THE LONERGAN LAW FIRM, P.L.L.C.
The Texas SAFE Act and Its Impact on Owner-Finance Sellers and Hard Money Lenders
by Abid Hussain, Attorney
The Lonergan Law Firm, P.L.L.C.
12801 North Central Expressway, Suite 150, Dallas, Texas 75243 (214) 503-7509
http://lonerganlaw.com
ahussain@lonerganlaw.com
June 29, 2010
In our real estate investor community, there has been much discussion and fear over the Texas version of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). Although several resources and articles exist on the Internet (including the bill itself), the Lonergan Law Firm, P.L.L.C., feels that a simplified guide might be more useful to our clients. As a standard disclaimer, the following is not legal advice, and any publication of this document does not create an attorney/client relationship between the Lonergan Law Firm and the reader.
SAFE vs. T-SAFE
Before getting into the statute itself, let's discuss the federal statute first. You may have heard that the Texas version of SAFE (T-SAFE), passed in 2009, is more restrictive than the version enacted by the federal government. This is true. T-SAFE is allowed to be more restrictive than SAFE because the federal government's version establishes a minimum threshold of rights and protections. States are allowed to 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.
Now, let's dive right into T-SAFE and see how it impacts you.
T-SAFE Summary
T-SAFE is encompassed in the Texas Finance Code, Chapter 180, and is enforced by the Texas Department of Savings and Mortgage Lending (SML). The act establishes minimum requirements for obtaining a mortgage loan originator license, the process for obtaining such a license, who must obtain a license, and penalties for originating loans without a license. The act specifically applies to residential mortgage loan originators.
Under the act, a residential mortgage loan originator (RMLO) is any individual who takes a mortgage loan application, or offers or negotiates the terms of a residential mortgage loan. There are several exceptions to the definition of an RMLO, but the two most relevant to our clients are:
- People who perform only administrative or clerical tasks for a licensed RMLO.
- A real estate broker or agent, unless he is compensated by a lender, mortgage broker, or other RMLO, or their agent.
A residential loan is a loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other security interest in a dwelling or residential real estate. This definition provides a very narrow exception to hard money lenders that I'll cover below.
A dwelling has the same meaning as defined in the Truth in Lending Act, which is a residential structure or mobile home containing one to four family housing units, or individual units of condominiums or cooperatives. Residential real estate means real property located in Texas on which a dwelling is - or is intended to be - constructed.
There are only a few classes of people exempt from having to be licensed when originating a residential mortgage loan. They are:
- A registered mortgage loan originator, meaning someone who is an RMLO and an employee of a depository institution, a subsidiary thereof that is regulated by a federal banking agency, or an institution regulated by the Farm Credit Administration.
- An individual who offers or negotiates terms of a residential mortgage loan with or on behalf of an immediate family member of the individual
- A licensed attorney who negotiates the terms of a residential mortgage loan on behalf of a client as an ancillary matter to the attorney's representation of the client, unless the attorney does both of the following two things: (a) The attorney takes a residential mortgage loan application, and (b) offers or negotiates the terms of a residential mortgage loan.
An exclusive agent of a registered financial services company who is individually enrolled as a registered mortgage loan originator with the Nationwide Mortgage Licensing System and Registry. - Someone who offers or negotiates terms of a residential mortgage of his own homestead property.
- A non-profit organization providing self-help housing that originates zero-interest residential mortgage loans for borrowers who provide sweat equity to construct the dwelling securing the loan.
Becoming licensed as a RMLO requires classroom work and passing an exam. The Texas Department of Savings and Mortgage Lending will also conduct a background check. The full details of how to become licensed are available on the agency's website.
The penalties for originating a residential mortgage loan application without a license are severe. The agency is authorized to:
- Deny, suspend, revoke, condition, or decline to renew a license.
- Order restitution.
- Impose an administrative fine up to $25,000.
- Issue cease-and-desist orders, as well as immediate temporary orders if necessary.
The overall goal of T-SAFE is to ensure that each licensed RMLO is assigned a unique identification number, which appears on each residential mortgage loan that the RMLO originates. By doing so, T-SAFE hopes to track originated loans and install some accountability that was lacking in the recent housing and finance crisis.
Impact to Owner-Finance Deals
The impact of T-SAFE to owner-finance deals is significant. The definitions of residential loan, residential real estate, and RMLO are broad and extensive. We are hard-pressed to imagine a scenario where the seller in an owner-finance deal would not discuss the terms of the loan with the buyer. Therefore, T-SAFE makes it practically impossible for investors who routinely enter into owner-finance transactions to do so without being licensed.
