The Safe Act- How it Applies to Texas

Notes from meeting with Texas Department of Savings & Mortgage Lending

On Wednesday, June 9, Mr. Foster from the Texas Department of Savings & Mortgage Lending (TDSML), the government agency that will oversee The Texas Safe Act (TSafe) spoke to a room full of 200+ real estate investors about the effect of TSafe on Owner Financing.  The purpose of this article is to inform the reader about the overview of the meeting.  This article will not go into testing or licensing requirements, as this information can be found athttp://www.sml.state.tx.us.  Rather the purpose of this article is to understand how an unlicensed investor who desires to sell properties with owner financing involved is able to operate under this new legislation.

Understand that I am not an attorney and would advise Texas investors interested in engaging in the Seller Financing exit strategy to consult with an attorney prior to investing.

Enforcement- How will the TDSML enforce this ruling? Mr. Foster stated that they will not be auditing every transaction to see if the people involved are licensed. Neither the state nor the HUD has the manpower to do so and there is no talk of ramping up the agencies involved in order to be able to perform such audits.  The purpose of the rule is to protect the customer by making sure all paperwork required for loans is filled out completely and accurately.  The only time that this issue will likely be brought to the attention of the TDSML is if the consumer complains.  And, most likely, the only time the consumer will complain is if they are being foreclosed upon by the investor and decide to seek legal counsel. The attorney for the homeowner being evicted may decide to look over the seller financed loan package for any errors and use and Truth in Lending Act (TILA) or Real Estate Settlement Procedures Act (RESPA) violations as leverage against the investor to prevent foreclosure.

Enforcement- What are the penalties for violations? From the current buyer’s perspective, violations of TILA and RESPA will not void the lien but may result in a class B misdemeanor in the state of Texas and fines range from $1000 to $25,000 per violation.  But then you also get into federal violations.  Depending on the issue and severity of the violations, fines for TILA and RESPA can average about $10,000 per violation plus jail time.  With the consequences being as they are, the current buyer who is delinquent in payments certainly has leverage over the foreclosing investor not following the TSafe.

Enforcement- How do you determine the severity? Violations of this rule are pretty black and white.  But the significance of complaints by the TDSML are determined by the two following ways:  1) is there an actual valid complaint and 2) was there an intent to harm consumer.

What can a non-licensed Investor say to a customer looking to buy a home with owner financing? The investor is limited in taking an application.  Only a residential mortgage loan officer (RMLO) can take an application.  The rules of the TSafe define the term application differently than other government agencies.  TSafe broadly definesapplication as anything needed to make a credit decision.  Stating terms or interest rates of the loan or negotiating (giving information to the customer) with the potential customer directly based on this information is not allowed by the ACT.

What can a non-licensed investor say to a customer looking to buy a home with owner financing? If no harm or intent to harm is in place, an investor can have an initial pre-screen.  But the key here is to gather information and not give information.  You can ask questions to see what the customer can afford as a down payment or afford as an interest rate in order to weed out applicants.  But the investor cannot give out information about their answer or what the down payment, the terms, or the interest rate requirements are.  Mr. Foster recommends the process of non-licensed investors to contact a RMLO and let them know the rate and terms.  But, he emphasized, the investor can gather the information for the RMLO but cannot give information to the potential buyer.

What is the purpose of the having an RMLO for owner financing? Essentially, the purpose of TSafe and the RMLO involvement in the seller financing process is to ensure paperwork compliance.  The purpose, surprisingly, is not to decrease the possibility of defaults.  The job of the RMLO is to ensure paperwork compliance, not make credit determination or determine if the homeowner can afford the property.  There is a something along the lines of a ‘Can You Afford This House’ document in the loan paperwork.  If the homeowner checks either ‘Yes I can afford’ or ‘No I can’t afford but I still want the house’, and the RMLO has had the homeowner complete all paperwork accurately, then the RMLO is not liable for the outcome of the loan.

Are Hard Money Lenders or Note buyers at risk with this TSafe Act? No.  As long as Hard Money Lenders (HML) are not lending directly to the homeowner, rather they are lending to the investor who signs an affidavit stating they have no intention of living in the house themselves,  TSafe does not apply.  Regarding note brokers, TSafe only applies to loan origination, not brokering of existing notes.

If the Investor wishes to modify the note in the future, does the RMLO need to be involved? If the investor is forgiving payments or extending terms, than the RMLO does not need to be involved.  However, if the investor is renegotiating terms or principal, then an RMLO would need to be involved.

When does TSafe take effect? TSafe was enacted on May 31, 2010.  It is not retroactive to any owner finance transactions that occurred prior to that date.

Can I utilize my attorney rather than an RMLO?  No, an attorney cannot both take a loan application and negotiate.  Therefore, if the attorney did one, the RMLO would have to do the other.  It would make more sense to just use an RMLO for the entire process.

In closing, an investor asked Mr. Foster how many complaints the TDSML received in a given year.  He explained about 5,000, most of which were not valid.  He was then asked how many were the result of owner financing, to which he replied ‘maybe a handful’.  The design of this ACT was to ensure compliance in paperwork for all loan officers and spilled into the owner financing world.  While there is a chance the seller financing aspect may be revoked, it is a very smart idea to comply with the TSafe ACT and add an RMLO to your team.

About the Author: Tom Bukacek is a real estate investor in Austin, TX, and Phoenix, AZ who focuses on pre foreclosures.  Tom is also the Marketing Director for the Entrepreneurs Incubator, a full service real estate investing marketing, systems, and mentoring company located in Austin, TX.  For more information on Tom, please visithttp://www.entrepreneurs-incubator.com.