PA Mortgage Licensing Law impacts financing options

In light of the challenges many real estate buyers continue to face in obtaining financing, it’s a good time to review recent changes to the Pennsylvania’s Mortgage Licensing Law (MLL) and how it impacts financing options for buyers, sellers and homebuilders.

The MLL went into effect in 2008 with its primary purpose being to provide greater protection to consumers in the residential mortgage market. With a few exceptions, the law requires anyone making a mortgage loan to be licensed by the Pennsylvania Department of Banking. I won’t burden you with an exhaustive explanation of all of the exceptions to the licensing requirement. Suffice it to say, sellers of residential property and homebuilders that are not licensed according to this law are prohibited from making mortgage loans to buyers. The penalties for violating the MLL include fines up to $10,000 for each offense and criminal charges of a third-degree felony. Mortgage loans for business and commercial purposes are not subject to the licensing requirement.

Under the 2008 version of the MLL, persons issuing less than three mortgages in a calendar year were not required to be licensed, even if the mortgages were residential loans. For the practical purposes of most residential sellers and builders, this exception functioned as a general exception for residential mortgage loans. Likewise, an employer could make a mortgage loan to an employee as an employment benefit. Exceptions were also created for certain nonprofits, banking institutions, credit unions, state or federal agencies and attorneys acting in the normal course of legal practice.

Since 2008, the MLL has gone through some changes. An amendment in 2009 had a significant impact on sellers and builders of residential property, because it removed the “less than three” exception. It was replaced by a much more limited exception for mortgage loans between immediate family members. This amendment also removed the employer-employee exception.

Following additional changes to the law at the end of 2010, sellers and other persons holding installment sales contracts for manufactured homes are no longer required to be licensed. However, employees of some exempt companies now must be licensed, if they are acting as mortgage originators.

Although residential sellers and builders are not able to issue mortgages, they may still enter installment sales agreements. In an installment sale, a buyer and seller execute an agreement whereby buyer takes possession of the property and makes payments toward the purchase of the property. However, the seller advances no funds to the buyer, and no promissory notes, loan agreements or mortgages are executed between the parties. Title does not pass to the buyer until the buyer pays the balance due under the installment agreement. Although this may not be an ideal arrangement for many buyers and sellers, it remains a good option for some and avoids the licensing requirements put in place by the MLL.