“The Secure and Fair Enforcement Mortgage Licensing Act of 2008 (SAFE Act), as a key component of the Housing and Economic Recovery Act of 2008 (Pub.L.110-289) enacted into law on July 30, 2008, directs all States to adopt licensing and registration systems for loan originators that comply with the minimum standards set by the SAFE Act. The Department of Housing and Urban Development (HUD) is charged by the SAFE Act with establishing and implementing a system for mortgage loan originators in States that do not meet the minimum requirements of the statute. So, HUD published its proposed Rule on the minimum standards under the SAFE ACT that States need to comply with in licensing loan originators, procedures and actions, as well as its enforcement authority in the Federal Register, Vol. 74, No. 239, December 15, 2009. Moreover, HUD proposes “to clarify or interpret certain statutory provisions that pertain to the scope of the SAFE Act licensing requirements, and other requirements that pertain to the implementation, oversight, and enforcement responsibilities of the States.”
The HUD proposed Rule, if codified as a Final Rule or regulation, would eliminate the business strategy of acquiring and reselling properties through seller financing without being licensed as a loan originator, unless: (1.) an individual offers or negotiates terms of a residential mortgage loan with or on behalf of a member of his or her immediate family; or (2.) an individual seller provides financing to a buyer pursuant to the sale of the seller’s own residence.
Proposed Rule Prohibiting Seller Financing Deprives Owners Of Property Rights Under The 14TH Amendment:
One of the cherished rights of U.S. citizens is property rights protected by the 14th Amendment of the Constitution from any state action without due process of law, which allows owners to dispose of their properties in any way they see fit.
One of their property rights is to sell their properties through seller financing to assist buyers who cannot qualify for bank loans. The usury provision (Article 15) of the California Constitution prohibits loan-shaking activities, charging in excess of 10 percent per annum, unless exempted by a finance lender’s license. Requiring owners of residential income properties to be licensed as loan originators in order to sell such properties through seller-financing directly to buyers interferes with property rights of owners.
The proposed Rule seeks to eliminate property rights exercised by property owners through centuries in favor of more regulations and of banks at the expense of home buyers with bad credit.
Proposed Rule Impairs Obligations Of Existing Contracts Protected By The Constitution:
The contract is the law among the parties. A property owner has the right to sell his or her property, including seller-financing to enable a buyer short on cash to consummate the sale.
Seller-financing likewise enables a seller to sell his or her properties faster, and earn income during the duration of the promissory note being financed.
The proposed Rule would impair obligations of existing contracts in cases involving contracts to sell with seller-financing, lease with option to buy with seller-financing, and other similar contracts.
Proposed Rule §3400.13 Requires Individuals To Be Licensed By States With Exemptions:
3400.13(e) of the proposed Rule provides that a State is not required to impose the prohibitions: (a) from “engaging in the business of a loan originator with respect to any dwelling or residential real estate in the State, unless the individual first registers and obtains and maintains a valid loan originators license for the State; and (d) complies with the same requirements in the case of an independent contracts engaging in residential mortgage loan origination, if: “(4) an individual who offers or negotiates terms of a residential mortgage loan with or on behalf of an immediate family member of the individual; and (5) any individual who only offers or negotiates terms of a residential mortgage loan secured by a dwelling that served as the individual’s residence.”….(underscoring supplied)
Loopholes To Proposed Rule:
A loophole to the proposed Rule is for the seller, who is amenable to seller financing of a residential income property, to hire the services of a licensed loan originator to offer or negotiate terms of a residential mortgage loan to a prospective buyer.
Another loophole is to retain “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 the client,” and who is not “compensated by a lender, a mortgage broker, or other mortgage loan originator or by any agent” thereof, pursuant to 3400.13(e)(6) of the proposed Rule.
The proposed Rule, prohibiting seller-financing without loan originator license except for family or one’s own residence, should not be codified into regulation because it deprives owners of their property rights to indulge in seller-financing, and it impairs obligations of existing contracts.
If it is found to be within the constitutional rule-making power of the Congress delegated to HUD, and not an over-reaching regulation beyond the scope of the SAFE Act, the loopholes of hiring a licensed loan originator or licensed attorney are available to owners willing to do seller-financing.