Mortgage Licensing Law: An Update in Response to New HUD Regulations

In August 2009, the Pennsylvania Legislature did, what many in the real estate community think of as the . . . unthinkable! It amended Pennsylvania's Mortgage Licensing Law ("MLL") so that an unlicensed person (no mortgage broker's license) could not offer mortgage financing to anyone other than a mother, father, brother, sister or child. Yes, second mortgage financing offered by a seller was no longer legal in Pennsylvania!

Now to be fair, Pennsylvania's Legislature did not act on its own. The changes were made in response to the federal SAFE Mortgage Licensing Act which established minimum standards for mortgage licensing that were to apply in all states. Pennsylvania's amendment was an effort to remain compliant with federal law and to provide "enhanced consumer protection."

As you can image, the real estate community's response to this restriction has been deafening. Fortunately this move is leading to change. In August 2001, HUD issued final regulations related to the SAFE Act that were inconsistent with Pennsylvania's newly amended legislation. On October 6, 2011, the Pennsylvania Secretary of Banking, Glen Moyer, issued a letter discussing the Department's position in light of the new HUD regulations. The Secretary stated that until the MLL is officially amended to come into line with HUD regulations, "The Department will not take exception to an individual making or brokering three or less mortgage loans in a calendar year without being licensed . . ."

Although the Secretary's statement appears to announce a return of the prior exception, it is important to recognize that the Secretary's letter is not "the law." It is a statement of the Department's policy and while it is safe to presume that the law will be restored, unlicensed sellers may wish to proceed with caution and obtain the benefit of an opinion from legal counsel before providing mortgage financing. While it is likely very safe for a seller to proceed with seller financing, we believe that the seller should make that determination and that real estate licensees should refrain from offering a legal opinion.

Also of note, in the letter of October 6, 2011, the Secretary also announced that the Department of Banking has reversed its prior position that installment sales agreements are not a form of seller financing subject to the mortgage licensing requirements. The Secretary explained that the reason for this reversal is that under the new HUD regulations, an installment sales agreement is considered to be a "residential mortgage loan" for purposes of the SAFE Act. Such agreement create an "equivalent consensual security interest on a dwelling or on residential real estate" and for that reason are essentially the equivalent of a mortgage. It therefore appears that an installment sales agreement will count toward the annual limit of three if the law is changed as anticipated by the Department of Banking.

All-in-all, the Secretary's letter is welcomed news!

Mr. Goldsmith is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees and representing and defending real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. He routinely counsels employers on employee relations issues as one of the voices of the PAR Legal Hotline. He may be reached at realcompliance.com.

Attorney with Caldwell & Kearns, which serves as general counsel to PAR. He routinely provides advice and counsel to real estate licensees as one of the voices of the PAR Legal Hotline. A substantial portion of his practice is dedicated to providing counsel on real estate matters and representing real estate salespersons and brokers in civil lawsuits. He may be reached at realcompliance.com.