THE NEW THREE TRANSACTION EXCEPTION IN OREGON FOR SELLER FINANCINGS: BE WARY!
Question: I am a licensed real estate broker in Oregon, and am representing a seller of a single family rental property who is interested in offering seller financing. The client does not live in the property and has never lived in the property. I understand that Oregon’s law dealing with seller financing was recently amended, and that my client can go ahead and offer and negotiate terms of the seller financing, and that I may assist him, all without having to get licensed as a mortgage loan originator (MLO). Is this true?
Answer: Unfortunately, you are only partially correct. The new law (HB 2856), was passed and signed by the governor on June 4, 2013, and amends Oregon’s existing version of the federal SAFE Act (Secure and Fair Enforcement of Mortgages Act) Act. However, it has not yet taken effect (the effective date will be September 3, 2013), and further, for you as the broker, the new law did nothing to change existing law as it relates to the involvement of a real estate broker. Simply put, you still can not participate in any substantive respect in the seller financing element of a residential mortgage loan transaction and be compensated for it without having to first become a licensed MLO.
Let’s first deal with how the new law will impact your client. In order to do this, it is first important to understand how Oregon law works regarding the initial determination of whether Oregon’s version of the SAFE Act even applies to the transaction.
Oregon is different from many states and federal statutes and regulations as to its mortgage licensing requirements, as Oregon focuses on the nature of the property, and not the purpose of the financing. If the property improved with a one to four unit residential dwelling, or if the property is vacant, but the financing is intended for the construction of a one to four unit residential dwelling, then the Oregon SAFE Act applies. It does not matter if the buyer intends to buy the property solely for investment purposes, or if the buyer is not an individual, but an entity, such as a limited liability company or a corporation. The nature of the collateral is what is controlling.
Therefore, even though your client is selling a single family residential rental property, it will not matter if the buyer is buying it for the buyer’s primary residence, or buying it for investment purposes as a rental property, the Oregon SAFE Act will apply, unless there is an applicable exception. If there is no exception, then the seller, in order to offer seller financing, would either have to become licensed as an MLO, or bring on an MLO to handle all aspects of the seller financing.
Under the existing version of the Oregon SAFE Act, there were a few exceptions available to a seller providing seller financing, which included (and still include) the following, among others:
A. If the seller was offering or negotiating seller financing with a buyer who had a familial relationship to the seller, such as a brother, sister or parent or child.
B. If the seller had either previously occupied the property or is now occupying the property as the seller’s primary residence. In other words, even if the property now being sold is occupied by a tenant (as framed in your question), if the seller had previously occupied the property as the primary residence, this exception would apply. Of course, this is a fairly narrow exception, and generally would not cover those individuals who are engaged in the business of buying properties, rehabbing them, and then selling them, with an offer of seller financing. HB 2856 is intended to address this, but does so in a fairly limited way.
HB 2856 (the full text of the bill can be seen below), added the following new exception, with the following conditions:
A seller may offer or negotiate three seller financed loans without having to be licensed as an MLO (or retain the services of a licensed MLO), IF ALL OF THE FOLLOWING CONDITIONS ARE MET:
1. The seller may not offer or negotiate more than three seller financed loans in any twelve month period (note the calendar year is not the measurement).
Potential Trap: The bill doesn’t refer to closed loans, so query whether if a seller engaged in more than three offers of seller financing in any twelve month period, even if only three transactions close, would the exception to be lost?
2. The bill refers to the seller as an “individual”, so it would appear that the exception is not available to sellers providing seller financing which are entities, such as limited liability companies or corporations.
3. Each of the three properties is to be secured by “a dwelling unit”. This would appear to mean that there must an improvement on the property being sold, and the exception would not apply to seller financing of the construction of a residential improvement on a vacant lot, even though the definition of a residential mortgage loan for purposes of the Oregon SAFE Act includes such construction financing.
4. Each of the three properties must not be or have been occupied as the seller’s residence.
5. The exception is subject to federal scrutiny as to whether the terms of the exception may not be in accord with the federal SAFE Act, but as Oregon’s version is substantially more strict than what was required by the federal SAFE Act, I don’t see the feds intervening.
6. .Finally (and this condition applies not only to the new three financing exception, but also to the existing primary dwelling exception, any seller attempting to utilize either exception may not “hold” more than eight residential mortgage loans at any point in time.
What does this mean for a seller? Take a hypothetical. A seller does three seller financings of properties, none of which were the primary dwelling of the seller in the first 12 month period, and each financing has a five year term. Then the seller does another set of three seller financings in the second 12 month period, as well as a seller financing using the primary dwelling exception. In the third 12 month period, the seller would only be able to do one seller financing transaction, as that will then result in the seller holding eight residential mortgage loans. The seller will then have to wait until at least one of the existing seller financings is paid off, or otherwise sold to a different party. And of course, if any of the buyers goes into default on the financing terms, and perhaps files a bankruptcy, or the seller has to initiate foreclosure proceedings, as long as the seller is holding that particular residential mortgage loan, it will mean that the seller’s ability to do the maximum number of seller financed transactions is going to be limited.
Complex? You bet. What can you do for your client? Just make sure the client is aware of the law, and recommend consultation with an attorney who is knowledgeable in the area.
Does the new law change anything for you as the real estate broker? No.
As was addressed in a previous The Fine Print column on the subject (from November, 2012, and you can access it at https://www.total-property.com/index.php?action=newsletterArchives), while there is an exception for the real estate broker from the MLO licensing requirement, it can be basically summarized as this: do not get involved in obtaining any compensation from your client over and above what would generally be expected in connection with a non-seller financing transaction, whether the seller has an exception to licensing under the Oregon SAFE Act or not. Here are some of the general rules for real estate brokers when taking on a listing of a seller who wants to offer seller financing:
1. Make sure the seller knows about the Oregon law on the subject.
2. If the seller does qualify for an exception, make sure that the seller retains the services of a licensed MLO and in providing your services, do not in any respect get involved in any part of the terms or conditions of seller financing. You can note in the listing remarks that the seller is interested in seller financing, but that’s it. Do not state potential terms, do not have discussions with any third parties about potential terms, and simply stay away from that aspect of the transaction.
If the seller does qualify for an exception, based upon communications with the State of Oregon, it would appear that you can be involved in assisting the seller, such as putting financing terms in purchase and sale documents and so on, but you may still not be compensated for doing so beyond your traditional commission. Having said this, a technical interpretation would suggest that even in such a circumstance, the real estate broker should stay away from being involved in any aspect of the seller financing.
Also, note that it is a dangerous position for the real estate broker to follow, as how do you really know that the seller qualifies for an exception? For example,, if the seller is utilizing the new three transaction exception, how do you know that the seller does not hold more than eight residential mortgage loans?
3. Make sure that your compensation in all cases is only for your services as the listing broker, and is commensurate with listings where seller financing is not involved. You want to be able to represent you have received no compensation from the seller because of the seller financing component of the transaction.
FINALLY! Not really. You may think the above is the end of the discussion about seller financing in Oregon. Unfortunately, that is far from the truth. Because of certain amendments to the Truth In Lending Act made through Dodd Frank, which take effect January 10, 2014, through the regulations adopted by the CFPB, there is now a further complex interplay between federal law and state law on the subject of seller financing, and whether a seller has to be licensed or not. Oregon law on the subject is simply not definitive if the Truth in Lending Act applies to the transaction. This will be addressed in detail in the next The Fine Print column. Stay tuned.