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Under the Department of Housing and Urban Development’s regulatory interpretation of mandatory minimum standards for residential loan originators imposed by the Secure and Fair Enforcement Mortgage Licensing Act of 2008 (SAFE Act), builder/vendors who “habitually and repeatedly” offer self-financing or contract to deed arrangements for the purchase of residential property may be required to be licensed as a loan originator.
The SAFE Act directed all the states to enact licensing legislation for residential loan originators in accordance with mandatory minimum standards.
In a final rule appearing in the June 30 Federal Register, HUD provided its regulatory interpretation of these minimum standards. The rule becomes effective on Aug.29.
The SAFE Act defines “loan originators” as individuals who take residential loan applications and offer or negotiate residential mortgages for compensation or gain. And while it is primarily intended to regulate the practices of banks and other commercial residential mortgage providers, in HUD’s view it can apply to builders.
In order to be licensed under the SAFE Act, residential loan originators, with some qualifications, must:
- Have no felony convictions
- Demonstrate financial responsibility and fitness of character
- Complete 20 hours of pre-licensing education
- Score at least 75% on a pre-approved test
- Be bonded or have a demonstrated net worth
- Submit fingerprints to the FBI
- Submit a personal history and experience resume to the licensing authority
- Undergo a credit and criminal history background check
For renewal, licensed originators must also annually complete eight hours of approved continuing education.
Self financing can help builders sell homes in situations where a buyer is unable to obtain a conventional bank loan because of appraisal difficulties or qualifying problems, such as credit histories.
In public comments, many urged HUD to either exempt self-financers or to provide an annual allowance for these transactions before licensing would be required.
Instead, in its final rule HUD provided the “clarification” that the individuals who must be licensed under the SAFE Act are those who “habitually and repeatedly” engage in the business of a loan originator for a commercial gain.
Unfortunately, by deliberately declining to define the parameters of the term “habitually and repeatedly,” HUD has left it to the discretion of individual enforcement authorities — and ultimately the courts — to determine the amount of loan originator activity, including self-financing transactions, that can be safely undertaken before licensing is required.
Contract to Deeds
A contract to deed is an installment sale arrangement in which the purchaser makes regular payments to the property owner and is permitted to live in the residence, much like a tenancy.
Since the SAFE Act defined 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, and since these are not involved in contract to deed transactions, it was believed that the SAFE Act did not apply.
In its commentary on the rule HUD took the opposite position, stating that installment sales contracts are “the practical equivalent of a lien,” and that “‘equivalent consensual security interests’ specifically include installment sales contracts, consistent with the treatment of many states of such contracts in the same manner as mortgages.”
Some states, such as Florida, agree with this position.
Others, such as Colorado, say an installment sale is only the equivalent of a mortgage at the discretion of a court, based on the consideration of certain factors — such as the length of a default period, the willfulness of a default, whether the seller has made improvements and whether the property has been adequately maintained — all of which occur after the loan origination.
Still other states, such as Minnesota, regard failing to use words like “security” or “mortgage” in the instrument as weighting against considering contract to deeds to be the equivalent of mortgages.
It remains to be seen whether the courts will sustain HUD’s position on this issue. In the meantime, builder/vendors who want to use contract to deeds are advised to consult with a local real estate attorney.
One further complication has been raised by the new Dodd-Frank Wall Street Reform and Consumer Protection Act, which transferred all HUD’s SAFE Act authority and duties to the new Consumer Financial Protection Bureau as of July 21.
It is not known how consistent the bureau’s interpretation of the SAFE Act minimum standards for loan originators will be with the positions taken by HUD.
For more information, email David Crump at NAHB, or call him at 800-368-5242 x8491.
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