Can the owner of residential investment property offer seller-financing in the State of Tennessee? The answer is not entirely clear. The Tennessee Residential Lending, Brokerage and Servicing Act (T.C.A. § 45-13-101, et seq.) had raised questions about the viability of seller-financing for residential properties that have not been occupied by the seller. Thanks to an amendment recently passed in the Tennessee legislature and a rule published by HUD, individuals and entities that engage in one-off or a very limited number of deals can provide seller-financing without complying with the act’s licensing requirements. The background and details are below.

The Tennessee legislature passed the act in 2009 intending to comply with the  Federal Secure and Fair Enforcement of Mortgage Licensing Act of 2008 (SAFE Act). The act required anyone arranging financing for residential real estate in the State of Tennessee to obtain a mortgage broker’s license from the Tennessee Department of Financial Institutions. The act did have limited exceptions for individuals who make loans for immediate family members and loans that are secured by property that was the seller’s residence, but it required investors in residential property to obtain a state mortgage brokers license in order to conduct even one seller-financed transaction in the State of Tennessee. The licensing process is burdensome and costly, and would effectively mean the end of many seller-financing deals for residential property.

In a bulletin issued in December 2010 the TDFI issued guidance indicating that seller-financing transactions would be permitted without a license as long as the individual seller did not engage in more than five financing transaction in a twelve month period. This safe harbor did not, however, apply to corporations, LLC, partnerships and other entities. The TDFI’s bulletin was tempered by a statement that HUD—the agency making rules for the implementation of the Federal SAFE Act—could override TDFI’s interpretation and require a more strict enforcement of the state act.

The state legislature stepped in with an amendment in the 2011 session that provided additional exemptions from the licensing requirement (codified in T.C.A. § 45-13-201(b)):

  • Any individual or entity that sells residential property and makes less than five residential loans in a twelve-month period and does not hold itself out to the public as a residential mortgage lending business; and
  • Any individual or entity that subdivides one piece of vacant property and provides seller financing for the individual lots (but not financing for the construction of homes on the lots).

These exceptions provide some leeway for business entities to engage in limited seller-financing.The issue was also recently clarified by HUD in a final rule published June 30, 2011. According to HUD the SAFE Act licensing requirements are not intended to regulate individuals unless they are engaged in the business of loan origination in a commercial context “with some degree of habitualness or repetition.” The rule does not give a bright line test based on a maximum number of transactions and the HUD exemption does not apply to corporations, LLC’s and other entities. It remains to be seen whether HUD will determine that the recent Tennessee amendments to the state act are in compliance with the SAFE Act.

The takeaway: Sellers need to carefully consider the applicable regulations before providing seller-financing for residential property in Tennessee and they should keep an eye on this issue as there may be additional developments in the near future. Individuals in one-off transactions probably will not have to obtain a license, but LLCs, partnerships, corporations and other business entities could potentially run afoul of the act if they regularly provide seller financing on residential property without obtaining the appropriate license from the state.