Seller Carry-Back Transactions in Oregon – Are They SAFE?

“Never let a serious crisis go to waste.” Rham Emanuel [PCQ Translation: Take advantage of  economic tragedy to regulate the lives and activities of more citizens than you ever dreamed possible.”]

What is the SAFE Act?

SAFE is the acronym for The Secure and Fair Enforcement for Mortgage Licensing Act of 2008. Although it is federal legislation that was enacted in response to the national credit and mortgage crises, it requires each state to enact regulatory legislation.  On August 30, 2011, HUD published its Final Rule for SAFE.

SAFE is currently regulated by the Consumer Finance Protection Bureau or “CFPB,” that regulatory Leviathan spawned by Dodd-Frank, which now oversees the Truth in Lending Act (“TILA”); the Real Estate Settlement and Procedures Act (“RESPA”); the Federal Fair Debt Collection Practices Act; Federal Fair Credit Reporting Act; Electronic Fund Transfers Act; Equal Credit Opportunity Act; Home Owners Protection Act; and, Privacy of Consumer Financial Information.  In short, if it deals with consumers and financial matters, it’s a good bet that the CFPB is involved – and if they aren’t involved now, it’s just a matter of time before they will be.

Initially, before the CFPB takeover, HUD was responsible for setting minimum standards for states to follow in the licensing of providers of certain residential mortgage services. It set up the Nationwide Mortgage Licensing System and Registry (“NMLSR”), which is a national database of all mortgage companies and mortgage loan originators.

What is the purpose of the SAFE Act?

SAFE was designed to increase consumer protection in residential lending. It applies to mortgage companies and their mortgage loan originators, or “MLOs,” acting either as employees or independent contractors.   An individual is in the business of loan origination if they, “in a commercial context and habitually or repeatedly” engage in: (1) taking a residential  mortgage  loan  application;  and  (2) offering or negotiating the terms of a residential mortgage loan for compensation or gain; or represent to the public (e.g. through advertising or other means of communicating) that they will perform these two activities. The phrase “taking a residential mortgage loan application” means that the MLO receives it for the purpose of facilitating a credit decision.  The phrase “offering or negotiating” means that the MLO presents particular lending terms for consideration by a borrower.  It is the activity – not its label or the title of the person – that determines whether one is a mortgage loan originator.  The law does not make one a mortgage loan originator if they engage in the above-described conduct exclusively for private (?), charitable, or family purposes.

In order to obtain a license as an MLO, SAFE requires testing, pre-licensure and continuing education, criminal background checks, and financial responsibility. 

What type of transactions does SAFE apply to?

SAFE applies to certain mortgage transactions. A “mortgage transaction” means a credit or loan transaction that is or will be used by the debtor primarily for personal, family, or household purposes and is secured by a mortgage or equivalent consensual security interest on a dwelling or residential real estate.

Oregon laws enacted pursuant to the SAFE Act.

ORS Chapter 86A is Oregon’s response to the SAFE Act.  The MLO laws are enforced by the Oregon Division of Corporate and Financial Securities (“DFCS”). The interpretation of these statutes by DFCS purportedly follows the legislative commentary during the discussion period leading up to the enactment of the SAFE Act.  It can be found in the Federal Register, here.

Does SAFE apply to sellers if they don’t directly “lend” purchase money funds, but merely carry back paper, such as a retail installment contract or note and security interest in the home?

Yes. This was specifically addressed in HUD’s Final Rule:

A ‘‘residential mortgage loan’’ includes an installment sales contract, which the commenters advise is frequently involved in seller financing. ‘‘Residential mortgage loans,’’ as defined by section 1503(8) of the SAFE Act, refers to typical financing mechanisms such as mortgages and deeds of trusts.  In addition, the SAFE Act definition also includes ‘‘other equivalent consensual security interest on a dwelling (as the term ‘dwelling’ is defined by section 103(v) of TILA) or residential real estate upon which is constructed or intended to be constructed a dwelling,’’ which has the potential  for including a broad range of other financing mechanisms. For the purposes of this rule, ‘‘equivalent consensual security interests’’ specifically include installment sales contracts, consistent with the treatment by many states of such contracts in the same manner as mortgages and purchase money mortgages offered by sellers of residential real estate.

Under Oregon law, who qualifies as a mortgage loan originator, mortgage banker and mortgage broker?

