Accession Law LLC


Mar 25, 2011

Seller Financing Of Homes Often Requires a "Mortgage Loan Originator License"

Thinking of selling a property to a home buyer on a land contract?  You may need to think again.  Effective January 1, 2010, a "mortgage loan originator's license" is required for any person who offers or negotiates the terms of a "residential mortgage loan."   Adopted under the guise of emergency financial recovery legislation, the federal SAFE Act of 2008 required all States to adopt legislation complying with mortgage licensing standards set forth in the SAFE Act.

Wisconsin modified Chapter 224, Stats., to comply.
Sections 224.71-224.83 govern mortgage loan bankers, originators and brokers.  The provisions now prohibit a property owner from negotiating for the sale of property with seller financing under many circumstances unless the owner is licensed as a "mortgage loan originator."

According to sec. 224.71, "mortgage loan originator" means an individual (not excluded by par. (b)) who, for compensation or gain,  ... offers or negotiates terms of a residential mortgage loan.  "Residential mortgage loan" means any loan primarily for personal, family, or household use that is secured by a lien or mortgage, or equivalent security interest, on a dwelling or residential real property in Wisconsin.  "Residential real property" means real property on which a dwelling is constructed or intended to be constructed.  These broad definitions would require mortgage loan origination licensing of sellers as well as their attorneys and agents for many seller-financed real estate transactions. However, there are exclusions.

According to 224.71(6)(b)
(b) "Mortgage loan originator" does not include any of the following:

1. An individual engaged solely as a loan processor or underwriter, unless the individual represents to the public, through advertising or another means of communication such as the use of business cards, stationery, brochures, signs, rate lists, or other promotional items, that the individual can or will perform any of the activities of a mortgage loan originator.
2. An individual who performs real estate brokerage activities only and is licensed under s. 452.03, unless the individual is compensated by a lender, mortgage broker, or another mortgage loan originator or by any agent of a lender, mortgage broker, or another mortgage loan originator.
3. An individual solely involved in extensions of credit relating to time-share plans, as defined in 11 USC 101 (53D).
4. An employee of the department of veterans affairs when engaged in duties related to administering the veterans housing loan program under subch. III of ch. 45.
Further, section 224.726 describes persons exempt from mortgage loan originator provisions. The provisions relating to mortgage loan originators do not apply to ...:
(2) Any individual who offers or negotiates terms of a residential mortgage loan with or on behalf of the individual's spouse, child, sibling, parent, grandparent, or grandchild, including any stepparent, stepchild, stepsibling, or adoptive relationship.
(3) Any person who offers or negotiates terms of a residential mortgage loan secured by a dwelling that served as the individual's residence.
(4) A licensed attorney who negotiates the terms of a residential mortgage loan on behalf of a client as an ancillary matter to the attorney's representation of the client, unless the attorney is compensated by a lender, mortgage broker, or mortgage loan originator or by any agent of a lender, mortgage broker, or mortgage loan originator.
Take, for example, the case of a person selling vacant land on which the buyer intends to build a residence.  The seller is NOT EXEMPT and may not negotiate the terms of land contract financing without a mortgage originator's license.  The seller's agent would be exempt from licensing per 224.71(6)(b)(2) unless the agent is "compensated by a lender."  Since the seller is the lender, this exemption probably does not apply.  In any event, since the seller cannot negotiate the terms of a land contract without violating the law, the agent cannot arrive at an accepted offer to purchase.

If the seller has lived in the property, the seller can offer financing.  If the property is neither used nor intended to be used as a residence by the buyer, the seller can offer financing.  However, in the relatively common case where a tenant proposes to buy property from his or her landlord on a land contract, the seller is not permitted to contract for that sale unless the seller has a loan originator's license.

UPDATE - 2013 

The regulatory picture described above is now even more complicated given the passage of the Dodd/Frank legislation.  Many legal commentators have opined that the one-two punch of the Safe Act and Dodd/Frank has removed the possibility of seller financing from most transactions.

UPDATE - 2014
The definition of "mortgage loan originator" has been modified again following the CFPB regulations.  Make sure you are reviewing the most recent statutes and regulations. 

Real estate attorney James N. Graham,