What Does the S.A.F.E. Act Mean for Land Investors and Seller Financing?

Safe Act Long

REtipster provides real estate guidance — not legal advice.

The information below can be impacted by regional legislation and other unique variables. For the real deal, always consult with a qualified legal professional before taking action.


In 2008, the U.S. Congress and President Bush passed the Secure and Fair Enforcement for Mortgage Licensing (commonly known as the “SAFE Act”).

The SAFE Act was part of the larger Housing and Economic Recovery Act of 2008, which came in response to the subprime mortgage crisis that unfolded around the same time.

The idea behind the SAFE Act was to require all 50 states to implement a Mortgage Loan Originator (MLO) licensing and registration system as a way of having a uniform licensing standard throughout the United States.

The SAFE Act was also intended to create and maintain a centralized public database containing all the relevant information on MLOs throughout each state. As Wikipedia explains,

This should allow consumers to perform research, obtain unbiased professional information, and help them choose professionals with whom to deal. Especially, it will aid them in identifying and avoiding bad actors. Eventually, it is hoped, widespread consumer use of the Registry will drive dishonest and incompetent MLOs out of the mortgage loan origination business entirely.

Prior to the SAFE Act, each state had its own licensing standards, but under the SAFE Act, each state was required to bring their legislation in line with the uniform standards required by the SAFE Act. Furthermore, if any state didn't fall in line with these uniform standards, then HUD would ultimately have the power to control the licensing responsibility for any state that didn't conform to the standards (source).

What's the Problem?

When the SAFE Act first hit the scene in 2008, it caused a significant outcry from many real estate investors who had been in the regular practice of using seller financing to sell their properties.

In order to continue providing seller financing on their properties for sale, it would effectively require many (though not all) of these individuals to become licensed mortgage loan originators.

Given the added complexity that comes with maintaining a mortgage loan originator license (which arguably falls outside the scope of what most “mom and pop” real estate investors bring to the marketplace), the SAFE Act cast a wide net that would disqualify many real estate investors from being able to sell their properties on terms.

Another tricky thing about the SAFE Act is that this regulation was originally created at the federal level, but was ultimately intended to be implemented at the state level. Since each state can either, “operate their own systems, subject to stringent federal standards, or they can participate in the Nationwide Mortgage Licensing System and Registry” (source), it's entirely possible (even probable) that each state's version of the SAFE Act will have some variations.

Covering each individual state's rules is beyond the scope of this article – but if you're looking for more information on how the SAFE Act is written in your state, it shouldn't be terribly difficult to find. Simply do a Google search for “State Name” and “SAFE Act” – and you should be able to find what the rules say in each applicable state.

With that said… given that each state is essentially looking at the same set of standards to design their own implementation the SAFE Act (assuming they don't simply participate in the Nationwide Registry), this article is going to focus on the text of Regulation G, the S.A.F.E. Mortgage Licensing Act—Federal Registration of Residential Mortgage Loan Originators, because this is the original electronic code of federal regulations and represents the foundation that the SAFE Act is built upon.

Disclaimer: Before we get any further, please be aware that I am not an attorney and the information in this article should not be interpreted as legal or financial advice. The information below is simply a summary of how I read and interpret the SAFE Act and its related material. This analysis is based on several sources and should not be relied on for any transaction without first consulting your attorney.

Note: This blog post gives a written summary of my findings, but if you’d prefer to watch a video overview instead, you can see that right here.

The SAFE Act and Vacant Land

Back when the SAFE Act first hit the news, I was more than a little scared.

As someone who was just getting into the land investing business (and was planning to use seller financing as a big part of my business strategy), I had a GIANT pit in my stomach when I heard about how this was going to sabotage the seller financing strategy for so many real estate investors.

Luckily, I had heard from most of my fellow land investors that the SAFE Act wasn't going to affect seller-financed transactions that involved ONLY raw land.

At the time, the news sounded great to me, so I just accepted it and moved on without paying much more consideration to the SAFE Act. It wasn't until just recently that I decided to do a deep dive into Regulation G in an effort to point out very clearly how and why the SAFE Act does not apply to the typical vacant land transaction.

To start with, let's look at Regulation G§1007.101 – which covers the authority, purpose, and scope of the SAFE Act.

As we already explained above, the “Purpose” of the SAFE Act is as follows,

(b) Purpose. This part implements the S.A.F.E. Act's Federal registration requirement for mortgage loan originators. The S.A.F.E. Act provides that the objectives of this registration include aggregating and improving the flow of information to and between regulators; providing increased accountability and tracking of mortgage loan originators; enhancing consumer protections; supporting anti-fraud measures; and providing consumers with easily accessible information at no charge regarding the employment history of, and publicly adjudicated disciplinary and enforcement actions against, mortgage loan originators.

As this section clearly spells out, the SAFE Act is for mortgage loan originators.

What is a “Mortgage Loan Originator” exactly? Let's look closer at how Regulation G defines this in §1007.102.

Mortgage loan originator means

(1) An individual who:

(i) Takes a residential mortgage loan application; and

(ii) Offers or negotiates terms of a residential mortgage loan for compensation or gain.

