This is a follow-up to my post about the Alabama S.A.F.E. Act, and the new amendments that go into effect on January 10, 2014. In a nutshell, you will be able to do only one seller-financed transaction per year if it has a balloon payment, or only three per year that are fully amortizing. Three is the limit, though, even if one of them has a balloon. You don’t get three of one kind, AND one of the other kind, for a total of four. Just three, total. If you go over the limits, you will need to have a licensed mortgage loan originator involved in the transaction.
If you violate the S.A.F.E. Act, the Alabama State Banking Department can obtain a cease and desist order, impose a civil penalty up to $25,000 per incident, or “such other affirmative action as the supervisor deems necessary.” The borrower’s obligation to repay their loan is not affected, and there is no private cause of action. Ala. Code 5-26-13 “No private cause of action” means the borrower cannot sue you simply for violating the Act.
An unhappy borrower will more than likely rat you out to the Banking Department, though. The $25,000 fine is for each seller-financed loan that was not exempt. It’s a lot of money, and can add up to a lot more in a hurry. Knowing that a borrower might tattle on you, you’re going to be vulnerable to being strong-armed into caving in to a defaulting borrower’s demands. Yes, it’s extortion. That’s how it works in the real world.
In addition, the licensing is just the tip of the iceberg. The mortgage loan originator is required to perform significant and important consumer protection duties in connection with the loan, even seller-financed loans. Those duties include state and federal disclosures, and due diligence to ensure the borrower/buyer will be able to make the required mortgage payments. Most likely, if you don’t have a licensed mortgage loan originator involved in a transaction, you will also be in violation of other laws. That could result in other penalties AND the borrower’s right to sue you for those other laws.
I’m a big believer in DIY for many things, but this is not one of them. Get the license yourself, if you must, but I highly recommend hiring someone. I know someone who will complete her licensing in about six weeks or so, and offer her services on a fee basis to financing sellers. I don’t know how much she will charge, but I’ve heard people in other states charge $500 to $800 per transaction, depending on volume. If you read the comments to my earlier post, you’ll see someone who negotiated a $500 fee for his transactions, probably because of his volume. He shared the name and contact information of the originator he uses.
This is just one more cost that either has to be absorbed by the seller, or paid by the buyer. Considering the consequences of non-compliance, I think the cost is well worth it.