(DON'T KILL THE MESSENGER....)

From the FTC MARS Rule to the SAFE ACT, who can actually negotiate short sales anymore?  According to the Arizona Department of Financial Institutions, a Realtor CANNOT NEGOTIATE a short sale without being licensed AND employed by a mortgage lender/broker.  Although many Realtors may be aware of the SAFE ACT and their specific state laws regarding additional licensing requirements for negotiating short sales, I thought it might be worthwhile to report what I have been told and my research on this subject matter. Please note that the Arizona SAFE ACT law is nearly identical to the federal SAFE ACT model legislation for the states and as such, you may want to check your own state laws immediately.

HISTORY:

The SAFE Act was adopted by the United States Congress as part of the Housing and Economic Recovery Act of 2008.  In essence, the SAFE Act required all states to ensure that they had a mortgage loan broker and originator licensing system that met certain minimum standards in place by August 1, 2009.  A state that failed to adopt such a compliant system would have its regulatory authority taken over by the United States Department of Housing and Urban Development. 

ARIZONA STATUTES

As codified under §6-991.12, the Arizona version of the SAFE Act defines a “Loan Originator” as (a) … a natural person who for compensation or gain or in the expectation of compensation or gain does any of the following: (i) Takes a residential mortgage loan application, (ii) Offers or negotiates terms of a residential mortgage loan….  Section §6-991.12(b) Does not include:…(ii) A person who only performs real estate brokerage activities and who is licensed in accordance with title 32, chapter 20, unless the person is compensated by a lender, a mortgage broker or any other loan originator or by an agent of the lender, mortgage broker or other loan originator.

Under §6-991.17, the statute further defines “Real estate brokerage” to mean any activity that involves offering or providing real estate brokerage services to the public including: (a) Acting as a real estate salesperson or real estate broker for a buyer, seller, lessor or lessee of real property, (b) Bringing together parties interested in the sale, purchase, lease, rental or exchange of real property, (c) Negotiating on behalf of any party any portion of a contract relating to the sale, purchase, lease, rental or exchange of real property other than in connection with providing financing with respect to any transaction….

According to the Arizona Department of Financial Institutions, “real estate brokerage” does not include negotiating loans.  As such, the AZ Department of Financial Institutions has verbally stated that a Realtor may not negotiate a short sale unless they are licensed as a Loan Originator and employed by a mortgage lender.  Furthermore, commission that are contingent and in control of the lender for approval are considered compensation.

ATTORNEY EXEMPTIONS:

Under A.R.S. § 6-991.01, “A licensed attorney who negotiates the terms of a residential mortgage loan on behalf of a client as an ancillary matter to the attorney’s representation of the client unless the attorney is compensated by a lender, a mortgage broker or any other loan originator or by an agent of the lender, mortgage broker or other loan originator.”

The AZ Department of Financial Institutions has clarified this attorney exemption under the MB&BK-09-02 Regulatory Alert to mean “the Department interprets this “ancillary matter” exemption language to mean that a lawyer who negotiates a new loan or a modification of an existing loan as a transaction that is supplemental or subordinate to other representation or counseling of a client is exempt from licensure as a loan originator unless he is paid as described in the statute.  On the other hand, a lawyer who is engaged solely in negotiating loan originations, including loan modifications, is not exempt from licensure as a loan originator.”

CONCLUSION:

As we have the short sale environment start with the realtor community and under the increasingly burdensome federal and state regulatory schemas and pending litigation from the public move toward an attorney centric model, it would appear that we are in for another massive change.  Under the SAFE ACT and as implemented by the different state legislative and regulatory departments, it would seem that the short sale world is heading back to the very people that were part of making so many of these loans in the first place, the Mortgage Loan Originators. 

What’s with that?

(PS: back to LO school)