The New SAFE Act: The Death of Seller-Financing in Texas?

A recent law passed by the Texas Legislature has quietly hit the books, one that promises to have a significant and adverse effect on Texas consumers’ ability to obtain financing for the purchase of residential property. The legislation serves to place further limitations on a prospective purchaser’s financing options, at a time when the current negative banking environment already has severely restricted the viability of real estate transactions.

Called the Texas SAFE Act, the new law requires individuals who offer to finance a residential purchase, either as a third party lender or through seller-financing, to be licensed as a mortgage loan originator. What this means is that an individual is now prohibited from fronting the money for an acquaintance to purchase residential property, or offering seller-financing to a potential purchaser of his/her own property. What, you say? This can’t be true, not here in Texas!

Unfortunately, it is true. The law passed in 2009, in part as a result of a directive placed on the states from the current administration in Washington, D.C. As of April 2010, the Texas Department of Mortgage Lending has announced its intention to commence enforcement activity to crack down on the perceived dangers of obtaining financing from an unlicensed person. There are only two exceptions, or exemptions, to the law: First, the law doesn’t apply if you are offering seller-financing on the home in which you actually reside. Second, the law doesn’t apply to persons who offer financing to others in a “direct familial relationship”. For all other residential transactions, a person is prohibited from offering financing or seller-financing, even on a one-time, single transaction. The fine for non-compliance is a mere $25,000 PER OCCURRENCE! Selling your beach-house or a rental unit? You better hope that your buyer can qualify for bank financing.

It remains to be seen how this new law will be enforced, or whether due to public outcry, its scope may be narrowed in the future. But for now, the SAFE Act is extremely broad and far-reaching, and seemingly further hampers consumers’ ability to kickstart the economy in an already depressed real estate market.

Copyright 2010 Jeffrey A. Rattikin, all rights reserved