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Seller Financing: Alabama Banking Department Speaks Out

Posted by 15789465 on

I JUST this minute finished a phone call with the Alabama Banking Department.  I asked them three questions:
  1. Does the mortgage loan originator's license requirement apply to seller-financed transactions?  Their answer: YES!
  2. Are there any exceptions for seller financing?  Their answer:  ONLY when the seller is selling his or her personal residence and holding some or all of the financing.
  3. Do "bonds for title" and "contracts for deed" and similar arrangements qualify as "seller financing" and require a license as a result?  Their answer:  YES!
They also advised me regarding some other issues that I will explore and report back to you. They say that mortgage loan originators cannot hold a license all by themselves, they must be "sponsored" by a licensed company. They also say that if you do six or more seller-financed transactions in a year, you are classified as a "creditor" under the Alabama Mini-Code and have responsibilities under those laws.  I previously advised you about Truth in Lending requirements. Like you, I'm not happy about any of this. But, it's the law, and we have to learn how to deal with it.  Please forward this to your friends and colleagues, and ask everyone to subscribe to this blog for updates on this issue, and suggestions regarding what you can do.

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13 comments

  • The law applies to “dwellings.” The Alabama law does not define “dwelling” but refers you to the federal Truth in Lending definition. For purposes of Truth in lending, a dwelling is "a residential structure that contains 1 to 4 units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence. (12 CFR 226.2(a)(19).) " One would assume that a houseboat would also qualify is a dwelling.

    The law exists because the federal government felt that if mortgage loan originators had been licensed in the past, and if part of their licensing was an educational component and background check, and if another part of their licensing required duties and ethical obligations to borrowers, then we would have avoided the financial mess we are in. So, as always, we prepare for the “next war” by planning strategies for the “last war.” The federal government felt so strongly about this, that it told the states to pass their own versions of the law and, if they did not, the federal government would take over licensing and regulation in that state.

    deniselevans on
  • Does this just apply to residential houses? …and exclude lots, land and commercial? Why does it exist?

    starke on
  • grrrrrrrrrrr -
    WRONG answers -
    tell’em they flunked the test!!!!!

    Well darn, there goes an option I had for getting rid of a rental house I have. Thank you for the update!!

    Travis

    Travis Parker on
  • The Feds and the State have indeed created a mess with the AL SAFE Act. The State may say that they will not enforce the MLO provision for owner financing, but when the deal goes south that’s when a problem may develop. While the law specifically upholds the validity of the lien, the vendor could be liable for taking the application or quoting the terms and conditions of their own owner financing because they do not hold a MLO license.

    Ask yourself, who do you think the borrower’s attorney is going to complain too? If they involve HUD, you may be looking at a unfair terms and conditions complaint. Plus HUD will look at all your other deals. HUD may also sue you over this and represent them for free. HUD wants borrowers to be given disclosures in advance. A borrower may claim that had they “known” more about the “loan” in advance they would not have gone through with the deal.

    For example here are some documents required by HUD in advance of the transaction:

    1) GFE 2) TiL 3) Servicing Transfer disclosure 4) Homebuyer booklet

    Also, many of you may be running afoul of the Federal Higher Cost Mortgage Loan law.

    Special Provisions Applicable to Higher-Priced Mortgage Loans
    Higher-priced mortgage loans will be subject to a number of restrictions and prohibitions, including but not limited to the following:
    • creditors shall not extend credit based on the value of the security property without regard to the borrower’s repayment ability, including the borrower’s current and reasonably expected income, employment, assets other than the security property, and mortgage-related obligations, such as property taxes, mortgage insurance, and similar expenses;
    • other than with respect to bridge loans of 12 months or less, creditors must verify the borrower’s repayment ability by verifying the income or assets by using IRS W-2s, tax returns, payroll receipts, or third-party documentation that provide reasonably reliable evidence of the borrower’s income or assets, as well as the borrower’s current obligations;
    • there is a presumption of compliance if the creditor verifies the borrower’s repayment ability as provided in the regulation, and uses the largest payment of principal and interest scheduled in the first seven (7) years of the loan (taking into account the borrower’s current obligations and mortgage-related obligations), and takes into account either the borrower’s total debt to income ratio, or the borrower’s income after paying debt obligations; however, the presumption does not apply to loans that provide for negative amortization or a balloon payment during the first seven (7) years of the loan.
    • prepayment penalties are allowed provided they are otherwise permitted by law, are limited to two years, the penalty will not apply if the source of prepayment funds is a refinancing by the creditor or creditor affiliate, and the periodic payment of principal or interest or both is fixed for at least the first four years following consummation; and
    • creditors must establish an escrow account before consummation for the payment of property taxes, homeowners’ insurance, and mortgage insurance, if the loan is secured by a first lien on a borrower’s principal dwelling; creditors may offer a borrower the opportunity to cancel the escrow after the first 12 months following consummation (this final provision does not become effective until April 1, 2010 (and not until October 1, 2010 if the loan is secured by manufactured housing)).

    In sum the laws have changed and create traps for the unwary. My company is now doing disclosures for and taking applications for vendors that want to owner finance their own property. We charge a small fee, but we think it makes the deal legal on the front end. We hold both a MLO and AL Consumer Credit License. If you are interested you can email me at doug@nfm.cc.

    Doug Ferguson on
  • I’m sorry, I was not very clear with my prior comment. Ham is correct regarding real estate agents. I covered this point in my August 2, 2010 Take Action! newsletter (before I started the blog) when I said I was able to find out from the Alabama Banking Department: “They say that as long as the real estate agent does not receive a separate consideration for negotiating the terms of the seller financing, the agent does not need a mortgage loan originator’s license. In other words, if the agent receives their typical commission whether there is seller financing or not, they do not need a separate license.”
    My personal prediction is that interpretation will change in the future. After reading the legislative history of the federal SAFE Act, and the HUD explanations, and the various Comments submitted to HUD, and the way in which many other states interpret their SAFE Acts, I think real estate agents will not be allowed to negotiate the terms of seller financing unless they have the separate mortgage loan originator’s license. The spirit of the law is very clear—no negotiations without a license. The interpretation of “consideration” is very clear—direct or indirect consideration counts, and merely getting a deal done that might not otherwise be doable without the seller financing qualifies as “indirect consideration.” I hate being the one to say the sky is falling, but look for changes in the future on this issue. For comparison, you might want to review Georgia’s interpretation of some of these issues.

    deniselevans on

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