BE SAFE: Comply with S.A.F.E.!

Question: I am a licensed real estate broker in Oregon, and have been asked to represent a seller who wants to offer seller carryback financing. Do I need to be concerned about any laws which may specifically apply to such terms?

Answer: Yes! You must be thinking of Oregon’s version of the federal S.A.F.E. Act (Secure and Fair Enforcement for Mortgage Licensing Act) (the “Act”), and the answer to your question is that it depends upon the nature of the property being sold and the current or past use of the property by the seller.

Oregon adopted the federal S.A.F.E. Act in 2009.  Per HUD, the federal S.A.F.E. Act “… is designed to enhance consumer protection and reduce fraud by encouraging states to establish minimum standards for the licensing and registration of state‑licensed mortgage loan originators… .”  You may ask, then, what does this have to do with seller carryback financing and real estate brokers?

Because the Act’s broad definition of a “mortgage loan originator” will generally apply to (1) a seller of the seller’s own property if the seller offers or negotiates the terms of seller carryback financing, as well as (2) a real estate broker in the representation of a seller which includes the offer or negotiation of the terms of seller carryback financing and receives compensation (i.e., the commission) from the seller. There is no safe harbor provision under the Act (as there is for private money lenders) and therefore even one such transaction will bring the seller or the real estate broker under the Act. If the Act applies, and a seller or real estate broker engages in a transaction as an unlicensed mortgage loan originator, the State of Oregon could levy a fine of $5,000 per transaction!

Therefore in such circumstances, what should the real estate broker know, and how can the real estate broker protect himself or herself as well as assist the client seller in being aware of the Act? First, know the conditions and exclusions.

A. The Act only applies to the sale of residential real property (1‑4 dwelling units, or bare land which is planned for construction of a residential 1‑4 unit improvement). The focus is on the type of property and not the type of loan, so even the sale of investment, vacation, or other business purpose properties will be covered.  The sale of commercial real estate would not be covered. However, note that the Act arguably will apply to a mixed use property, such as the sale of a unit with retail space on the ground floor and residential space on the upper floors.

ALERT: the Act would apply to a builder who sells a lot which is intended for construction of a home and proposes to carry the financing of the purchase of the lot and construction of the home.

B. The seller will not have to be licensed as a mortgage loan originator if the residential real property is or was formerly occupied as the bona fide dwelling of the seller.  If the property is now rented out, but was previously occupied by the seller as the seller’s dwelling, the seller will not have to be licensed. But if a seller were to just move into a property for a brief period of time in order to avoid application of the Act, licensing would arguably still be required.

If you find yourself in a situation where you are asked to represent a seller who does not currently occupy the property, but who says he or she did in the past, here is a practice tip:  obtain a declaration or affidavit from the seller as to the circumstances of the prior occupancy and why the move out, and keep this in your file. Also note that the Act does apply in such a situation ‑ it just provides that the seller does not have to be licensed. Therefore, you should not be involved in any respect in the negotiation over the terms of the seller carryback financing, and that element of the transaction should be limited to the seller.

C. The seller will not have to be licensed if the sale of the property is to a member of the seller’s family. Again, the Act does apply, so in such a circumstance, you should not be involved in any aspect of the negotiations over the terms of the seller carryback financing.

D. The Act will not apply to a licensed real estate broker who represents the seller and engages in the negotiations of the terms of seller carryback financing as part of the sales transaction, provided the real estate broker is not compensated by the seller. Obviously no real estate broker wants to work for free, so this exception is of no practical assistance to you.

E. The Act does not apply to the buyer of a property involving seller carryback financing, but there is a catch here for the real estate broker ‑ given that commission is generally paid to both the listing broker and the selling broker by the seller, the Act could apply to the selling broker as well as the listing broker!

There are other exceptions set out in the Act, but the foregoing are generally the ones which will be of the most concern to real estate brokers.

What if the Act does apply or appears to apply? You should inform the seller in writing of this fact (undoubtedly many sellers have never heard of the Act), and urge the seller to obtain competent legal advice as to what the seller can or cannot do (obviously you cannot provide such advice). Next, know and comply with your own limitations in connection with the process. Based in part upon a recent webinar put on by the State of Oregon, here are some general guidelines:

1. You can include in the MLS listing the fact that the seller is willing to consider seller carryback financing, but you should not include any specifics as to the terms of the financing, such as interest rate, term, and so on, and simply state that it is subject to negotiation.

2. If you receive a purchase offer which includes specifics about proposed seller carryback financing terms, you should not engage in any negotiations over such terms, and the seller should not do so either. Instead, at this point, the seller should secure the services of a licensed mortgage loan originator (“MLO”) to handle the negotiation of the terms of the seller carryback financing. There is also the possibility of getting an attorney involved in the negotiation of those terms, which will be discussed in more detail below. If the seller refuses to comply with the Act, I believe you should withdraw from the representation of the seller and terminate the listing.

3. If the seller elects to retain the services of a licensed MLO, then it will be up to that licensed MLO to engage in the negotiations with the buyer and the buyer’s broker, on behalf of the seller, as to the specific terms of the seller carryback financing. You should not participate in any of those negotiations.

As noted above, there is a role to be played by an attorney in seller carryback financing transactions. The Act specifically provides that an attorney can engage in the negotiations over terms of financing, whether seller carryback financing or otherwise, if the work is ancillary to the attorney’s representation of the client and there is no compensation paid to the attorney by certain defined parties. While it may seem circular, the way the law reads, it would appear the attorney can represent the seller in negotiating terms of seller carryback financing, as long as the attorney is not compensated by the seller. Similar to the way it works for a real estate broker, except that an attorney would still be considered a mortgage loan originator ‑ just that the attorney would not have to be licensed. Clear as mud?

So, how does the seller help the process of seller carryback financing? By entering into an arrangement where the attorney represents the seller in negotiating the terms of the seller carryback financing, but is paid for the legal services by the buyer. This could be structured as part of the purchase and sale terms. There are ways to do this which also protect your client, the seller, in the event of a failed sale, which I have heard from a number of real estate investors is a matter of concern to them. If you or your client would like to discuss how this can be done in more detail, feel free to contact me.

Bottom line: for better or for worse, we are in a new era of regulation. If the subject of seller carryback financing comes up in a deal you are being asked to be involved in, whether on behalf of the seller or buyer, be cautious, watch your back (and that of your client), and pay attention to the rules.

The full text of the Act can be found at Oregon Revised Statutes Chapter 86A, beginning at 86A.200. The Oregon Division of Finance and Corporate Securities does have available at its website an FAQ page: http://www.cbs.state.or.us/dfcs/ml/faq/seller_carry.html, which provides quite a bit of useful information on the Act.