In November of 2008 Pennsylvania’s new Mortgage Loan Industry Licensing and Consumer Protection Law went into effect (“Mortgage Lender Law”). The law was subsequently amended. Those amendments went into effect August 2009. The new Mortgage Lender Law is intended to provide better government control over mortgage lending practices. The law requires that, in almost every instance, anyone issuing a loan primarily for personal, family or household use, which is secured by a mortgage on residential real estate, must be licensed by the Pennsylvania Department of Banking.
The new law does not have an exception for builders, homeowners, or real estate holding companies. In the past it was not uncommon for any of the aforementioned entities to, on occasion, provide short term buyer financing, secured by a mortgage on the property. Now it would be a violation of the new Mortgage Lender Law to provide such buyer financing in Pennsylvania, without the requisite license. Prior to the August 2009 amendment, there was an exception that permitted an entity to issue 3 or fewer mortgage loans without a license. This would have likely been sufficient to address the needs of most builders or real estate holding companies looking to sell residential real estate and provide short term buyer financing. That exception has been completely removed by the August 2009 amendment.
Now there is no way for a builder, or residential real estate seller, to provide new homeowners with short term seller financing, or any form of secured swing loans, without the requisite license. The inability of builders and other sellers to provide these types of financing in residential transactions is likely to have many unexpected effects in the currently depressed new home market. However, there are some creative alternatives to seller financing that can be employed in lieu of swing loans and seller financing. Use of long term agreements of sale and separate specifically drafted rental agreements, may provide builders with a palatable and creative marketing tool to entice new home buyers. Use of this marketing method is a way for builders to lessen carry costs and potentially boost sales during a down economy. Care must be taken to draft the documents necessary for these transactions to avoid unintentionally violating Lender laws, planned community laws, new home warranty laws, landlord tenant laws, and other multiple areas of the law. It is therefore extremely important to have a skilled attorney prepare the necessary lease and sales documents for each transaction.
While long term agreements of sale and leases are not as straight forward as seller provided financing and swing loans, they are a viable method for builders to entice new home buyers to move forward with purchasing a new home.