Update to Pennsylvania’s Mortgage Licensing Act: Three Mortgages Per Year or Less Excepted
As described in the July 2011 Construction Law Brief, the Pennsylvania legislature passed amendments to the Mortgage Licensing Act (the “MLA”) which prohibits individuals and entities from engaging in the residential mortgage loan business (except to immediate family members) without being licensed under the MLA. The amendments to the MLA were made in response to, and to remain compliant with, the federal SAFE Mortgage Licensing Act (the “SAFE Act”). The SAFE Act establishes minimum standards for mortgage licenses that apply to all states.
Since the amendments to the MLA have been enacted, the Pennsylvania real estate community responded to the MLA with major opposition and has been working to restore seller financing in limited situations.
In August 2011, the United States Department of Housing and Urban Development (“HUD”) issued a final regulation related to the SAFE Act that was inconsistent with Pennsylvania’s prohibition on individuals and entities engaging in the residential mortgage loan business without a license (the “HUD Regulation”). The HUD Regulation, in part, prohibits an individual from engaging in the mortgage loan business if the individual, in a commercial context, habitually and repeatedly takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan for compensation or gain, or represents to the public that such individual can or will perform these activities. The MLA, as currently enacted, contains no similar qualification.
On October 6, 2011, the Pennsylvania Department of Banking (the “Department”) issued a letter discussing the Department’s position with regard to the MLA in light of the HUD Regulation. The letter states that the Department will be seeking amendment to the MLA in order to implement the HUD Regulation as soon as possible, thereby making the MLA consistent with the HUD Regulation.
The Department’s letter, however, stated that “the Department will not take exception to an individual making or brokering three (3) or less mortgage loans in a calendar year without being licensed as a mortgagor originator.” Accordingly, the Department apparently will not enforce the MLA against a residential seller who finances a portion of the purchase price and takes back a residential mortgage on property that it is selling, even if the mortgage is not from an immediate family member, provided that the seller take back three or less mortgages in a calendar year.
This is welcome news for the Pennsylvania real estate community. However, it is important to proceed with caution, since a letter from the Department of Banking is not the law. We expect amendments to the MLA implementing the Department’s position in the near future.
In addition to clarifying its position regarding private residential mortgages, the Department’s letter also announced that the Department reversed its original position that installment sales agreements are not a form of selling financing subject to the mortgage licensing requirements. The Department explained that installment sales agreements create an “equivalent consensual security interest on a dwelling or on residential real estate.” Accordingly, sellers of residential real estate, by means of installment sales agreements, are essentially treated as mortgagees for purposes of the MLA and the same licensing requirements apply.