The Safety Net’s Unintended Catch

May 25, 2010

Two years into the Great Recession and people are still disagreeing over the origins of its underlying cause:  the crash of the housing market.  Some argue that borrowers acted irresponsibly by buying houses they could not afford, while others claim that speculators drove up prices in an attempt to turn a quick profit.  Regardless of this debate, there is some consensus that, due to relaxed lending standards and a desire to provide loans to buyers that would not have—or should not have—qualified, banks and mortgage lenders share part of the blame. 

Recognizing this consensus, Congress determined that it needed to take steps to regulate those handling residential mortgages.  Therefore, in response to the impact of the collapsing subprime mortgage market, Congress passed the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (more commonly known as the SAFE Act).  Among its many provisions, this law mandates that states adopt minimum licensing requirements for individuals and companies that offer, negotiate, or solicit mortgages secured by residential real estate.  Although New Hampshire adopted legislation to comply with the Act last year, the state Banking Department has now begun to take an active role in clarifying the broad scope of the Act, and alerting the general public to its requirements. 

This begs the question: Why would the Banking Department bother alerting the general public to a law that regulates mortgage professionals?  The answer to that query highlights one of the biggest problems of the Act; its broad scope.  Hoping to protect consumers from the wide range of individuals and businesses that handle residential mortgages, Congress drafted the law so broadly that non-professionals who participate in otherwise routine mortgage lending transactions have now been caught in its net. 

An example may help illustrate the extent of this problem: Adam agrees to sell to Dave a vacant lot that Adam owns, and Dave informs Adam that he intends to build his new house on the property.  Dave is unable to get a loan from a bank so Adam takes back a mortgage and allows Dave to pay at a later time.  In this scenario, Adam would need to obtain a state-issued license prior to entering into the transaction.  The law does not, however, stop with owners of land.  If Chris, a contractor, performs work on Mike’s residence and takes a mortgage on that property in order to secure Mike’s repayment of the bill, Chris would also need to obtain a mortgage originator license from the state.  Entering into a transaction without being properly licensed can result in the Banking Department imposing fines up to $25,000 for each unlicensed transaction.

To comply with the Act, one can obtain a license.  However, because the intent of the law was to regulate banks, mortgage brokers, and loan originators, the license application requires the disclosure of substantial personal financial information and is more burdensome than what should be expected for non-recurring, private transactions.  For this reason, obtaining a license for an isolated deal is often not practical, which means that the next best option is to fit into one of the SAFE Act’s limited exemptions.

First, the New Hampshire SAFE Act does not apply to those involved in sales of commercial real estate.  Additionally, other specific exemptions include providing financing for the sale of one’s personal residence, as well as the sale of residential property between immediate family members.  So, in the example above, if Adam were selling his house to Dave and taking a mortgage in return, he would be exempt from licensing.  Alternatively, if Adam and Dave were father and son—instead of just friends—no license would be required. 

Although the current SAFE Act imposes a substantial regulatory framework over even the most mundane of transactions, there is hope that the requirements may change.  While the federal government obligated the states to amend their laws by mid 2009, the Department of Housing and Urban Development—the federal agency responsible for enforcing the SAFE Act—has not yet provided final regulations on how to interpret the Act.  Depending on the guidance offered by those final regulations, New Hampshire’s legislature and Banking Department may have some room to amend the current requirements and provide sensible limits to the scope of the well-intentioned SAFE Act.  Until then, those dabbling in mortgage lending should remain mindful that what may appear to be a fairly simple residential mortgage loan may require state licensure.

Aaron Rozenek is a member of the Corporate Department at the law firm of McLane, Graf, Raulerson & Middleton, Professional Association.   He can be reached at or (603) 628-1489.  The McLane Law Firm is the largest full-service law firm in the state of New Hampshire, with offices in Concord, Manchester and Portsmouth as well as Woburn, Massachusetts.