DAVID J. WILLIS ATTORNEY
Copyright © 2018. All rights reserved worldwide.
SAFE Act In Texas Residential Transactions
by David J. Willis, J.D., LL.M.
The "Secure and Fair Enforcement for Mortgage Licensing Act of 2008," commonly known as the SAFE Act, is a federal consumer protection law that each state is required to implement. The Texas version of this law, abbreviated "T-SAFE," was passed in 2009 and contains tighter rules than the federal law.
Licensing and registration are a major emphasis of the SAFE Act. On the national level, the Nationwide Mortgage Licensing System and Registry was created under the supervision of the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators. On the state level, individual states were required to devise their own licensing and registration regimes. In Texas, this was accomplished by T-SAFE.
T-Safe and its Implementation by the TDSML
T-SAFE places a licensing requirement on certain types of residential 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. RMLOs, who are trained in compliance with both federal and state law pertaining to mortgage loan origination, function as a buffer against recurrence of the abuses of the past.
State agencies 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 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 Tex. Fin. Code Sec. 156.202(a)(3).
The Role of Intermediary Agents
Does T-SAFE effectively shut the door on non-homestead owner finance for persons who do more than five such deals per year? Not now that RMLOs are available. These intermediary agents charge fees (ranging from half a point to a one percent of the loan amount) and will step in and ensure that the Act's requirements are satisfied. The RMLO supplies the new form of Good Faith Estimate, the Truth in Lending disclosures, orders an appraisal, gives state-specific disclosures, and the like, and insures that all "cooling periods" are observed in the loan process. So, non-homestead owner-finance transactions can still be done by professional investors, but only with the assistance of these licensed individuals. The practical result? Owner financing deals remain feasible but at a higher net cost.
There has been a proliferation of RMLOs 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 RMLOs 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.
Who is a loan originator?
Anyone who takes a loan application, arranges credit or helps a consumer apply for credit, offers or negotiates loan terms, or even refers someone to a loan originator or creditor falls within the definition of "loan originator." Brokers may engage in these activities so long as they are not compensated for doing so. Clerical persons are also exempted, but it is risky for a professional investor to rely too heavily on this loophole.
Real estate attorneys should be careful to avoid negotiating loan terms in these cases since they are not exempted.
There are also complex new rules relating to compensation of loan originators, designed to avoid any incentive for such persons to inappropriately steer consumers into the wrong loan product.
Penalties for Violation of T-SAFE
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? Likely a refund of the down payment and all monthly payments that were made.
T-Safe is not the only law designed to protect buyers and avoid the resurgence of mortgage loan fraud. It significantly overlaps with other statutes:
(1) Chapter 5 of the Texas Property Code. Sec. 5.061 et seq. provides strict rules and penalties relating to executory contracts such as contracts for deed and lease-options, devices that typically fall within the owner finance category. The intent is 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 accumulated equity. Now, initial and ongoing requirements must be observed with respect to such contracts 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. Read our article on Executory Contracts in Texas.
(2) The Dodd-Frank Law. Dodd-Frank is a federal statute that overlaps T-SAFE and Prop. Code Ch. 5 in regulatory scope. Its intent is to put an end to the practice of making of loans to people who cannot afford to pay them back. Dodd-Frank 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. There is a de minimus exception for persons doing not more than three OF transactions per year (so long as the seller/lender is not in the building business), but the OF note may not balloon (except in the case of a single sale per year by a non-builder) and must usually be fixed-rate. Read our article on The Dodd-Frank Law in Texas.
(3) Federal Reserve Regulation Z prohibits certain forms of compensation payable to loan originators.
(4) Seven-Day Notice. Prop. Code Sec. 5.016 requires: (1) that seven-days notice be given to a buyer before a closing in which an existing loan remains in place; (2) that the buyer be given this same period to rescind; and (3) and that a similar seven-day notice be given to the lender. Giving notices in the form prescribed by the statute is the duty of the Seller. Lender consent, however, is not required. Closing with title insurance eliminates the notice requirement.
It may be true that greater protection of buyers has been achieved by T-SAFE, Prop. Code Ch. 5, 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 real estate attorney before entering into an OF sales contract and never use forms off the internet to do an OF 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 © 2018 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 website, http://www.LoneStarLandLaw.com