Sunday, August 8, 2010

Indiana’s First Lien Mortgage Lending Act – Death to seller financing

Recently, many real estate lawyers have stopped preparing purchase money mortgages and land contracts for buyers and sellers of 1- to 4-family dwellings (unless the seller has lived in it) or land on which 1- to 4-family dwellings may be built. In other words, seller-financing transactions on non-owner-occupied property have slowed to a trickle.

This radical change is partly because of the SAFE Act, which took effect on July 1, 2010 (see my blog of three weeks ago). As a reminder, “SAFE” is an acronym for the Secure and Fair Enforcement for Mortgage Licensing Act of 2008. But seller-financing has also been shut down by Indiana’s First Lien Mortgage Lending Act (IC 24-4.4-1), which dates back to January 1, 2009. Not heard of FLMLA? You’re not alone.

Double coverage

Both SAFE and FLMLA cover the same ground using practically the same wording. When Congress passed the Housing and Economic Recovery Act of 2008 (HERA) which President Bush signed into law on July 30, 2008, HUD was tasked with assisting in revitalizing of the US housing market, preventing foreclosure, and enhancing consumer protection. Title V of HERA is the SAFE Act. The SAFE Act, or something similar, must be enacted in every state. In states failing to act, HUD's model act will control. In any event, Indiana passed its version of the SAFE Act, which took effect July 1.

Interestingly, Indiana already had a law – the FLMLA – which had been in effect for 18 months and which covers the same subject. Nonetheless, two separate provisions now apply, the SAFE Act being a regulation and FLMLA being a statute. The difference is Indiana’s Department of Financial Institutions (IDFI), which enforces SAFE, can change the regulation fairly easily, while the legislature must change the statute. So, tweaking the two provisions to eliminate unintended consequences (did the legislature really mean to prohibit casual investors from using seller-financing on their own property?) may be straightforward on the one hand but rather difficult on the other.

Land contracts vs. mortgages

What’s clear is that both the SAFE Act and FLMLA don’t allow sellers of dwellings to deed their property to buyers and take a mortgage back (unless they’re licensed as a mortgage loan originator or have lived in the dwelling). But some lawyers believe the SAFE Act doesn’t apply if the sale is by land contract instead. Before you think you’ve found a loophole, though, be sure to take a close look at FLMLA, because it clearly outlaws land contracts as well.

While there are exclusions from both the SAFE Act and FLMLA (such as selling your own house and selling, say, a commercial building or a 5- or more-unit residential building), some exclusions are ambiguous enough to discourage lawyers from taking a chance on being considered a mortgage loan originator. The definition is so broad, almost anyone involved in a seller-financing transaction runs the risk of being considered a mortgage loan originator.

There is a way out, but not a very good one. Lawyers could continue drafting mortgages and land contracts on non-excluded transactions by becoming licensed mortgage loan originators. But I think it’s safe to say (no pun intended) most lawyers (including this one) won’t be doing that.

- Morrie Erickson