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UNSAFE: UNINTENDED CONSEQUENCES OF SAFE MORTGAGE LICENSING ACT OF 2008 MAKE IT HARDER FOR SOME LOCAL BUYERS TO FINANCE THEIR HOME PURCHASES

Local buyers hoping to finance their home purchases with a loan from a parent or other family member are going to need to change their plans. Quickly. Sellers offering financing to prospective buyers too.  As of January 1st, 2011, ONLY Illinois mortgage licensees, regulated/licensed banks, savings & loans, credit unions, insurance companies, and the like can make residential mortgages for gain or profit..

Non-interest bearing mortgage loans are still allowed.

The new rule was enacted to implement a Federal law intended to enhance consumer protection and reduce fraud in the mortgage industry. That protection it seems, comes at a cost. Consumers have no choice now. Licensed mortgage lenders are the only game in town. At least for residential transaction.

THE FEDERAL LAW:
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”), was passed on July 30, 2008.  The federal obligated each of the 50 states to enact their own laws requiring licensure of mortgage loan originators (lenders) according to national standards and to participate in the Nationwide Mortgage Licensing System and Registry (NMLS).  The Act sets minimum standards for licensing and registration of state-licensed mortgage loans.  The Department of Housing and Urban Development (HUD) is charged by the SAFE Act with establishing and implementing a system for mortgage loan originators in States that do not meet the minimum requirements

State-licensed loan originators must  
complete pre-licensure training,
pass written tests,
take annual continuing education courses,
be fingerprinted,
submitted to a national registry and to the FBI for a criminal background check;
provide authorization to the registry to obtain an independent credit reports, or provide appropriate surety bonds.

The SAFE Act required the states to have a licensing and registration system in place by either July 31, 2009 (for states whose legislatures meet annually) or July 31, 2010 (for states whose legislatures meet biennially). The federal registry itself just opened on January 31, 2011.

THE PROBLEMATIC FEDERAL PROVISION:

This law applies to  any individual who, for compensation or gain, takes a residential
mortgage loan application or offers or negotiates terms of a residential mortgage loan application. There are no apparent exceptions. This means that anyone who expects to collect interest on a mortgage loan, including say,  sellers wishing to give a buyer financing or parents intending to help a child out, are deemed to be receiving compensation or gain in the process. They must take the classes, tests and otherwise enter the federal registry.

THE PROBLEMATIC STATE PROVISION:

Although Illinois law exempts individual who offer loans with immediate family members and who offer loans secured by their own residences from registration as loan originators, the Illinois Residential Mortgage License Act prohibits the funding, originating and servicing of residential mortgage loans without a license.

HELP ON THE WAY:

Last week, Senator Michael Frerichs introduced SB1603, seeking to exempt anyone who makes three or fewer residential mortgage loans a year from licensure. If and when this bill is enacted into law, seller financing, and intra-family secured mortgage lending may resume.

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