RUBENSTEIN: New law may put limits on residential seller financing

clifford rubensteinA new federal law intended to enhance consumer protection and reduce fraud in the residential loan market may put the kibosh on seller financing of residential properties.

This has huge implications for owners of rental housing.

The government is heralding the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 as another step in the recovery and revitalization of America’s residential housing market by requiring registration and minimum national standards for loan originators.

However, others protest that, unless seller financing is exempted, the act is another attack on individual property rights, one that takes away an individual’s right to offer seller financing on property the person owns. Critics also say the act penalizes the private investor and will further stifle the residential housing market.

Seller financing is the method by which the owner of a property sells the property and agrees to personally finance the purchase so that the buyer does not have to get a loan from a bank or other lender.

Seller financing is typically used by owners of properties in the lower to middle price range and for buyers who for one reason or another do not qualify for bank financing.

The new act requires every loan originator taking a residential mortgage loan application from a consumer to obtain a mortgage loan originator license from the state agency where the property is located. Each state’s licensing requirements at minimum must comply with standards for education, testing, criminal background check and credit background check.

A mortgage loan originator is defined as any individual who, for compensation or gain, takes a residential mortgage loan application, or offers or negotiates terms of a residential mortgage loan application.

Once an originator is licensed, the information will be submitted to a nationwide mortgage licensing system and registry so that consumers can have free access to information about an originator and know the originator has met the act’s training and education requirements. The information will also include employment history and any disciplinary or enforcement actions against the originator.

So what’s the problem? Sellers must be licensed. The proposed rules only exempt an individual seller financing a sale of his or her own residence.

Seller financing is an age-old tradition based on private property rights. But the new act is part of the Housing and Economic Recovery Act of 2008 in response to the banking system’s abuses of the system, and seller financing had nothing to do with this. The government shouldn’t be penalizing private investors for the sins of bankers.

Seller financing provides opportunities for otherwise non-creditworthy consumers to purchase houses. People who have purchased residential properties as an investment now stand to be locked out of the only financing vehicle to realize their equity.

Not all is lost. The proposed rules on seller financing are not final.

Much of the public comment to the Department of Housing and Urban Development has been about seller financing.

HUD hopes to issue final rules by the end of the year. However, once the final rules are issued, they go to the Office of Budget and Management for 90 days of review and possibly more negotiations.

The aim to protect consumers against unscrupulous originators and require a minimum competency level for originators should be applauded, but as with other well-intentioned legislation, unintended consequences must be eliminated.

An individual’s right to sell his or her property and finance the sale is a private property right that in no way contributed to the residential mortgage mess. Quite the contrary, seller financing has always filled the financing void created by the mortgage industry.

Let’s hope (I’d say “pray” but I’m not sure that can be said in public anymore) that the final HUD rules recognize the folly and only try to cure the disease that caused the problem.•

Rubenstein is an associate at Carmel law firm Maurer Rifkin & Hill, PC. Views expressed here are the writer’s.

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