Michigan Loan Origination Act and Seller Financing, Including Land Contracts
Much confusion has ensued since the passage in Congress of the so-called SAFE Act. This Act mandated that all states, including Michigan, license, register and regulate the practices of “mortgage loan originators.” The direct question is, who is a “mortgage loan originator” under the Michigan statute enacted pursuant to that mandate? Perhaps it is best to work backwards.
Oddly, this statute, which went into effect July 2009, did not modify the pre-existing statute (MCL 445.1651) known as the Mortgage Brokers Lenders and Servicers Licensing Act, in effect since 1987. That statute (the old statute) clearly defines in Subsection 1a(n) a mortgage loan as included a land contract covering real property used as a residency by four or fewer families (a four unit).
Commercial loans are not covered by that statute. An individual investor selling residential property on a land contract needs to be licensed unless an exemption is found. The exemptions are buried in Section 25 of that statute. Realtors are generally exempt under Subsections b, c and d of Section 25. Under Subsection (g) a mortgage lender (defined earlier as a seller on a land contract of residential property) who makes 10 or fewer mortgage loans (land contracts included) in a 12 month period is also exempt from licensing under that Act. The new statute doesn’t change this.
The problem lies in the definitions (Section 3) of the new statute. In Subsection (c), once again the statute only applies to residential four families or less. Subsection (s) defines “residential mortgage loans” as any loan primarily creating a security interest or equivalent on a dwelling (again, four units or less). Note: There is no mention of land contract in this definition, unlike the old statute. Subsection (f) says that a mortgage loan originator is any individual who basically offers or negotiates terms of a residential mortgage loan. Thus, if land contracts were included in a residential mortgage loan, a private investor who negotiates the sale of residential dwellings on a land contract could very well need licensing and registration under the new Act.
Section 5 contains exemptions of the new statute—the only relevant one being an originator acting on behalf of an immediate family member or one selling one’s own personal residence. Realtors are also exempt as long as they do not receive separate compensation from the lender for negotiating the terms of the loan.
Thus, a private investor who sells residential real estate as defined by the statutes and retains a mortgage instrument to secure the installment price will be captured by the new statute. Such person must be licensed no matter how many sales they engage in. If they work for an already licensed broker, they only have to be registered. As a practical matter, this absolutely kills mortgage financing technique in Michigan for private, non-institutional investors.
So where does that leave land contracts? The Michigan Office of Financial and Insurance Regulation, which administers the statute, have opined that land contracts are not covered by the new statute. The Office of Financial Insurance Regulation may be just as confused as everyone given the legislative history and language. One can conclude that if the Michigan legislature intended to include land contracts in the new Loan Originator statute they would have plainly said so–just as they did in the old licensing act. Thus, by inaction, the legislature has indicated intent not to capture land contracts.
The conclusion then is that land contracts are excluded from the Michigan Loan Originator Act under its current language and absent a different ruling by the state or federal regulators.
Provided by: George Pawlowski, Attorney at Law
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