated is a MO.
The CA dept. of RE site has all their info on getting the special MO
endorsement geared towards real estate agents and brokers. There are
no answers or info for consumers who want to buy or sell a house with
seller held notes anywhere. I think they are intentionally silent on this
issue, as it’s not in the federal bill.
I’m confused as to why I can’t find any decent info or experiences from
anyone on this. It looks to me like the CA Dept. of RE is interpreting
seller financing as exempt. From the FAQ section “Does the MO
licensing apply to me”
Q. I lend out my own money, fund or make loans for residential
mortgage loans. I do not charge any fees to the borrower. Do I need a
Mortgage Loan Originator License Endorsement on my DRE license? A.
No.
Q. I lend out my own money, fund, or make loans for residential
mortgage loans. I solicit the borrower, help complete the loan
application or negotiate the loan terms and I am paid a fee by the
borrower. Do I need a Mortgage Loan Originator License Endorsement
on my DRE license? A. Yes.
Q. I broker only seller carry-back notes. Is a Mortgage Loan Originator
License Endorsement required? A. No.
Q. I do not regularly do mortgage loans, but once in a while I take a
loan application for one of my real estate customers. Do I need a
Mortgage Loan Originator License Endorsement on my DRE license? A.
Yes, if you are compensated for this activity.
The DRE is telling agents they do not need to be LMOs in order to list a
property and negotiate the seller carry back. I’m assuming that’s
because they believe that seller carry backs have no compensation to
the agent. Regardless, if CA agents to don’t need to be specially
licensed to arrange seller carry backs, then why would a seller?
There’s also an explanation that agents don’t need to be MLOs if they
arrange/broker loans, even if they are compensated, as long as the
investors use the loan for rental/income property.
Commercial/Business loans are exempt.
So, I’m an investor and I buy with seller carry backs. I use it for rental
income. So it’s a business loan and the seller is exempt from being an
LMO.
CA can’t be the only state interpreting the federal bill this way. So,
why do all the blogs and articles on this topic insist that it applies to
every loan?
here’s my take… - Posted by David Krulac
Posted by David Krulac on June 29, 2010 at 13:32:59:
I’m not an attorney nor CPA…
Since the law speaks to mortgage originatiotors, I think that the buying and selling of notes and mortgages is UN-affected by the Safe Act.
It was interesting to me that the law had no minimum number of mortgages as a safe harbor, and I was also strcuk by the specific reference to vacant land, since the purpose of the bill was to help prevent mortage fraud and protect consumers who are selling their homes.
Re: What Kristine says and… - Posted by cramdown
Posted by cramdown on June 30, 2010 at 24:26:55:
what I pointed out last night. That’s why I brought up Mr. Butler’s detailed discussions about the S.A.F.E. Act over in the Cash Flow Forum, and provided the links he offered back in April as additional support for his views. Kristine makes those points even better in her reply above in this thread in some respects. And she does a good job of supporting her views. I also went back to the Cash Flow Forum earlier today to get a more informative response when it wasn’t forthcoming here. Interestingly enough, he went right into the link you referred me back to for the S.A.F.E. Act, and illustrated how those two links I provided from his previous discussions in April, which are actually a part of the S.A.F.E. Act legislation you pointed back to here!?!
As Kristine says here, and Butler says in his responses on the other forum, the bulk of the law is silent on seller financing licensing requirements. But the law also points to the specific exemption for seller financing regarding one’s home, by way of the Model State Law. And nowhere is there any discussion about seller financing being illegal, in any way, shape, or form??? That’s why I asked for some specific details to support your confusing claims in regard to the points you made at #3 and #5. Just looking for more explanatory guidance on your take. Thanks
here’s the website for the law… - Posted by David krulac
Posted by David krulac on June 29, 2010 at 08:33:49:
http://www.kfi.ky.gov/NR/rdonlyres/3C72D379-0BC4-4B28-80D3-371066104DEB/0/SAFEAct2008.pdf
Re: Safe Act - Posted by Jack
Posted by Jack on June 29, 2010 at 14:53:20:
I agree that it is an absurd, and probably unconstitutional, law. But wouldn’t it be easier to just get licensed?
…Oh… - Posted by acw
Posted by acw on June 29, 2010 at 11:23:49:
You have no intention of complying?
LOL…better not let anyone know about it…including anyone who buys from you.
yea, its only $25,000 fine… - Posted by Bob
Posted by Bob on June 28, 2010 at 22:59:20:
and you can expect that the IRS will help to enforce by disallowing any interest deduction derived from an un-licensed source.
Re: Buying and selling of existing mtgs - Posted by redave
Posted by redave on June 30, 2010 at 12:05:21:
You noted the exemption for Commercial/Business loans, which covers you as a buyer, but isn’t the main concern being able to sell with owner financing to owner occupants?
Re: Safe Act - Posted by Alexander (FL)
Posted by Alexander (FL) on July 01, 2010 at 15:47:09:
Pay a licensed mortgage broker $500 to draw up the paperwork you provide him.
Re: Safe Act - Posted by Bob Smith
Posted by Bob Smith on June 29, 2010 at 18:53:45:
No. Here in Texas, for example, I can’t get my own mortgage broker’s
license without spending 3 years working for a licensed broker. I did
not get into real estate only to be forced into being somebody else’s
employee.
getting licensed - Posted by Kristine-CA
Posted by Kristine-CA on June 29, 2010 at 17:45:54:
Getting licensed sounds good. But it has nothing to do with a deal
where I’m buying and want the seller to carry back. The seller with one
house isn’t going to get licensed.
Lots of agents aren’t going to be adding this to their list of skills either.
In CA, the requirements for the LMO require a credit report. The DRE
says that it wants to make sure that there are no major financial
mishaps in the recent credit history of a LMO. Hmm. They don’t say
what’s a deal breaker. Foreclosure? Credit card debt? IRS lien? Also,
the education classes and tests required don’t look any too easy for
your average agent.
I’m actually all for more education for mortgage originators. Just not
so sure how that plays out with transactions involving seller financing.
Re: yea, its only $25,000 fine… - Posted by Edwin
Posted by Edwin on June 29, 2010 at 24:55:18:
No worries there. I’m not aware of anything in the IRS regulations that interest paid on a loan that may have originated from an unlicensed source is not deductible. I believe enforcement of this rule would come from somewhere other than the IRS.
Re: Buying and selling of existing mtgs - Posted by Kristine-CA
Posted by Kristine-CA on June 30, 2010 at 12:36:01:
You know, I haven’t considered that angle too much. I think I’ve only
sold one property to an owner occupant. And I’ve never bought from
an owner occupant.
But for what it’s worth, I’m banking on the CA DRE guideline that says
brokering a seller carryback does not require one to become a
mortgage originator. BTW, it’s not like these things are spelled out in
the federal or state law. It’s an interpretation from which the DRE is
making guidelines. That’s all we have to go on right now.