Current bill aims to remove the long-standing business purpose exception from mortgage lender licensing
In 2008, the United States Congress passed the Safe and Fair Enforcement for Mortgage Licensing Act (SAFE Act), which required all state regulators to regulate mortgage loan originators who originated consumer loans secured by 1-4-unit residential properties (“Dwellings”). The states were empowered to legislate more restrictive licensing requirements if they desired. To date, 10 states, mostly in the western region of the United States, require a mortgage lender license to make a business purpose loan secured by a Dwelling and the remaining 40 do not. Utah was the most recent state to start requiring a license for originating a business purpose loans when secured by a Dwelling when it passed legislation last year.
Previous Legislation Attempts
During the 2018 Senate session, Florida legislators introduced two bills covering private mortgage lenders. The bills, introduced by Sen. Rene Garcia (R-Miami) and Rep. Jeanette Nunes (R-Miami), aimed to eliminate the longstanding business purpose exemption for loans secured by a Dwelling. Ultimately, in a welcome move, the legislation was extensively modified to remove the licensing requirement based on property type and instead put into place common sense regulations and penalties. The passed legislation did not modify licensing requirements.
In 2017, an almost identical bill previously passed through the legislature, but was ultimately vetoed by then-Governor Scott in June. Former Governor Scott issued a letter at the time stating that the regulation “would make Florida one of the most restrictive states in the nation in the residential mortgage lending arena.”
Current Pending Legislation
On March 1, 2019, Sen. Annette Taddeo introduced Florida Senate Bill 1632 (SB 1632). After the initial filing, SB 1632 has been introduced in the Florida Senate as of March 13.
The bill should alarm private lenders because it makes a major substantive change to current law. Like previously proposed legislation, the current bill aims to remove the long-standing business purpose exception from mortgage lender licensing. Specifically, SB 1632 revises the definition of the term “mortgage loan.” The current definition is: “Residential loan that primarily for personal, family, or household use which is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling….” The new definition removes the following language “primarily for personal, family, or household use.” If this bill is signed into law, every lender who makes a loan secured by a dwelling, regardless of the purpose of the loan would need to obtain a mortgage lender license.
If the bills become law, the legislation would empower the state Office of Financial Regulation to regulate mortgage loans made for business purposes, require brokers of these loans to be licensed, and allow examination of firms offering or making private loans.
To obtain a mortgage lender license the lender must produce expensive audited financials documenting a net worth of at least $63,000. Further, any control person of the company must be fingerprinted and undergo FBI and Florida State background checks as well as provide a credit report, among other requirements. The audited financial requirement alone will have a significant chilling effect due to the prohibitive costs of hiring an accounting firm and will drastically reduce the number of lenders capable of making mortgage loans in the state.
Finally, the intent of the pending legislation is on its face contradictory. Specifically, the bill states that “the Legislature finds that Florida borrowers who apply for and receive business purpose loans, which are mortgage loans for business purposes which are secured by dwellings, are afforded limited CONSUMER protection.” It is only rational that corporations and other business borrowers should NOT be afforded consumer protections as they are not consumers. These same borrowers are exempt from most federal consumer protections such as the Truth in Lending Act and the Real Estate Settlement Procedures Act. It is common sense that these same borrowers should not be treated as consumers because they are not consumers. Otherwise, these business borrowers will only see a reduction of available credit as lenders become hamstrung by irrelevant regulations and unnecessary red tape.
Ironically, if this legislation passes, a private lender would not be required to conduct a foreign registration of their company in the state of Florida as the state Legislature intentionally exempted mortgage lending from registration requirements, but would instead need to pay more than $30 thousand to obtain audited financials no matter how small the business was. Florida like most states exempts mortgage lending from foreign registration requirements in a bid to attract foreign investment capital into the state. However, this legislation if passed would clearly have the exact opposite effect.
AAPL and General Counsel Geraci LLP’s Position
It is too soon to tell if this is a case of “how goes Florida, so goes the rest of the country” situation, but these developments should, at a minimum, alarm those in the private lending industry. This bill significantly impacts how brokers and lenders will operate under Florida law.
Many association members make loans in the state of Florida and many lenders will assuredly choose not to become licensed due to the extensive administrative process. Further, all neighboring states including Alabama, Georgia, Tennessee, North and South Carolina all exempt business purpose loans from licensing requirements. Ultimately if the bills become law, the state of Florida which is going through a massive fix and flip resurgence should expect fewer market entrants and a corresponding increase in the cost of credit due to the lack of competition.
Private lenders provide much needed capital to a marketplace which is underserved by large financial institutions and this regulation appears to harm the individuals it ultimately seeks to protect by consolidating power to a few licensed parties. We agree with former Governor Scott’s comments when vetoing previous legislation as this change “would make Florida one of the most restrictive states in the nation in the residential mortgage lending arena,” which is bad for the economy of Florida and the private lending community as a whole.
Why You Care and What You Can Do
Any association member who is making a loan in the state of Florida should make their voice heard. Let the Florida legislature know that passing this bill will harm the residents they are trying to protect. Less market competition will necessarily translate to higher interest rates which only harms Florida residents. Reducing capital to business borrowers who fix and flip homes in the state will only restrict the supply of properties into the market driving costs up for the final end users. Borrowers will have less options for capital, potentially driving interest rates up, and closing the market off to those with the ability to go through length licensing processes. Professional business parties should be able to work with each other without significant regulatory intervention.
If this bill potentially affects your business, we urge you to reach out to policy-makers in the state of Florida and urge them to vote against SB 1632. Below, find simple instructions on contacting Florida senators to voice your concern.
- To reach your senator, visit the Florida Senate webpage at https://www.flsenate.gov/Senators/#Senators. Once on the webpage, locate your senator by searching for your county in the right column. Click on the name of your senator, which will direct you to their page.
- Alternatively, you can also contact Senator Tadeo’s office directly by going here: https://www.flsenate.gov/Senators/S40 where you are able to email or call her office.
- Once on your senator’s page, locate the blue “email this senator” button on the left side under their photo. After clicking this button, a contact screen will pop-up.
- Choose “Jobs and the Economy” as the topic. Then, copy and paste the following language into the “Your Comment or Question” box and fill in the blanks with your information:
Dear Senator __________,
Thank you for your contributions and political leadership in our community and the state of Florida. My name is _____, and I transact business in Florida as _____. It has come to my attention that proposed legislation, Florida Senate Bill 1632, poses great risks to the people, businesses, and economy of Florida. I strongly urge you to vote against Senate Bill 1632.
Specifically, this bill would devastate Florida’s private lending industry. Senate Bill 1632 would eliminate the long-standing “business-purpose” licensing exception, an exception many private lenders transact business under. Around 40 states recognize this useful exception. To change the norm in Florida would make the state unduly restrictive and encourage borrowers and lenders to make transactions elsewhere. This bill will personally affect myself and my business, as a member of the private lending community. To date, I have made around ______ loans in the state of Florida. This totaled to approximately _____ dollars. Should this legislation pass, I will be unable to operate in your state.
Senate Bill 1632 has potential grievous effects on the economy, as it would drive out lenders who have made loans in the state for many years. Further, borrowers will have less options for capital, hurting Florida property owners seeking a competitive mortgage loan market. For the reasons stated above, I urge you to vote against Senate Bill 1632.
Thank you for your consideration.
- Next, complete the rest of the online form with your information, and press the “send email” button on the bottom left of the screen to complete.
 Florida Statutes 494.001 (25)(a).
 Text of SB 1632 as of March 1, 2019.
 See Florida Statutes Annotated 605.0905.