The net impact of T-SAFE is that almost all owner-finance sellers will have to use an RMLO to originate loans unless they fall into one of the extremely narrow exemptions. Unless any such seller is originating a loan for an immediate family member (defined as a spouse, child, sibling, parent, grandparent, or grandchild) or owner-financing the sale of their own homestead property, the seller will have to outsource the loan application to a registered RMLO.
Complicating matters further, there is an exemption that applies to attorneys. However, the exemption states that the attorney can only provide loan terms as an ancillary matter to the seller's representation, and the attorney must not both take a residential loan application and offer or negotiate the terms of the residential mortgage loan. For example, if the attorney is drafting the loan package and the deed for the owner-finance seller as well as reviewing additional contracts and disclosures, and as a function of such a role also provides loan terms to the buyer, this is one of the few scenarios where T-SAFE is not violated. According to Doug Foster, the commissioner of SML, this attorney exception is being reviewed and clarified. As a practical matter, we are hard pressed to find a situation where we, as attorneys, might be able to replace an RMLO in the loan origination process for our clients.
July 2010 Update In mid-June 2010, Doug Foster of SML communicated that SML will postpone enforcing T-SAFE's removal of the Chapter 156 de minimis exception until Aug. 31, 2010. T-SAFE enacts Chapter 180 of the Texas Finance Code, and where conflicts arise with Chapter 156 (which Chapter 180 is designed to supersede), Chapter 180 would be the new governing law. One of these conflicts is a de minimis exception in Chapter 156 that allows five or fewer owner finance transactions without the use of an RMLO. This was the old rule with which many investors are familiar. T-SAFE removes any such de minimis exception and requires all owner finance deals to use an RMLO.
By waiting to enforce T-SAFE's removal of the de minimis exception until Aug. 31, SML is effectively allowing owner-finance transactions under Chapter 156 rules until that date. Therefore, sellers may execute up to five owner finance transactions in a consecutive 12-month period without needing an RMLO. After Aug. 31, 2010, Chapter 180 could be in full effect, and sellers would have to use an RMLO to generate a loan for all owner-finance transactions per the requirements summarized in this article.
August 2010 Update SML has been seeking clarification about the de minimis exception in the Chapter 156 rules that allow sellers to do five or fewer owner-finance deals within a 12-month period without using an RMLO. However, to add to the confusion, as of last month, the federal Dodd-Frank law passed, providing a safe harbor allowing three or fewer owner finance deals without an RMLO.
The Dodd-Frank law, passed in July 2010, allows for a de minimis exception of three or fewer owner finance deals without an RMLO in a 12-month period, but with the following restrictions: The seller must not be a builder, and the loan must be fully amortized (meaning no balloon). In addition, the seller has to determine that the buyer has the ability to repay. There are also restrictions on the loan terms. You'll find the law at http://www.govtrack.us/congress/billtext.xpd?bill=h111-4173 and the de minimis exception is specifically stated in section 1401(2)(E). Thus, the Dodd-Frank law creates some confusion and conflict with T-SAFE. As a result, SML will seek clarification from the Texas state legislature. Therefore, SML may consider extending it's delay of enforcing T-SAFE's removal of the de minimis exception (currently extended to August 31, 2010), in order to allow the legislature enough time to adequately discuss this issue and provide clarification.
Update - August 12, 2010 SML has just announed that it will continue to allow the de minimis exception of five owner finance deals a year (the old rule in Chapter 156) until the Texas legislature specifically amends the statute to state otherwise, or until there is written guidance from HUD. The written publication from the Commissioner is published here: http://www.sml.state.tx.us/ResidentialMortgageLoanOriginator/documents/rmlo_news_information/rmlo_notice_20100811_156.202a3%20Exemption.pdf
Since there is no time frame stated in the publication, the answer to the question of if/when the de minimis exception may/could/will go away is unanswerable. However, based on this publication, I would probably be comfortable advising clients who do five owner finance deals or less a year that they do not need an RMLO any time in the near future, at least until we get a communication from SML telling us otherwise. In such an event, I'll let my readers know immediately!
Keep in mind that adding an RMLO into your process may only increase the cost of your deals by a little bit, and you may be able to pass that cost to your buyer. Therefore, it's often a good idea to consider using an RMLO. Furthermore, if you're an investor who does more than five owner finance deals a year, you should definitely find an RMLO who can provide you the best service for your needs in order to be fully compliant with T-SAFE.
