Owner Financing Alive and Well in Tennessee

April 22, 2011
Eric Thornton

The Attorney General for the State of Tennessee issued an opinion in 2010 that left many real estate investors and home owners in Middle Tennessee wondering whether or not they could legally offer owner financing terms to a potential buyer.  Prior to the Attorney General publishing this opinion, Tennessee law has allowed a seller of real property to offer owner finance terms to their purchaser.  In the wake of the economic crisis impacting the housing and banking industries, it has become more difficult for purchasers to obtain financing through traditional lending institutions.  As a result seller financing has become increasingly more attractive to prospective buyers and owners who are highly motivated to sell.

The Attorney General said in his opinion dated August 24, 2010 that an individual investment property owner who provides a purchaser with financing that qualifies as a residential mortgage loan must be licensed under the Tennessee Residential Lending, Brokerage and Servicing Act as found in T.C.A. § 45-13-101, et seq.   The Act requires that before certain property owners in Tennessee may offer financing terms to a potential buyer they must first obtain a license through the Tennessee Department of Financial Institutions.  This opinion left many in the real estate industry to believe that the traditional models for owner financing in Tennessee were no longer permissible.  Further, obtaining a license through the Tennessee Department of Financial Institutions for most sellers to conduct a single loan transaction would be cost prohibitive.  The Act has traditionally been applied only to individuals and companies in the business of offering loans to Tennessee consumers, not individuals who purchase real estate as an investment with the intent to sell it or individuals seeking to sell a piece of real estate to a potential buyer who may not be able to obtain traditional financing from a bank or other lending institution.

Under the Tennessee Act, only a handful of exceptions exist to the licensing requirement.  Among the exceptions are the following:
•    an individual who makes a residential mortgage loan with or on behalf of an immediate family member of the individual, and
•    an individual who makes a residential mortgage loan, or simply offers or negotiates terms of a residential mortgage loan, when the loan is secured by a dwelling that served as the seller’s residence.

The Tennessee Act is intended to carry out the purposes of and be compliant with the requirements of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (known as the SAFE Act) which was enacted by Congress to enhance consumer protection and reduce fraud in the residential lending industry by establishing uniform minimum standards for licensing and registration of state-licensed mortgage loan originators.    The primary concern of lawmakers was to protect homebuyers in Tennessee from being taken advantage of by unscrupulous lenders who were not subject to the same oversight and guidelines as mortgage loan originators properly licensed with the State to do business in Tennessee.  The Commissioner of the Tennessee Department of Financial Institutions is authorized under the Act to interpret and enforce the Act.

Fortunately, in response to an overwhelming number of questions and concerns related to the Attorney General’s Opinion, the Commissioner of Financial Institutions has published a Bulletin which interprets and creates an additional exception from the licensing requirements set forth in the Act.  You can view this bulletin by visiting our Resources on our website at www.dicksontnlaw.com.

The Commissioner has taken the position that the “formality and commercial context” is absent where an individual does the rare and occasional seller financing.  As a result, effective December 20, 2010, with the publishing of the Commissioner’s Bulletin, it is appropriate to exempt an individual, as seller of his or her own real property, who makes five (5) or fewer residential mortgage loans within any twelve (12) month period from all licensing requirements of the Act according to the Commissioner.  This exemption applies strictly to individuals and is not applicable to business entities.

As a result, owner financing is alive and well in Tennessee.  For almost every resident in Dickson County, you may still owner finance the sale of your home or investment property.  However, the Commissioner’s Bulletin only delays a determination of whether individuals must be licensed with the Department of Financial Institutions until HUD publishes it’s final interpretation of the licensing provisions of the SAFE Act.  When, and if, HUD issues a final rule, interpretation, or regulation contrary to Tennessee’s limited exception, the Commissioner and Department of Financial Institutions will rescind this current exception and enforce the final rule published by HUD.  Conclusively determining whether a license is required and what exceptions may apply is a process which cannot be determined solely from this article.  There is no ability to predict what HUD’s position will be with respect to Tennessee’s exceptions, but, until such time, seller financing will continue to be a legal and safe option for financing the purchase of real estate in Tennessee.  Of course, both sellers and purchasers involved in a seller-financed transaction should consult legal counsel to ensure that all documents in the transaction are proper and all parties are adequately protected.

Mr. Eric Thornton is a partner with the law firm of Ramsey, Thornton & Barrett, PLC.  He can be reached via email at leah@dicksontnlaw.com or by visiting www.dicksontnlaw.com.

The foregoing article is not intended as, nor shall be used, relied upon, or otherwise construed as legal advice or an attorney-client relationship.  You are advised to seek independent legal advice from an attorney licensed in the State of Tennessee

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