Since a mortgage loan originator is defined as an individual who underwrites and negotiates the terms of a residential mortgage loan, let's look closer at how Regulation G defines this in the same section.

Residential mortgage loan means 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 (as defined in section 103(v) of the Truth in Lending Act, 15 U.S.C. 1602(v)) or residential real estate upon which is constructed or intended to be constructed a dwelling, and includes refinancings, reverse mortgages, home equity lines of credit and other first and additional lien loans that meet the qualifications listed in this definition. This definition does not amend or supersede 12 CFR 613.3030(c) with respect to Farm Credit System institutions.

Similar to many of the regulations linked to Dodd-Frank, there seems to be a very clear specification that a residential mortgage loan (and thus, all the rules associated with it) is defined as a loan secured by properties with a “dwelling” (currently, or intended).

In accordance with this definition, so let's look closer at how the word “dwelling” is defined in section 103(v) of the Truth in Lending Act, 15 U.S.C. 1602(v).

(w) The term “dwelling” means a residential structure or mobile home which contains one to four family housing units, or individual units of condominiums or cooperatives.

Given this, it appears that when a piece of real estate does not contain a dwelling, and furthermore, if there are no immediate plans for the property to contain a dwelling (i.e. – residential structures, mobile homes, individual condominium units or cooperatives), this type of property would NOT be subject to the requirements of the SAFE Act as defined in Regulation G.

However, we should also note that the definition of “Residential Mortgage Loan” includes residential real estate upon which is intended to be constructed a dwelling. In other words, vacant land only falls outside of this definition IF there are no plans to build improvements on the property.

In other words… if you're selling a residential vacant lot with owner financing, it may be wise to include a provision in the loan documentation specifying that the borrower will NOT to develop the property until after the loan is paid in full.

In many cases, this kind of pre-construction payoff will most likely happen by default (because most construction lenders won't lend money if the seller has an outstanding deed of trust or land contract memorandum recorded as part of the property's title history), but this isn't necessarily a guarantee. As a protective measure, it would be prudent for most sellers to be abundantly clear about this requirement (in writing) at the time of closing.

Further Reading

Similar to my article on Dodd-Frank, there were a few outside articles and reports that I found quite helpful when compiling this blog post. Here they are (in no particular order):

Free Webinar With Seth and Jaren

You are invited to an exclusive webinar with Seth Williams and Jaren Barnes on Wednesday, October 24 at 8:00pm EDT (5:00 PDT).

Jaren will be hosting a live presentation addressing some of the most critical elements involved with finding deals and motivated sellers in the land business.

In this live webinar, you’ll get the scoop on how to choose the right market, how motivated sellers think, where to find them and what to say ( including some of the best tips, tricks, stories and lessons you’ll need to know as you start pursuing cheap land deals on your own). You won’t want to miss it!

Space is limited, so register now to hold your spot!

2016-08-15_15-47-09

About the author

Seth Williams is a land investor and residential income property owner, with hundreds of closed transactions and nearly a decade of experience in the commercial real estate banking industry. He is also the Founder of REtipster.com - a real estate investing blog that offers real world guidance for part-time real estate investors.

Did you find this article to be helpful?

Our goal is always to provide our users with the most up-to-date and relevant content so that we can continue to empower others! Please share your feedback.

Join the conversation

Your email address will not be published. Required fields are marked *


This site uses Akismet to reduce spam. Learn how your comment data is processed.

  • David says:

    This is one of those minor details that can catch you! I think I’ve made every mistake in the book but haven’t tried seller financing yet. Seems like it might be worth it, but how can you guarantee someone won’t start building on their property sooner than when they pay off their mortgage? Thanks Seth for taking the time to clarify this issue for us!

    • Seth Williams says:

      Hi David – I’m not sure you can technically “guarantee” anything – but you can include some conditions in your land contract or deed trust stating that the buyer won’t improve the property without your permission (or without paying you off first). Even then, it still doesn’t mean they’ll follow through with this part of the agreement – but I would think it better to include this kind of condition than nothing at all.

  • Michael Smith says:

    Thanks for the information. It’s been really helpful!

Bonus: Your FREE copy of the INVESTOR HACKS e-book gives you instant access to the REtipster Toolbox, with even more resources to succeed.

Success requires decision
and action

The market moves fast. Stay ahead with the latest tips in low-risk, high-return real estate investing for your business.

Scroll Up
X

Welcome to REtipster.com

We noticed you are using an Ad Blocker


We get it, too much advertising can be annoying.

Our few advertisers help us continue bringing lots of great content to you for FREE.

Please add REtipster.com to your Ad Blocker white list, to receive full access to website functionality.

Thank you for supporting. We promise you will find ample value from our website. 

Get Classified Access

Get Classified Access

Join the email list and get INSTANT ACCESS to the RETIPSTER TOOLBOX - with tons of free tools, downloads, video tutorials and more!

Check your email to confirm!

Get Started Right Now!

Where should we send your free stuff?

Check your email inbox to confirm!