Hawaii Now Prohibits Seller Installment Sales w/o A Broker

The state of Hawaii now prohibits homeowners from using “seller financing” without a licensed broker.

According to a Hawaii real estate attorney, “The statute now requires any “seller financed” transaction to be handled by a licensed or registered broker, even in a family situation. I hear the registration process is too involved for most one-time sellers. Our Government Affairs Committee has begun to look at options to get clarification and see if legislation is needed during the next session to provide appropriate exemptions. Actually, the prior law allowed seller financing by exemption, but the new law removed the exemption. On that basis, the Hawaii State Bar has concluded that it now prohibits unregistered seller financing.”

This is a commentary by the Political Affairs Director of the Maui Realtors Association:

December 03, 2014

“This one appeared out of the blue. Or out of the telephone. About two weeks ago a long-time Maui agent called to complain that he was being told that the State Legislature wiped out the owner’s right to finance the purchase of the owner’s property.

“That was news to me, HAR (the Hawaii Association of Realtors), our attorney and a variety of other people one would expect to know these types of things.

“The agent said he was working on a deal involving family-held property in Olinda and the owner was offering financing. The buyer liked the proposal but wanted to ask her attorney. And that attorney informed the buyer that the State Legislature removed that owner’s right in its last session and that action went into effect on July 1.

“How can that happen without responsible persons knowing about it, you might ask? The answer is: easy, because our state legislative process resembles an organized train wreck. With 3,000 bills being reviewed in 60 days, seemingly innocuous measures that are depicted as “housekeeping” by the proposing agency, get a lot less review than more notorious measures. There are always goofs. Given the amount of material blasting through the State Capitol in such a short time, it’s just a wonder that there are not a lot more goofs.

“This particular action – removing the exemption in the state’s mortgage loan origination act (aka Hawaii SAFE Act or HRS 454) that allows owners to finance the sale of their own homes or for family members to finance the sale of property within the family – was a one-liner in an eight-page bill that dealt with a variety of adjustments to the SAFE Act. The SAFE Act was written to tighten up Hawaii’s mortgage origination laws and licensing requirements after the 2008 mortgage meltdown. It is a consumer protection measure and the decision to eliminate the owner’s right to finance fell into that category.

“Mortgage loans involved substantial assets and should be handled by qualified licensees,” DCCA said in its testimony on the bill. That one line is the sum total of the discussion on removing the owner’s right to finance that could be found in the testimony and committee reports on Senate Bill 2817, later to become Act 198-14.

“While not much of an argument, it did include a fundamental flaw in logic. Because the statement was not specific, there is no way to tell who the department was referring to by “qualified licensees.” Was the department referring to licensed mortgage originators or were they referring to licensed Realtors and attorneys? The bill was mainly about mortgage originators. But the DCCA bill did not request that the Legislature remove other existing exemptions for Realtors and attorneys if they are working on behalf of their clients who want to finance.

“It appears from later statements, that the Department wanted to eliminate the owner’s right in total and force them to take the mortgage originator licensing test if they want to make loans. But they apparently inadvertently left in place the other Realtor and attorney exemptions. And those exemptions imply that the right of owners to finance still exists as long as they are working with a Realtor or an attorney.

“Why did DCCA believe this action was necessary? Apparently because in the few years since the Hawaii SAFE Act when into effect, there had been a handful of owner-financed deals that had blown up. That was a handful too many for DCCA. The state was looking to update the SAFE Act anyway, making timely adjustments, and decided to include this minor adjustment.

“While HAR missed this one (that includes me), this action flew so far under the radar that even Senate Judiciary Committee Chairman Gil Keith-Agaran did not know about it. For some reason this measure did not go through his committee, so Gil never saw the bill’s details. When he figured out what had happened, the Senator spoke to DCCA to get their side of the story and then wrote a letter to the State Attorney General to get an official opinion: no owner financing is allowed or only with a Realtor or an attorney? He hopes to have an answer from the AG by the end of the month. If not, then he will start writing a bill to amend HRS 454.

“HAR is also studying its options and getting ready to use its resources to get this fixed.

“So the question RAM and HAR should consider is: what sort of amendment do we want? If the owners’ right remains, as long as they get an attorney to bless the deal, maybe an amendment is not necessary. Or do we want to go back to where the law was last year with called-out exemptions for owners selling their own homes or family members financing family members? But now that the door is open for this discussion, why not broaden the law so that an owner can finance the sale of any kind of property they own as long as they work with an attorney?

Whatever the conclusion is, the resulting law definitely needs to clear up the current conflict.”

There is one organization fighting for the right of property owners to sell with installment sales (“seller financing”): www.SaveSellerFinancing.org Please visit the website, read the issues, sign the petition and support them by donating generously.