Q- Can an investor sell upto but not exceeding 5 properties on contract without a license?
A- Yes, in Indiana, as of 2012.
5 is fine. 6 is prohibited.
In response to the August 2011, federal changes to the HUD SAFE Act rules, Indiana changed its rules. Additionally, the Indiana General Assembly changed the Indiana Code to reflect changes in the federal law. As a result, the Indiana Department of Financial Institutions now takes the position that a person can engage in five (5) mortgage transactions per year without being subject to the SAFE Act.
Opponents of the SAFE Act had argued to HUD that an investor is not subject to the SAFE Act, unless the investor engages in a certain number of transactions each year. A large number of public comments to the draft federal rules urged HUD to allow a limited number of transactions each year without requiring a license. This is referred to by many as the “de minimis” exception. HUD expressly rejected the concept of a “de minimis” exception. HUD’s position is that Congress did not give HUD the authority to exclude certain transactions from the licensure requirements. HUD’s rules state it this way:
In regard to the request for a de minimis exemption . . . , as noted in HUD’s response to the earlier comments on seller financing, HUD has no authority to establish a de minimis exemption for individuals who are engaged in the business of a loan originator. However, Indiana regulators take the position that the HUD rules permit the states to define the “habitualness” standard. Thus, Indiana has passed rules stating that the SAFE Act only applies to persons who do fewer than 6 transactions per year. The statute in Indiana now only applies to persons who are “regularly engaged” in mortgage loan transactions, which includes land contract sales. Here’s what the new Indiana rule says:
“Regularly engaged” means a person who:
(A) engaged in the business of a mortgage loan originator on more than five (5) mortgage transactions in the previous calendar year, or who expects to engage in the business of a mortgage loan originator on more than five (5) mortgage transactions in the current calendar year; or
(B) serves as the prospective source of financing on more than five (5) 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 (5) mortgage transactions in the current calendar year.
Accordingly, you are not regulated as a loan originator and are not required to hold a license, if you do fewer than six (6) mortgage transactions per year.
Summary of the New Rules
The final SAFE Act rules describe the minimum standards for the state licensing and registration of residential mortgage loan originators, requirements for operating the Nationwide Mortgage Licensing System and Registry (NMLSR), and HUD’s federal oversight responsibilities pursuant to the Secure and Fair Enforcement Mortgage Licensing Act of 2008 (“SAFE Act”), to ensure proper monitoring and enforcement of states’ compliance with statutory requirements. The SAFE Act is a 2008 law that requires every state to adopt loan originator licensing and registration requirements that meet the minimum standards specified in the SAFE Act. Indiana has passed its own SAFE Act and regulations as required by the federal law. In short, everyone who engages in certain mortgage-related transactions must have a mortgage loan originators license.
The new HUD rules codify the minimum licensing standards and HUD’s oversight responsibilities under the SAFE Act. The new rules also clarify or interpret certain statutory provisions that pertain to the scope of the SAFE Act’s licensing requirements, and other requirements that pertain to the implementation, oversight, and enforcement responsibilities of the states. The new rules make substantial changes to the draft rules that were the basis of rules adopted by many states. The changes to the federal rules will require that many states revisit their state rules and make changes to match the new federal rules. So, the rule-making process is still not finished, even after three years since the SAFE Act was first passed by Congress and signed into law by the President. However, with a couple important exceptions, the new federal rules do bring clarity to the SAFE Act and make it easier to understand what is lawful and what is prohibited.
Why 5 but not 6?
Simply put, the Indiana Department of Financial Institutions looked at the exemption number under the federal Truth In Lending laws, which is five (5) transactions per year, and decided to use the same number. While there is no logical link here, it sure makes it easy to remember how many transactions per year are permitted before these federal and state laws would be triggered.