Seller Financing in Maine: What You Should Know If You Self-Finance the Sale of Residential Real Estate in Maine
With the real estate market slow to recover, buying and selling homes can be a long and drawn out experience. Buyers, hurt by tough financial times, may be slow or unable to acquire home loans from banks in light of poor or diminished credit. Many sellers have seen property languish on the market for months, even years, as they try to recoup value in the limping economy. For both buyers and sellers, seller financing can be an attractive alternative to conventional bank loans to spur sales. From a seller’s perspective there have been a few developments in the past few years that you need to know about before making any decisions with regard to financing the sale of property you own. Chief among these considerations is the Safe and Fair Enforcement for Mortgage Licensing Act (the Safe Act).
Congress passed the SAFE Act in 2008[i], directing the states to establish minimum standards and licensing requirements for residential mortgage loan originators. This legislation sought to increase uniformity, improve accountability, combat fraud and enhance consumer protections in light some unscrupulous lending that led to the housing bubble which burst in 2007.
The Maine Legislature acted on this directive by enacting its version of the SAFE Act in 2009[ii] (the Maine SAFE Act). The language of the Maine SAFE Act tracks that of its federal counterpart very closely. Unless exempted, an individual may not engage in the business of a mortgage loan originator without first obtaining, and maintaining annually, a license. A “mortgage loan originator” is an individual who for compensation or gain or in the expectation of compensation or gain takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan.[iii] In turn, a “residential mortgage loan” is any loan primarily for personal, family or household use that is secured by a mortgage, deed of trust or other equivalent consensual security interest on a dwelling or residential real estate upon which is constructed or intended to be constructed a dwelling.[iv] In 2011, the legislature added an exclusion to this definition which is unique to the Maine law. Under this exclusion, a “credit sale,” defined as the sale of a dwelling or residential real estate purchased for a personal, family or household purpose in which credit is extended by the seller and either the debt is payable in installments or a finance charge is made, is not considered a residential mortgage loan.[v]
This legislation has prompted many people, who have or may have residential property to sell and are interested in financing a potential sale of that property themselves, to ask whether or not they qualify as a mortgage loan originator and would thus be required to obtain a license under the Maine SAFE Act.
To answer that question we look to the Maine Bureau of Consumer Credit Protection which oversees implementation and enforcement of the Maine SAFE Act. However, the Bureau has not undertaken any rulemaking in this regard and has itself looked to the federal Department of Housing and Urban Development (HUD) for clarification and guidance. HUD issued a final rule relating to the SAFE Act in June 2011 which provided some much needed detail. The rule states that engaging in the business of a loan originator requires a commercial context and a degree of habitualness or repetition.[vi]
Unfortunately, HUD did not provide any clarification on what it meant by habitualness or repetition. It did state that an individual selling his or her own residence or vacation property cannot be considered engaged in the business of a loan originator since the required commercial context and habitualness are likely absent. However, it left the issue with respect to other properties owned, but not lived in, by a seller unresolved. While selling and financing these other properties will likely result in a profit, a seller may undertake so few of these transactions that the requisite habitualness cannot be met. HUD declined to establish a “de minimis” exemption allowing, without licensing, a certain number of transactions per seller.
Maine’s “credit sale” exclusion, discussed above, is subject to any rule, advisory ruling or interpretation issued by the Bureau or HUD that determines that it actually does constitute a residential mortgage loan as defined by the SAFE Act. So far, neither agency has made any such determination. By enacting this exclusion, it would appear that the State’s legislature was attempting to circumvent any detrimental effect the SAFE Act had on the financing of residential properties by the seller for a personal, family or household purpose. However, in light of HUD’s 2011 rule, some uncertainty remains.
Further clarifications are likely as more questions arise and legislative updates are enacted. An individual contemplating seller financing should tread carefully. While a failure to comply with the Maine SAFE Act should not affect the validity or enforceability of any resulting residential mortgage loan, a person found in violation may be subject to administrative fines and penalties.
Any further questions or concerns should be directed to a qualified attorney.
[i] S.A.F.E. Mortgage Licensing Act, 12 U.S.C. §§ 5101 – 5116 (2012).
[ii] 9-A M.R.S. §§ 13-101 – 13-120 (2012).
[iii] 9-A M.R.S. § 13-102(7).
[iv] 9-A M.R.S. § 13-102(13).
[v] 9-A M.R.S. § 13-102(1-A).
[vi] 24 C.F.R. § 3400.103(b) (2011).