Seller Financing Redux
INTRODUCTION: Oregon, as mandated by federal law, adopted legislation which, in connection with residential seller financed transactions, requires that the seller either obtain a mortgage loan originator (MLO) license, or retain the services of a licensed MLO to negotiate the financing terms. Two previous Fine Print columns dealt with the initial adoption of the legislation, and expansion of the exemptions, and you can link to those two columns, here: BE SAFE: Comply with S.A.F.E.!, and here: The New Three Transaction Exception In Oregon. The following deals with a further recent expansion of the available exemptions.
Question: I am a real estate broker and have a client who wants to provide seller financing, but the property is held by the client in a limited liability company (LLC). I understand there is new Oregon legislation expanding the exemptions from mortgage loan originator licensing to LLC’s. Is this correct, and what are the limitations?
Short Answer: You are correct. In the last legislative session, SB 879 was passed, which, among other things, expands the availability of the three transaction exemption from mortgage loan originator licensing to LLC’s. Prior to this legislation, the exemption was only available to individuals. This legislation does not take effect until January 1, 2016.
While the expansion is welcome, it should be noted there are significant “gotchas” to the legislation which any seller financer with properties held in one or more LLC’s should be aware of, as well as their advisors. Keep on reading for the details.
Long Answer: As you likely know, existing Oregon law provided several exemptions to sellers who want to provide financing of the sale of their properties from having to either be licensed as a mortgage loan originator (MLO), or involve a licensed MLO in the negotiations. These include, among others: (1) where the seller was selling a home which was either occupied by, or had been occupied by, the seller as the seller’s residence (SB 879 did not change this exemption); (2) where the seller was involved in a transaction with or on behalf of other designated family members (SB 879 did not change this exemption); and (3) where the seller was involved in selling not more than three dwelling units in any 12 month period (none of which had been occupied by the seller as the seller’s residence) (and which also included a condition that the seller could not hold at any one time more than eight “residential mortgage loans” – i.e., the financing paper (this exemption was expanded by SB 879).
Under SB 879, as to the latter exemption (the “3 transaction exemption”), the 3 transaction exemption now applies not only to sellers who are acting on their own as individual sellers, but also if they are acting on behalf of owners of the dwelling unit which are limited liability companies (to emphasize, this expansion is limited to LLC’s, and does not apply to corporations or other entity structures) in which the individual is also a member of the LLC.
In order to qualify for the LLC to qualify for the exemption, there are a number of additional conditions:
(a) the membership in the LLC is limited to the individual, and/or the individual’s designated family members.
(b) the individual and the LLC can not have engaged in advertising activity that evidences the individual or the LLC are engaging in the business of making residential mortgage loans (this is similar to the annual 10 transaction exemption for private money lenders from the mortgage lender licensing law);
(c) The individual complies with new disclosure requirements relating to the cap on the number of residential mortgage loans which can be held at any one time. Basically, and logically, the cap of not being permitted to hold more than eight residential mortgage loans at any time will apply to those loans collectively held in the name of an individual, as well as the LLC (or multiple LLC’s) in which the individual is a member.
For example, if an individual holds four seller financed loans in the individual’s own name, and the individual is also a member (there is no specified minimum percentage membership interest), of an LLC or LLC’s which hold five seller financed loans, then the individual as well as the LLC or LLC’s, would not be entitled to the exemption.
In order to determine whether an individual claiming this exemption holds eight or fewer seller financed residential mortgage loans, new ORS 86A.203 (3) (as a result of SB 879), requires disclosure by the individual to the Oregon Department of Consumer and Business Affairs (DCBS), of the aggregate of all such loans held by any LLC in which the individual is a member. It’s unclear as to how this process will work, when the disclosure must be made, with what frequency, and so on, and I understand DCBS is working on enacting new regulations to address this new disclosure obligation.
(d) The individual does not engage in any of the conduct prohibited in ORS 86A.224 or 86A.236 (these statutes set out a lengthy list of types of prohibited conduct, including acting negligently, engaging in fraudulent conduct, failing to make required federal or state disclosures, as applicable, and so on).
This latter condition highlights the fact that, as structured, even if a seller is exempt from the licensing requirement for an MLO, as required by ORS 86A.200, the seller is still an MLO for all other purposes, if the seller engages in the conduct defining an MLO – ORS 86A.200 (4): “(4)(a) “Mortgage loan originator” means an individual who, for compensation or gain: (A) Takes an application for a residential mortgage loan; or (B) Offers or negotiates terms for a residential mortgage loan.”
Bottom line: the seller would be well advised to consult with a legal advisor to determine whether the exemption applies and what must be done to insure compliance.