Confusion reigns! In the real estate investor community there's been much hype, discussion, fear and misinformation over the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) and all of its state variations. My good friend Shae Bynes makes the premise that the SAFE Act might well be the most mind boggling bit of legislation to come down the pike as of late. You can check out her rant here.
I've done quite a bit of research and reading of the both the federal act and its many state variations and spent hours talking with my cadre of real estate attorneys and my takeaway is this……
Investors: Stop Freaking Out about the SAFE Act!
Why? Because most of our investing activities do not fall under the provisions of the ‘‘Secure and Fair Enforcement for Mortgage Licensing Act of 2008.”
Let me explain.
In short, the SAFE Act requires that only Licensed Mortgage Originators may take mortgage loan applications; offer or negotiate terms of a residential mortgage loan for compensation or gain; assist a consumer in obtaining or applying to obtain a residential mortgage loan by advising on loan terms (including rates, fees, other costs); or collect information on behalf of the consumer. Sounds daunting, doesn't it? And confusing.
And to add to the confusion the federal government's version establishes only a minimum threshold of rights and protections. States are allowed their own version of the act and some states (such as TX) have enacted more stringent rules and regs. They may add more protections in their own specific versions of a federal law, but they may not go the other way and provide fewer rights or protections than the minimum threshold set by that federal law.
In order to determine how the SAFE Act affects us as investors, let's consider the provisions of the Act as it relates to one important distinction: who’s exempt and who’s not exempt. We need to be clear as this will determine whether a particular transaction is subject to the requirements of the SAFE Act or not.
So who’s exempt? It really depends on the buyers use and purpose of the property. If the transaction does not involve a buyer who will use the property as a personal residence the transaction is exempt. Why, you may ask? Because such a transaction does not involve a residential mortgage loan. Only residential mortgage loans are covered under the SAFE Act. The Act defines a residential mortgage loan as
“…any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on residential real property or any loan primarily for personal, family, or household use that is secured by collateral that has a mortgage lien interest in residential real property.”
Thus the real estate investor may buy (using seller financing) a property to hold as a rental, sell (with seller financing) to a wholesaler or another investor, buy and sell any commercial property, and anything that does not involve a residential mortgage loan. It also means that private and hard money lenders are exempt since their loans are made for business purposes and is not a “loan primarily for personal, family, or household use.”
Who's not exempt? A real estate investor who sells (using seller financing) to someone who intends to use the property for their personal residence. The seller financing would be considered a residential mortgage loan and a license would be required.
So, as an investor, if you sell (with seller financing) to a “buyer-occupant,” you fall under the SAFE Act. If not, you are exempt.
In any event, it is extremely important that you understand the specific laws of the state in which you live. You should consult your own real estate attorney regarding your state's rules and regs before selling to a buyer-occupant using seller financing.
Thanks for reading. Let me know YOUR option or questions on the SAFE Act in the comment section below. And hey – tell your friends about us!