A mortgage loan originator, or “MLO,” is defined under Oregon law to mean an individual employed by or acting as an agent or independent contractor for a mortgage banker or mortgage broker with the expectation of compensation or gain that is determined by the amount borrowed or the terms and conditions agreed to by the mortgage loan borrower.  The MLO is the individual having the primary job responsibilities, including negotiating with a potential borrower for the purpose of establishing the terms and conditions of a mortgage loan. A loan originator does not include an individual whose responsibilities are clerical or administrative, such as gathering information, requesting information, word processing, soliciting general interest in mortgage loans, sending correspondence and assembling files.

Subject to several exceptions, a mortgage banker is one who, for compensation or in the expectation of compensation, directly or indirectly makes, negotiates or offers to make or negotiate, a mortgage banking loan or a mortgage loan, and services or sells a mortgage banking loan. The term does not include financial institutions, financial holding companies, bank holding companies, or savings and loan holding companies, as defined under state and federal laws. It also excludes various individuals who make loans secured by an interest in real estate for the person’s own investment and who is not engaged in the business of making such loans: Oregon licensed attorneys; real property owners who sell their own property; builders and contractors who accept repayment on an installment or deferred payment basis and arising out of labor and materials furnished in the improvement of that real property, and those who are exercising their statutory lien rights.

A mortgage broker is one who engages all, or part of the time, for the account of others, or for the person’s own account, in the business of: (1) Selling real estate paper whether as an issuer, agent or principal; (2) Accepting funds from one or more persons or (3) For compensation, or the expectation of compensation, directly or indirectly makes, negotiates or offers to make or negotiate a mortgage loan.  Exemptions for mortgage bankers generally exist for mortgage brokers, and include real estate licensees and attorneys, if such services are incidental to their professional real estate activity.

How does ORS Chapter 86A apply to seller-carried real estate transactions?

DFCS has taken the position that while one may sell their own home [so long as they had lived in it], there is NO exemption for one selling their own rental property or vacation property.  Posted on their website here are several FAQs.  The one pertaining to seller-carried financing reads as follows:

“Question:  I am selling my investment property and I have been told that I need a MLO license to tell the borrower my terms for financing the sale. Where does the SAFE Act state that I need a MLO license?

Answer:  You will not find a statute that that [sic] expressly states you must tell the borrower your terms for financing the sale. The MLO licensing requirements apply expressly and by implication to loan origination activities. It is the absence of an exception that requires the seller to obtain the license to provide financing for an investment property. Specifically, ORS 86A.200(4) defines a loan originator as a person who, for compensation or gain, takes an application or negotiates terms of the loan. It does not provide an exception to the definition for those providing seller carry financing. In addition, ORS 86A.203 requires that loan originators obtain a license. While there is an exception to the license requirement for a seller providing seller-carry financing, that exception is limited to financing on a property that was the seller’s residence. Because there is no exception that covers investment property, the license requirement applies to those transactions.” [Italics mine.]


It is incongruous that DFCS is taking this position, since it diminishes affordability of housing.  Currently, the cost of hiring an MLO is approximately $1,300 per transaction, assuming one can find an Oregon-licensed mortgage broker willing to do so.  While DFCS might say their interpretation is self-evident, it is not – as demonstrated by the sophistry of the answer.[1] One must connect several intellectual dots in order to come to the conclusion that folks owning their own property may not sell it on contract or trust deed, without paying an MLO to handle the “paperwork.”  Of course, property owners are always invited by DFCS to get licensed, in which case Mom and Pop owners of rentals have the pleasure of paying the agency to provide further regulatory oversight of their lives.

Remember, under SAFE, one is in the business of “loan origination” only if, in a commercial context, they habitually and repeatedly engage in the regulated activity. And, if the sale of a rental unit is to another investor, it is not, by definition, “used by the debtor primarily for personal, family or household purposes.” Ergo, SAFE should not apply in such an event.  Lest one argue that first time buyers in a seller-carried sale of a residence need protection too, the harsh penalties and attorney fees that exist under Oregon’s Unlawful Trade Practices Act would seem sufficient.

The Oregon Association of Realtors® is attempting to negotiate a three-transactions-per-twelve months exception with DFCS.  The final draft of the legislation is due out anytime.  It will be important to remember that notwithstanding the existence of an exemption, if passed, it will not eliminate any of the TILA and RESPA rules, should they apply.

[1] Here is where the logic fails:  DCBS concludes that the absence of a single word in SAFE’s legislative history suggesting an intent to regulate these transactions must mean that they were intended to be included in the regulatory scheme.  The sale of Moon rocks and St. Helens ash weren’t mentioned either. Do you suppose…?