Starting July 1, 2017, the Florida law regarding mortgage lending will apply to many loans that are currently exempt from coverage. House Bill 747 became a law on May 4. The law changes the definition of a “Mortgage Loan” from one that is “primarily for personal, family, or household use” to any mortgage loan that is secured by a mortgage on any one to four-family residential dwelling or the land upon which such a dwelling is to be constructed.
Many private lenders in the past few years had made mortgage loans without needing a mortgage lending license, arguing that they were lending to borrowers who were purchasing the residential properties for investment or business purposes rather than for the investor’s own primary personal, family, or household use. The law already defined a “mortgage loan” as any loan to an individual regardless of the use of the property secured by the mortgage. Therefore, most unlicensed private and hard money lenders had altered their lending business practices so that they only lent to entities such as limited liability companies, corporations, and land trusts, and required borrowers to execute forms stating that the loans were to be used only for business or investment purposes. With the new changes to the law, this will no longer provide a safe harbor for unlicensed mortgage lenders.
The amendments to the law also exempt licensed securities dealers and investment advisers so long as they solicit mortgage loans from their securities clients or simply refer their clients to licensed mortgage brokers or lenders. The securities dealers and investment advisers are still prohibited from soliciting, accepting, or negotiating mortgage loan applications or the sale of an existing mortgage loan to a noninstitutional investor.
Finally, the amendment to the mortgage lending law defines “hold himself or herself out to the public as being in the mortgage lending business.” This issue has presented itself to our firm several times over the years when clients have been accused of “holding themselves out as a mortgage lender” when they in fact do not hold the license as such. Doing so is illegal, but there has been no bright line legislative test of what that entails. Many private lenders are “country club” lenders, only offering their lending services quietly to close friends, business associates, and fellow members of real estate investment associations. We have had to rely on guidance from the Department of Financial Services as to what the investigators consider to be or not to be a violation of the “holding out” portion of the law.
As of July 1, 2017, however, a person or entity will be deemed to be holding itself out to the public as being in the mortgage lending business when they are:
(a) Representing to the public, through advertising or other means of communicating or providing information (including the use of business cards, stationery, brochures, signs, rate lists, or promotional items), by any medium whatsoever, that such individual can or will perform the activities described in F.S. 494.001(23).
(b) Soliciting in a manner that would lead the intended audience to reasonably believe that such individual is in the business of performing the activities described in F.S. 494.001(23).
(c) Maintaining a commercial business establishment at which, or premises from which, such individual regularly performs the activities described in F.S. 494.001(23) or regularly meets with current or prospective borrowers.
(d) Advertising, soliciting, or conducting business through use of a name, trademark, service mark, trade name, Internet address, or logo which indicates or reasonably implies that the business being advertised, solicited, or conducted is the kind or character of business transacted or conducted by a licensed mortgage lender or which is likely to lead any person to believe that such business is that of a licensed mortgage lender.
(e) Using any form promulgated by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the United States Department of Housing and Urban Development, or the Consumer Financial Protection Bureau in performing the activities described in F.S. 494.001(23).
Therefore, if a person is using a business card, website, flyer or other advertising medium that holds that person or entity out as a “hard money lender” or “private lender,” they would – under the amended statute – be “holding themselves out” as being licensed mortgage lenders even if only provided to friends, family, and associates. If they lend funds that are secured by mortgages on residential dwelling units, regardless of whether the borrower is an entity or human being, or if they are making loans to individuals and those loans are secured by any type of property in the State of Florida, then they are making mortgage loans that are subject to licensure.
Based on these slight revisions of the definition of a “mortgage loan” coupled with the bright line definition of “holding oneself out as a mortgage lender,” we are now cautioning any private lenders and hard money lenders in Florida who are not licensed mortgage brokers or lenders that they should indeed obtain such a license, or they should use the services of a licensed lender to originate their mortgage loans. In fact, if a family member simply wants to lend funds to another family member, and that loan is to be secured by a mortgage, a mortgage licensee may need to be engaged to avoid running afoul of the law. Failure to do so could subject such lenders to civil and even criminal penalties for violations. It should be noted, however, that the limited federal law exceptions for seller financing are still effective in those cases where such mortgage lending financing occurs.
Governor Rick Scott vetoed this bill on June 26, 2017. Therefore, there will be no change in the definition of a “Mortgage Loan” from its current definition. A Mortgage Loan will continue to be one that is “primarily for personal, family, or household use.” Therefore, private lenders who are lending on properties that are not to be used by the borrower for those purposes are not making a “Mortgage Loan” that is subject to licensure. It should be noted that the exemptions for licensure were still also going to be in place. For instance, if the private lender is making the loan from their own funds, that is exempt. The problem for many private lenders is that they often lend from self-directed IRA’s. In that case, there is a potential argument that the lender isn’t lending their own funds. The veto also means that the exemptions for licensure for securities dealers, and the bright-line definitions of “holding out as a mortgage lender” will not go into effect.
The Florida Legislature passed House Bill 935, and the Governor signed it into law on March 21, 2018. The new law does not take effect until July 1, 2019. This law doesn’t go as far as the previously vetoed HB 747 in 2017, but still defines “holding out” oneself as a mortgage lender.
The previously vetoed version tried to “stretch” the definition of mortgage loans to include any one-to-four family residence, regardless of who was purchasing it or for what purpose. This newly passed version of the law adopts the federal regulation regarding exemptions from coverage.
In short, under 12 C.F.R. § 1026.3 (and the new statute, by reference), a loan is exempt from Florida’s mortgage lender license law if the loan is for business, commercial, agricultural, or organizational credit, including:
