Land Contract Regulations: The SAFE Act Impact on Seller Financing

The Department of Housing And Urban Development (“HUD”) issued a final rule for the Secure and Fair Enforcement for Mortgage Licensing Act (“S.A.F.E. Act”), effective August 29, 2011.  This article summarizes a few key sections of the new rules for the real estate community.  This article is not a substitute for legal advice from a knowledgeable licensed attorney.

Background:  

Real estate investors, brokers and other industry participants have repeatedly sought confirmation that they can engage in activities or transactions that are prohibited by the SAFE Act or other laws.
Neither wishful thinking nor hiding one’s head in the sand can change law or make prohibited activities lawful.  Attempts to interpret the SAFE Act and the Michigan Mortgage Loan Originator Licensing Act (MLOLA) sections applicable to Land Contracts have been complicated by a disjointed law-making process, multiple sets of federal and state laws, the involvement of multiple state and federal governmental agencies, different and sometimes conflicting rules and regulations.

To make matters worse, purveyors of the legal equivalent of “snake oil” are offering real estate training based on land contracts.  These “legal gurus” and their disciples have spread bad information to the real estate community.

Combine wishful thinking, bad advice from both non-lawyers and lawyers and the confusing law-making process by state and federal agencies, and the result is incomprehension and non-compliance.

Even well-intentioned, knowledgeable, ethical persons, those who always follow the law (and some who even teach the law), have been stumped in their efforts to navigate through this bewildering maze.

Many Land Contracts Are Covered as of August 29, 2011

Many real estate investors have relied on outdated guidance that land contracts are not regulated by the SAFE Act.  That is now untrue.  There are circumstances when a land contract might not be subject to the SAFE Act, but the presumption is that land contracts, also known as “installment sales agreements,” are subject to the SAFE Act.  A significant portion of the public comments submitted on HUD’s proposed SAFE Act rules pertain to the issue of a property owner selling and financing the sale of his or her own property.  Whether an owner sells a property using a deed and “take-back” mortgage, or a land contract, the transaction is subject to the new rules.  The HUD rules clarify that a land contract is a “residential mortgage loan” under the SAFE Act.

The HUD SAFE Act Rule states in part:

As an initial statement, HUD confirms the commenters’ observation that a ‘‘residential mortgage loan’’ includes an installment sales contract, which the commenters advise is frequently involved in seller financing. ‘‘Residential mortgage loans,’’ as defined by section 1503(8) of the SAFE Act, refers to typical financing mechanisms such as mortgages and deeds of trusts. In addition, the SAFE Act definition also includes ‘‘other equivalent consensual security interest on a dwelling (as the term ‘dwelling’ is defined by section 103(v) of TILA) or residential real estate upon which is constructed or intended to be constructed a dwelling,’’ which has the potential for including a broad range of other financing mechanisms. For the purposes of this rule, ‘‘equivalent consensual security interests’’ specifically include installment sales contracts, consistent with the treatment by many states of such contracts in the same manner as mortgages and purchase money mortgages offered by sellers of residential real estate. While there is no formal recorded lien held by the provider of financing, the fact that the seller holds title to the property until the contract has been paid in full is the practical equivalent of a lien for purposes of the SAFE Act and its purposes and is comparable to the status of a mortgage in a state that follows title theory under mortgage law.

Accordingly, many Land Contracts are subject to the new rules, despite prior information to the contrary.

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