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The S.A.F.E. Act, more fully known as the "Secure and Fair Enforcement for Mortgage Licensing Act of 2008," is a federal law that each state is required to implement. The intent of this legislation is to achieve better consumer protection in order to avoid the abuses of the past.

The Texas version of this law, sometimes abbreviated "T-SAFE," was passed in 2009 and contains tighter rules than the federal law. Note that the T-SAFE licensing rule applies only to residential owner financing.

T-SAFE places a licensing requirement on certain types of owner financing provided by professional investors. Since traditional owner finance transactions, wraps, and land trusts are all a form of owner finance, the Act applies to these transactions; however, the seller is required to be licensed only if the property is not the seller's homestead and/or the sale is not to a family member. For example, if the subject property is an investment rental house being sold to a non-family member, a strict reading of the law would mean that the seller is required to have a residential mortgage loan origination (RMLO) license from the Texas Department of Savings and Mortgage Lending ("TDSML") in order to complete this transaction.

However, state agencies typically have the power to issue rules and regulations designed to clarify and implement the acts of the legislature. In the case of T-SAFE, the Commissioner of the TDSML has ruled that the Act will not be applied to "non-pros" - persons who make five or fewer owner-financed loans in a year, thus preserving the so-called "de minimus exemption" under Finance Code Sec. 156.202(a)(3).

Does T-SAFE effectively shut the door on non-homestead owner finance for persons who do more than five such deals per year? Not necessarily. The TDSML has expressly approved the role of an "intermediary agent" who, for a fee ranging from half a point to a point (i.e., 1%) of the loan amount, will step in and satisfy the Act's requirements. The intermediary agent will supply the new form of Good Faith Estimate, Truth in Lending disclosures, order an appraisal, give state-specific disclosures, and the like, and insure that all "cooling periods" are observed in the loan process. So, non-homestead "OF" transactions can still be done by professional investors, but with only with the assistance of a licensed person - an "RMLO." The practical result? OF deals will still be available, but at a higher net cost.

There has been a proliferation of RMLO's as a result of T-SAFE. Note that there is an exception to the licensing requirement for attorneys who as part of their drafting duties provide loan terms to the buyer, but attorneys so far are steering clear of this loophole because of potential liability. It therefore appears that RMLO's are here to stay. A careful investor/seller is well-advised to utilize an RMLO in every owner-financed transaction both as a means to comply with T-SAFE and to offload potential liability.

The TDSML may enforce T-SAFE by a variety of measures, including license suspension, a fine of up to $25,000, and an order to make restitution to the buyer. What does restitution mean in this case? It is likely that it would include a refund of the down payment and all monthly payments made by the buyer.

T-Safe is not the only law designed to protect buyers and avoid the resurgence of mortgage loan fraud. It significantly overlaps with other recent statutes.

(1) Chapter 5 of the Texas Property Code, extensively amended in 2005, provides strict rules and penalties relating to "executory contracts" such as contracts for deed and lease-options, devices that typically fall under the category of "owner finance." The intent of these changes was to remedy abuses by sellers - e.g., collecting a large down payment and then, if the buyer fell behind, using the eviction process to repossess the property as if the buyer were no more than a tenant. This approach unfairly confiscated any equity that had been deposited and accumulated by the buyer in the property.

Under Chapter 5, numerous initial and ongoing requirements must be observed with respect to executor contracts of any kind, and the burden is on the seller to comply. Failure to do so incurs not only penalties under Chapter 5 (return of all payments made by the buyer) but also liability under the Deceptive Trade Practices - Consumer Protection Act, which can involve treble damages plus attorney's fees. Note that Chapter 5 includes no seller defenses.

(2) The Dodd-Frank Law is a federal statute that overlaps T-SAFE and Prop. Code Ch. 5 in regulatory scope. It requires that a seller/lender in an owner financed transaction involving a residence to determine at the time credit is extended that the buyer/borrower has the ability to repay the loan. The seller is obligated to investigate the buyer's credit history, current and expected income, current obligations, debt-to-income ratio, employment status, and the like in order to make this determination. This law provides a de minimus exception for persons doing not more than three owner financed transactions per year (so long as the seller/lender is not in the building business) but the loan must be fully amortizing (i.e., there may be no balloon); the seller must determine that the buyer has the ability to repay the loan; and the owner-financed note must have a fixed rate or, if adjustable, must adjust only after five or more years and be subject to reasonable annual and lifetime limitations on interest rate increases. The intent of Dodd-Frank is essentially to put an end to the practice of making of loans to people who cannot afford to pay them back.

(3) Beginning Jan. 1, 2008, Property Code Sec. 5.016 requires: (1) that 7 days notice be given to the buyer before a closing in which an existing loan is and remains in place; (2) giving the buyer this same 7 day period in which to rescind the contract to purchase; and (3) and also requires that the 7 day notice be sent to the lender. These notices are the obligation of the seller and must be in the form prescribed by the statute. Actual lender consent, however, is not required. Note, however, that Property Code Sec. 5.016(c)10 provides an exception "where the purchaser obtains a title insurance policy insuring the transfer of title to the real property," although few title companies like to get involved in creative financing. Sec. 5.016 is an odd law that has no "teeth" to speak of, although future legislation may change that. For now, it has not become a significant impediment to ownerfinanced transactions.

Owner finance has traditionally been a favorite tool of Texas investors. It may be true that greater protection of buyers has been achieved by T-SAFE and other laws (including Prop. Code Sec. 5.061 and Dodd-Frank), but these measures have also had the effect of raising closing costs, particularly if an RMLO is involved as an intermediary agent. Consult a qualified real estate attorney BEFORE entering into a sales contract calling for owner finance and NEVER use forms off the internet to do an owner-financed transaction. Liability under recent statutes is just too great to take the risk.

Information in this article is proved for general educational purposes only and is not offered as legal advice upon which anyone may rely.  The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences.  Consult your tax advisor as well.  This firm does not represent you unless and until it is retained and expressly retained in writing to do so.

Copyright © 2011 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his web site, http://www.LoneStarLandLaw.com