The SAFE Mortgage Licensing Act of 2008 (the “SAFE Act”), which requires states to license loan originators, substantially restricts the ability of a small retailer or community operator to sell manufactured homes to purchasers/residents that do not qualify for financing from traditional third-party lending sources. These problems are exacerbated by the Dodd-Frank Act’s changes to the Truth in Lending Act. Nonetheless, appropriately drafted licensing de minimis exemptions may provide some relief to small retailers and community operators.
After implementing the SAFE Act, each state now requires mortgage loan originators to be licensed or registered. While the licensing requirements may vary across states, most states define a “mortgage loan originator” as 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 the terms of a residential mortgage loan, which is defined to include a loan secured by a manufactured home. Without some relief, a small retailer or community operator will need at least one licensed mortgage loan originator to offer financing.
In addition to individual licensing, entity level licensing may also be required. As a result of the manner in which several states implemented the SAFE Act, entity level licensing may include a mortgage banker or mortgage lender license, as opposed to, or in addition to, the installment sales/sales finance and consumer loan licenses that historically applied to manufactured housing finance transactions. The licensing and compliance burdens imposed on a mortgage banker or mortgage lender are generally greater than those that would have previously applied to a lender making a home-only loan.
Without de minimis exemptions or other relief, these licensing burdens, as well as the associated cost, may prohibit small retailers and community operators from providing in-house financing to potential purchasers/residents. For a de minimis exemption to provide the necessary relief to the manufactured housing industry, it must provide relief for transactions that are not secured by real estate. In addition, exemptions must provide relief for the individual engaged in mortgage loan originator activity and the entity that is providing financing.
State De Minimis Exemptions
By our count to date, twenty-five states have adopted thirty mortgage loan originator de minimis exemptions. These states include: Alabama, Arizona, Colorado, Connecticut, Idaho, Indiana, Kentucky, Louisiana, Maine, Mississippi, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Vermont, West Virginia, Wisconsin, and Wyoming.
While there are several states with de minimis exemptions, only six provide full relief to the manufactured housing industry. These states include: Arizona, Indiana, Maine, Montana, Pennsylvania, and Wisconsin. New Jersey also recently adopted a de minimis exemption that provides full relief, but the exemption only extends to transactions involving manufactured homes that are located in communities.
In these states, an individual is exempt from mortgage loan originator licensing even if he or she does not own the home that is the subject of the transaction and the individual is not the source of financing. In addition, these states either have entity level de minimis exemptions for the individual or entity that is providing financing or do not have entity level licensing for home-only transactions.
Indiana has good examples of de minimis exemptions that provide full relief to the manufactured housing industry. In Indiana, mortgage loan originator and entity level licensing are required for those that regularly engage in a regulated activity. With respect to mortgage loan originator licensing, “regularly engaged” is defined to mean: (a) engaged in the business of a mortgage loan originator on more than five mortgage transactions in the previous calendar year, or who expects to engage in the business of a mortgage loan originator on more than five mortgage transactions in the current calendar year; or (b) served as the prospective source of financing on more than five mortgage transactions in the previous calendar year, or who expects to serve as the prospective source of financing, or perform other phases of originations, on more than five mortgage transactions in the current calendar year. Similarly, with respect to entity level licensing, “regularly engaged” is defined to mean: (a) extended or originated more than five first lien mortgage transactions in the preceding calendar year; or (b) extends or originates, or will extend or originate, more than five first lien mortgage transactions in the current calendar year if the person did not extend or originate more than five first lien mortgage transactions in the preceding calendar year.
Eight of the de minimis exemptions provide limited relief because either the individual level or entity level licensing de minimis exemptions apply only to transactions involving real property.
Nine of the de minimis exemptions provide limited relief because they require the individual that is engaged in mortgage loan originator activities to actually be the source of financing. Seven of these exemptions also require the individual that is providing financing to also own the subject home. In addition, there are three de minimis exemptions that are not conditioned on the individual engaged in mortgage loan originator activity providing financing, but do require that the individual own the subject home.
The de minimis exemptions described in the preceding paragraph are problematic from the standpoint of a small retailer or community operator because individual employees engaged in mortgage loan originator activities will not be the ones providing financing and will not own the subject manufactured homes.
Authority for a State to Adopt a De Minimis Exemption
The SAFE Act required individuals engaged in the business as loan originators to either be federally registered as loan originators or licensed as state-licensed loan originators. The SAFE Act directed the Federal Banking Agencies to establish a federal registration requirement for loan originators employed by depository institutions and their subsidiaries. The SAFE Act also sets forth minimum standards that states are required to have in place with respect to mortgage loan originator licensing. If a state failed to adopt or fails to maintain those minimum standards, HUD (now the Consumer Financial Protection Bureau (“CFPB”)) will administer licensing in the state.
In their rules, the Federal Banking Agencies and HUD took different approaches when they interpreted the meaning of “engaged in the business,” as the term is used in the SAFE Act. The Federal Banking Agencies adopted a de minimis exemption for an individual that has never been registered or licensed as a mortgage loan originator and that acts as a mortgage loan originator for five or fewer loans during the prior twelve months.
On the other hand, HUD’s rule provides that an individual engages in the business of a loan originator if he or she engages in a commercial context “habitually and repeatedly,” which may be met “either if the individual who acts as a loan originator does so with a degree of habitualness or repetition, or if the source of prospective financing provides mortgage financing or performs other origination activities with a degree of habitualness or repetition.”
This divergence in interpreting the meaning of “engaged in the business” likely resulted from the different roles that the Federal Banking Agencies and HUD were to play in connection with the SAFE Act. Nonetheless, the Dodd-Frank Act transferred rulemaking authority under the SAFE Act, both for federal registration and state licensing standards, to the CFPB. As a result, if a state were to adopt a de minimis exemption that is consistent with the rule adopted by the Federal Banking Agencies and the rule adopted by HUD, the CFPB cannot object. If the CFPB objected to such a de minimis exemption, it would be taking a position contrary to its own regulations that interpret the meaning of “engaged in the business.”
The de minimis exemption adopted by the Federal Banking Agencies (now a CFPB regulation) and the fact that the CFPB has not taken over licensing of mortgage loan originators in any state that has adopted a de minimis exemption should provide the necessary support to show a state legislator or a state regulator that a de minimis exemption is authorized by the SAFE Act.##
Marc J. Lifset, J.D.
Jeffrey P. Barringer, J.D.