Private lenders or hard money lenders exclusively making investment mortgages to non-homeowners are generally exempt under the SAFE Act. We describe the SAFE Act, highlighting the specific considerations private lenders and hard money lenders must take into account originating and servicing their loans.
In This Article
Why did the SAFE Act come about?
In response to the U.S. mortgage meltdown in 2007, Congress enacted the Secure and Fair Enforcement for Mortgage Licensing Act (the SAFE Mortgage Licensing Act of 2008) SAFE Act. This act is designed to provide consumer protection and reduce fraud by ensuring minimum standards for the licensing and registration of mortgage loan originators.
Who Needs to Be Licensed Under the SAFE Act?
Individual residential mortgage loan originators employed by agency-regulated institutions must register with the registry, obtain a unique identifier, and provide it to consumers. Additionally, agency-regulated institutions must require their employees who are mortgage loan originators to comply with these requirements and adopt written policies and procedures to assure compliance with the registration requirements.
SAFE Act Final Rule
HUD issued a final rule on June 29th, 2011, outlining the criteria used to determine the role of a mortgage originator for the purpose of state compliance and federal licensing laws. The rule clarifies the meaning of “engaging in the business of a loan originator” and specifies activities that do not require licensing under the SAFE Act.
For instance, individuals who take an application but never negotiate or offer loan terms, employees of government agencies or non-profit organizations acting as loan originators, and those making an offer of loan terms without receiving an application from the borrower directly or indirectly are not required to be licensed under the SAFE Act.
Defining a Loan Originator
The act defines a “loan originator” as an individual who takes a residential mortgage loan application, offers or negotiates the terms of a residential mortgage loan for compensation or gain. Engaging in the “business of a loan originator” refers to acting as a residential mortgage loan originator with financing provided in a commercial context and with regularity and habitualness.
It’s important to note that not everyone who acts as a loan originator is necessarily subject to the SAFE Act’s registration and licensing requirements. The distinction lies in whether an individual is in the habitual business of making loans in a commercial sense.
Further details and the full text of the SAFE Mortgage Licensing Act final rule, effective as of October 1, 2010, can be found on the HUD.gov website. However, it’s essential to seek competent legal counsel and financial advice for specific circumstances as we cannot provide legal or financial advice.
Exemptions from SAFE Act Licensing
While the SAFE Act aims to establish minimum licensing standards for mortgage loan originators, there are certain exemptions that apply. For example, individuals who take an application but never negotiate or offer loan terms are not required to be licensed under the SAFE Act. Similarly, employees of government agencies or non-profit organizations who act as loan originators as part of their job description are also exempt from the licensing requirements.
Engaging in the Business of Loan Origination
The distinction between individuals who meet the definition of a loan originator and those who engage in the business of a loan originator is an important one. Not everyone who acts as a loan originator is necessarily subject to the SAFE Act’s registration and licensing requirements. The key factor is whether the individual is engaging in the business of a loan originator in a commercial context and with some regularity and habitualness.
For example, someone who takes back loans on properties they own on an occasional basis is not considered to be engaging in the business of a loan originator and would not require a license. On the other hand, a builder who is in the business of building homes and then selling them with owner financing would likely be considered to be engaging in the business of a loan originator and would need to be licensed.
Non-Commercial Lending and the SAFE Act
If you are a private lender or a hard money lender and only make a few loans to private individuals to buy a home they live in, and you don’t earn a fee or points, you are probably not required to be licensed by the SAFE Act. This is because the SAFE Act’s licensing requirements are focused on commercial lending activities, not occasional, non-commercial lending.
It’s important to note that the interpretation and implementation of the SAFE Act is the responsibility of the Department of Housing and Urban Development (HUD). While the SAFE Act establishes minimum licensing standards, individual states are required to enact their own licensing standards that meet the requirements of the federal law.
Seeking Legal Counsel and Financial Advice
If you are unsure about whether you or your business activities are subject to the SAFE Act’s licensing requirements, it is crucial to seek competent legal counsel and financial advice. The regulations can be complex, and the consequences of non-compliance can be significant. By working with experienced professionals, you can ensure that you are operating in compliance with the law and protecting your business and your clients.
Conclusion
Private lenders and hard money lenders who are not originating residential mortgages are generally exempt from the SAFE Act’s licensing and regulatory requirements. However, interpretations vary by state and it is essential to seek the guidance of legal, financial, and tax professionals when considering compliance for your business.
The key is for private lenders and hard money lenders to only originate investment loans for non owner occupiers. To be secure you are not coming within the remit of the act, you should avoid all homeowner loans, and also loans on second homes, that the borrower could reside in.
Further Reading on the SAFE Act:
- Visit the HUD.gov website for detailed information on the SAFE Act.
- View pdf of the SAFE Mortgage Licensing Act Final Rule, effective as of October 1 2010.
- Guide to Seller Financing Under SAFE and Dodd-Frank Acts
What Other Regulations Are there?
- Dodd-Frank Act
- Truth in Lending Act (TILA)
- Real Estate Settlement and Procedures Act (RESPA)
DISCLAIMER: We are not attorneys and we cannot advise you regarding your particular circumstances. You must always obtain competent legal counsel and financial advice. We believe this information to be accurate, but please check with a qualified real estate attorney in your state before making any decision based on this information.