Back in 2008, the Housing and Economic Recovery Act of 2008 (“HERA”) was signed into law by Congress, which represented a massive new initiative by the federal government designed to assist with the recovery and the revitalization of our nation’s residential housing market. One of the most important facets of HERA was the Secure and Fair Enforcement for Mortgage Licensing Act, commonly referred to as the SAFE Act. The primary purpose of the SAFE Act was to enhance consumer protection and reduce fraud by mandating that states establish minimum standards for the licensing and registration of mortgage loan originators. These standards were intended to also regulate both private lenders and owners of property who wanted to extend private financing to potential purchasers of their properties, a practice most frequently referred to as “seller financing.” In response to the SAFE Act, the Kentucky legislature adopted its own version of the Act in 2009.
One of the ultimate consequences at that time of the enactment of our state’s version of the SAFE Act was that private financing would be virtually prohibited under state law with regards to the acquisition of residential property (private financing for the purchase of commercial property would not be subject to the terms of the Act). The Act mandated that almost every entity of any type that wanted to extend real estate financing for the purchase of residential property within the Commonwealth of Kentucky would have to register with the Kentucky Department of Financial Institutions and be subject to its regulations. There were a few exceptions to this, the two primary of which were if either (1) the individual that was extending this kind of private financing was doing so to an immediate family member, or (2) a seller was extending financing to a third party for the acquisition of the seller’s primary residence.
In response to numerous objections throughout the state to these new restrictions, the legislature in its most recent session amended Section 286.8-020 of the Kentucky Revised Statutes to loosen these harsh effects. The amended statute now allows various private entities to make mortgage loans under certain circumstances, but with numerous restrictions and statutory requirements that must be met, and these must be strictly complied with or the consequences could be severe (for example, there are specific written disclosures that must be provided to the borrower at the closing table by the private lender). But at least it appears, for the time being, that certain forms of seller financing might be coming back in Kentucky.