“Danger Will Robinson, The SAFE Act Does Not Compute!”
I admit it. I’m a sci-fi nerd dating back to – uhhh – never mind the year. And although I loved Star Trek, nothing could ever beat a campy episode of Lost In Space. I remember thinking I was going to grow up fighting monsters just like the Robinsons. I soooo badly wanted a laser gun for the holidays. In case anyone cares, December is just around the corner.
Last week, I briefly mentioned the SAFE Act in my post regarding seller financing and got slammed with questions. When does it apply? What must you do to comply with it? How can we get around it? What about this new HR 4173 Dodd-Frank Act? How does that change things?
The answers to these questions are complex, and it’ll take a few posts to do it, but I’ll take a shot at answering them.
Let’s get started with Lesson One —
The first step in our journey is to watch this exciting episode from Lost in Space entitled The Mechanical Men:
Wasn’t that awesome!!!?? OK, so how does this relate to the SAFE Act?
You must imagine the big robot as the Federal SAFE Act, and imagine the little robots as each State’s specific SAFE Act.
Yes – you read this correctly. Each State has a specific “mini-version” of the SAFE Act and all of these little State robots interact with and are tied to the big Federal robot.
Therefore, in order to answer SAFE Act questions, we must first understand the relationship between big robot SAFE Act and little robot SAFE Act.
During my days at Hogwarts School of Law, I learned that sometimes Congress passes a law that is in direct conflict with a State’s law. If you live in that State, which law must you follow?
As a general and overly simplistic rule, the Fed always wins. For instance, if Congress outlaws wearing white pants between Labor Day and New Year’s Day (god forbid), States cannot pass laws in direct conflict with this law. However, if big robot says little robot can be more restrictive, States can then pass a law denying white pants even after New Year’s. Also, if Congress is silent on a particular matter, it is entirely up to the States to regulate that matter. In our clothing example, what if the State wanted to regulate purple pants? As long as Congress is silent on the issue, the State can probably regulate it.
And so it is with the SAFE Act and seller financing. Congress passed licensing and origination standards for people deemed to be engaging in “mortgage origination.” States were then forced to pass little robot SAFE Acts in compliance with Federal standards – which each State did. The SAFE Act itself remained silent on seller-financing. However, certain Federal agencies charged with interpreting the SAFE Act added some “regulations” (more on this later). These regulations suggest that, for the most part, sellers are not “exempt” from the law unless selling to an immediate family member.
End of story, right? No. Congress then permitted the States to create different restrictions on seller-financing. Some States kept the Federal language the same. Other States made their own restrictions. And all because Congress allowed it.
So why does this matter?
It matters because most people reviewing the SAFE Act are missing the most critical issue – that although the Federal SAFE Act is relevant to whether and when a seller can finance without a mortgage originator license, it is not nearly the end of the story. If you really want to know when you will be deemed a mortgage originator, when you must be licensed, how you must write a loan if you’re an originator, etc., you must first look at your State’s SAFE Act. It will likely incorporate most, but maybe not all of the Federal SAFE Act language, and it may allow some seller financing without licensing – but you will have to understand the limitations imposed by your particular State.
Now that you understand how Federal robot and State robots play together, we can move on to the specific issues presented by these laws.
Next time I will address:
- When and how the SAFE Act applies to investors attempting to seller-finance;
- When and how the Dodd-Frank Wall Street Reform and Consumer Protection Act applies (say that 5 times fast);
- How the Fed SAFE Act, the Truth-in-Lending Act and the Dodd-Frank Act all play in the Federal sandbox together (and why mass confusion now reigns);
- More critical issues related to seller financing with each of these laws.
“Crush, kill, destroy” (you L-I-S aficionados understand what I’m saying) Jeff
P.S. Jump start your SAFE Act knowledge by Googling your particular State’s SAFE Act. I guarantee you’ll find some good stuff in there.