The S.A.F.E. (Secure and Fair Enforcement for Mortgage Licensing) Act is very broad and the rule was almost continually modified by our politicians to fix it is expected to be more reasonable for real estate professionals of what is allowed in its current form.
Key features of the S.A.F.E. Act include:
This Act requires nationwide registration/licensing of any residential mortgage lender who offers or negotiates terms of a residential mortgage loan for compensation or gain. As investors, that would be us when we sell using seller financing and it would be sellers who sell to us via seller financing.
This Act prohibits the seller financing of a residential property without being licensed as a mortgage loan originator. This includes selling with wraparounds, land contracts, seller 2nds, etc. This applies to people who assist in this process (investors) and hard money lenders who take back real estate as collateral.
Implications Of The S.A.F.E. Act To Real Estate Investors And Lenders
Most lending that was previously unregulated or loosely regulated is now regulated by the S.A.F.E. Act. This includes hard money lending, seller “carrybacks” (seller 2nds), and independent mortgage loan originations. The S.A.F.E. Act is a federal law. While it imposes a general umbrella of regulation and requires meeting certain minimum requirements, it is up to each state to impose its own interpretation of the rules set forth in this Act. Most states have already implemented their own interpretations of the S.A.F.E. Act. Ironically, the federal government’s attempt to uniformly regulate mortgage lending has resulted in non-uniform regulations from state to state. Some states, such as Texas, have enacted laws that are even more restrictive than what is in the S.A.F.E. Act itself. Other states have enacted legislation that meets just the minimum requirements of the S.A.F.E. Act or have legislation that is very open to different interpretations so as to be almost useless.
The S.A.F.E. Act is intended to curtail the lending abuses in subprime loans that greatly contributed to the present mortgage mess and difficulties in the residential credit markets by more strictly regulating the financial derivatives that originated from subprime loans such as CDO’s (collateralized debt obligations) and CDS’s (credit default swaps, i.e., insurance for defaults on these loans). But it also restricts and governs activities of those who have nothing to do with subprime lending and hinders the sale of residential properties that would normally be facilitated by seller financing. In the federal government’s attempts to prevent another recession in the residential markets by more strictly regulating lending guidelines, it will most likely fail by making residential properties more difficult to sell by restricting seller financing. By restricting seller financing to the people who need it the most, the irony is that the S.A.F.E. Act hurts the very people that it was intended to help. » Read more: SAFE Act Overview and Effects on Investment Real Estate