NOTE: The following is for discussion purposes only and is not intended to substitute for legal research or advice on a particular issue. Further, because this area of the law has changed and is changing, it is critical to examine the actual statutes in effect at the time of the relevant occurrences. This discussion is general, is not intended to be comprehensive, and may not be updated.
Part 1 - Remind us, what was/is Dodd-Frank?
We have encountered numerous clients, more than a few lawyers, and even a judge or two, who do not understand the history and legislation commonly referred to as "Dodd-Frank." This is not surprising because the law is a byzatine modification of other areas of law which morphed over time as it was interpreted by the new federal agency known as the CFPB. So let's start at the beginning - what was/is Dodd-Frank?
As part of the aftermath and bail-out of the 2008 financial "crisis," Congress tapped Rep. Barney Frank and Sen. Christopher Dodd to draft regulations supposedly targeted toward preventing the recurrence of such an event. (In this author's humble opinion, this was akin to asking Mr. and Mrs. Fox to supervise reform of hen-house security). The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111–203, H.R. 4173) was signed into law by President Obama on July 21, 2010.
Dodd-Frank made sweeping changes to numerous areas of federal law as well as creating an entirely new body of regulations. As relates to real estate lending, Dodd-Frank modified the SAFE ACT, TILA, and RESPA. Dodd-Frank also created the Consumer Financial Protection Bureau, a new federal enforcement super-agency.
OK - let's start with the SAFE Act.
THE SAFE ACT Title V of P.L. 110-289, the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”) 12 USC 51 et seq.
Originally enacted on July 30, 2008, the SAFE ACT was signed by President Bush as part of the Housing and Economic Recovery Act which was the first supposed effort at preventing the collapse that was unfolding in 2008. The SAFE Act required states to pass legislation relating to mortgage loan origination licensure. In Wisconsin, provisions intended to comply with the SAFE Act were incorporated into the banking laws at Chapter 224, Stats., effective January 1, 2010.
2010 - Wisconsin Chapter 224
2010 - Wisconsin Chapter 224
Chapter 224, Stats, incorporated federal definitions of mortgage loan originators, mortgage brokers and mortgage bankers. A "mortgage loan originator" was defined as an individual who, for compensation or gain, takes a residential mortgage loan application or offers or negotiates the terms of a residential mortgage loan. Wis. Stat. § 224.71(6)(a). There were stated exceptions which should be reviewed for particular cases but which are not discussed here except to note that there was an exemption for a seller selling his/her domicile.
The broad definition of a mortgage loan originator, along with the following definitions, had fairly broad effects on who needed a mortgage loan originator's license.
- "Residential mortgage loan" = "any loan primarily for personal, family, or household use that is secured by a lien, mortgage, or equivalent security interest, on a dwelling or residential real property located in this state."Wis. Stat. § 224.71(14).
- "Residential real property" = "real property on which a dwelling is constructed or intended to be constructed."Wis. Stat. § 224.71(15).
- "Dwelling" = dwelling as defined by federal TILA = "a residential structure or mobile home which contains one to four family housing units, or individual units of condominiums or cooperatives." Wis. Stat 224.71(1f)
Under the plain language of Chapter 224, and as interpreted by the Division of the Banking Administrator of the Wisconsin Department of Financial Institutions, a mortgage loan originator's license was required for home sales to consumers using seller financing via land contract, mortgage, or second mortgage (unless the home was the seller's home).
There was substantial confusion and concern at both the state level and the federal level as to the effects of the SAFE Act. In the meanwhile, pursuant to Dodd-Frank, a new regulatory entity was created, the Consumer Financial Protection Bureau, and it began the process of creating regulations including modifications to the SAFE Act.
In January of 2013, the CFPB released its final rules with a stated effective date of January 2014. (Note, several CFPB rules took effect between 2010 and 2014, so it is important to check timeframes and applicable rules and regulations for any particular case).
In an effort to comply with the revised SAFE Act as interpreted by the CFPB in its rules and regulations, on April 24, 2014, Gov. Walker signed 2013 Wis. Act 360 (Act 360) which further modified Chapter 224, Stats.
Among other changes, notably, the modified Chapter 224 definition defined mortgage loan origination to mean regularly engaging in the business.
224.725 Licensing of mortgage loan originators.
(1) License required. Except as provided in sub. (1m), an individual may not regularly engage in the business of a mortgage loan originator .... (without a license).
(13m) “Regularly engage," with respect to an individual, means that any of the following applies:
(a) The individual engaged in the business of a mortgage loan originator on more than 5 residential mortgage loans, in this state or another state, in the previous calendar year or expects to engage in the business of a mortgage loan originator on more than 5 residential mortgage loans, in this state or another state, in the current calendar year.
(b) The individual is acting on behalf of a person who is, or is required to be, licensed as a mortgage lender, mortgage banker, or mortgage broker in this state or another state.
(c) The individual is acting on behalf of a registered entity.
In other words, Chapter 224 now exempts from the mortgage loan originator license requirements individuals offering financing on five or fewer properties per year.
NOTE: Although this provides an exemption for seller-financing from the SAFE Act, there are different requirements and exemptions which must be considered for other areas implicated by Dodd-Frank such as TILA and RESPA.
Stay tuned for a disucssion of those other areas.