Is it Legal to get a seller to hold the Mortgage in Pennsylvania?

[Jim Majoros]

I am being told by an attorney that because of the Mortgage Licensing Act of 2008 I cannot get a seller to hold the paper. I do not understand because I hear of people doing this.

[Dion DePaoli]

Loc R., that is a good question, and is the case in many states now with similar laws. I am not positive there has been enough litigation to really say the loan is invalid. I think I could argue it is not as the penalty in most cases is from the state license authority and is a penalty against the originator. I am not sure it voids the contract but like I said lots of gray area there.

Certainly you can have him engage an attorney to satisfy the old and originate the new in compliance with the state regs. If it was done properly the mortgage file should contain paperwork where the borrower agreed to remedy any paperwork issues. I personally would not purchase the loan unless it is originated by a licensee in states where it is pretty clear there is no exception. Additionally, in states where there is an exception for X units per year, the burden of proving they didn't originate X+1 or more will be an issue in those states in the future.

K. Marie Poe, what I posted is the PA MLS (Mortgage Licensing Act) it is from the state. The SA gave states a minimum standard of licensing and monitoring to adhere to and setup the national registration system. Some states went with the min and some states have an overlay with more topics or details than the national rule.

You can view the act here: http://www.ffiec.gov/pdf/safeact.pdf

K. Marie wrote: "How can a seller offering seller carry back financing avoid offering and negotiating?

In regards to a little of this hyper confusion, HUD responded with clarification to the rule: "An individual required to be licensed under the SAFE Act is an individual who is engaged in the ‘‘business of a loan originator''; that is, an individual who acts as a residential mortgage loan originator with respect to financing that is provided in a commercial context and with some degree of habitualness or repetition."

You can read this in Section III. Overview of Final Rule—Key Clarifications here: http://mortgage.nationwidelicensingsystem.org/SAFE/NMLS%20Document%20Library/HUD%20Final%20SAFE%20Act%20Rule.pdf

So the rule gives exception to those who are not "in the business" of making mortgages. That would include seller finance folks. That said it does not define the quantity of transactions before one is act with "habitualness or repetition". HUD purposely left this with no quantification and will be reviewed on a case by case basis.

Further the clarity on page 4 reads: "An individual selling his or her own
residence is not engaged in the business of loan originator."

So a seller who sells their primary or secondary home in a state where an exception is granted to sellers of the same nature would be fine. A seller who is an investor and is in the business of real property might be a little bit of a gray area for more than one finance deal. An investor who makes a business out of writing seller mortgages should have a license or have the act performed by a licensed person or attorney. That said, if you read the rule it is not the definition or quantity of transactions it is the act that the rule is looking at.

If I run an ad or MLS listing that says "seller may carry with at least XX down", am I not offering a mortgage?

This is not in line with offering or negotiating as it relates to mortgages. This is advertisement and marketing which is a little different. You are not offering the mortgage, nor are you offering to obtain a mortgage for someone. You are merely posting a message, the seller is offering the mortgage. This is similar to a newspaper who prints a marketing ad for a bank mortgage, the newspaper is exempt from license as the burden falls on the bank. I am, of course, assuming you are an agent in the above equation and not the seller. If you are the seller in that example we sort of covered that already.

Additionally, I do not think the rule's intent is to be so restrictive as to not allow for conversation or conveyance of ideas around what a seller would like to see as a down payment. There is a short line of rope here though and you would not want to post on behalf of your seller or yourself any interest rates or credit requirements, etc. As an agent you are a licensed professional and the seller could deffer to you for any trouble they get in for a marketing message. There are also consumer protection issues around marketing such detail. IMO, I think saying in more words than you posted, "seller is selling his house and might consider financing it but would want to see $X or X% down" is fine. Where the logical conclusion is he doesn't want to do it for less than stated and that is his option and has no duty to accept anything less. A bank can offer a loan with 99% down and market that loan program and has no duty to grant the loan to a person who has less than 99% down. You just want to be careful about the fine print missing from your marketing piece.

As far as using a lawyer or licensed originator, yes it will keep you safer than doing it yourself. It certainly does not absolve you from any predatory practice or malice. The SAFE Act helps create a uniformity of thought around what it means to be a licensed originator. "An overarching purpose of the SAFE Act is to enhance consumer protection and support anti-fraud measures through establishment of state licensing systems that will ensure that loan originators have the necessary integrity and knowledge needed to perform their functions properly." By using a licensed person or attorney you certainly increase your chances of 1) originating a sound and fair loan and 2) remove any future doubt where you as an unlicensed person is exempt. I do think folks are starting to go to originators when they should go to an attorney. That said in both career paths there are those who are competent and good and those who are not. You will tend to have more recourse with an attorney if they prepared your security instrument and note opposed to a licensed mortgage person. It is certainly OK and frankly common industry practice to use both an attorney to draft paperwork and a licensed originator to take application and build a file. (and don't use a title company, that is just plain silly, IMO)

Jim Majoros, I am sure what the rule says and HUD confirms about exemption related to attorneys: "...a licensed attorney who only negotiates the terms of a residential mortgage loan on behalf of a client as an ancillary matter to the attorney's
representation of a client. HUD’s position remains that these activities do not constitute engaging in the business of a loan originator and are not subject
to licensing under the SAFE Act.". Whether or not the attorney chooses to act in this manner is his duty, he may not want the potential liability from you or he may not want other clients finding out he acted in this manner and they demand the same service which then makes him in the business and needs to go get a license.

I suppose the issue arises here as "street level" investors converge on this as a viable disposition solution. I am a big fan of having an attorney in my back office operation who overviews the security instrument and note and functions as a control point of the perfection of the instrument and paperwork execution. The mortgage originator functions as the front office file preparation and client interaction. This is how companies originate loans in the industry. LO's take application, stack files and work with borrowers and investors with their attorneys underwrite, review and fund. I know there has been some commentary around the site on what a reasonable fee for service on these topics would be and I see many very high fees sometimes. I believe I saw a originator told a seller they wanted 5% or so, I did state that was a bit too high. Again, LO's write loans everyday and attorneys review loans and paperwork everyday and banks and private investment funds and lenders are not out of business from paying fees to these service providers as such the fees should always be reasonable. The SA Act is forcing REI from existing on the fringe of the space with one foot in the water and one foot out.