(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)
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Replies
Bryant Tutas said:
Sandra,
Without a debt obligation in existence, you do not have a "settlement payoff." to discuss and a Payoff i.e. Balance is a term of a mortgage. In order for a lender to agree to this, the terms must change. in other words, once you start discussing the existing mortgage with the lender, you are in fact negotiating. There is a great footnote in MARS that defines this well but, frankly, I really don't want to have to dig it back up.
Law School Analogy. If the victim signs 20 pages of disclosure giving you permission to put a bullet in their head along with an additional 20 pages of disclaimer, release and waiver, AND you put the bullet in their head......You have still committed murder. The fact that the Seller has authorized you to do something, no matter the disclosure, does not make it proper or in compliance with statute or reg.
I mean no offense and in the Theme that Todd started with "Don't kill the messenger"
What we advise and guide our Real Estate Agent Clients of is this, The mere processing and submitall of the items necessary for the lender to approve a short sale, does not necessarily constitute "Negotiation" we advise our Agent Clients to immediately instruct their Seller / Client to deliver that Short Sale Approval to their attorney and allow the Attorney to advise the Seller on whether to accept or not, revise or not, counter or not. The Agent "Negotiator" merely receives that from the Attorney and submits it back to the Lender. The Agent maintains the control, skill, relations that they have garnered with the particular lender / Servicer while maintaining that they never represented the Short Sale approval as being good, bad or indifferent.
Hi Kevin,
Yes, I'll call you for lunch!
tjs
PS: I hope you didn't think I was referring to your spelling on the spell check comment! I noticed my grammer and spelling wihtout assistace was terrible....... there it goes again.
Todd,
We don't disagree with the black letter reading of A.R.S. 6-991.01 nor your interpretation of it. That is why our firm cannot and will not negotiate a short sale unless it is within the context of a greater client relationship per AZDFI's guidelines. In other words. A Homeowner comes into our firm, having been referred by an AZ Real Estate Agent, Title Company or other Law Firm, and desires to discuss their LEGAL options not to hire us to do a non legal services. Our first priority is to look at the loan documents themselves in order to verify that they have the loan(s) that they think they do. We then need to apply a proper waterfall analysis of AZ Deficiency Laws because THAT is the only real issue on the table i.e. if I pay, what will happen, if I short sale what will happen, if I walk away, what will happen? At this point, we are offering real legal services and analysis. If, and only if, the client makes the determination that they desire a loan modification or short sale, we will then represent them during it. But, to be clear, our firm does not accept payment as contingency, as we find that a conflict of interest and we should not be focused on getting paid if the sale closes as not all short sales should close. We do not accept payment from the lender, as we do not represent the lender. We do not accept payment from either buyer or selling agent as we do not represent them. Let's not forget, we issue a written legal opinion to the Seller / Homeowner as to their legal rights and obligations to that mortgage.
Now, as to the BAR, we have been working with AZ Bar for the last three years to put this best practices methodology in place. There are very few Attorneys here in AZ who don't know who those Attorneys are, that the BAR is looking at and have been beating our heads against a wall waiting for them to do something about it. We took the extra step to actually work with the BAR on an ethics review of our practice groups operations prior to even putting it in place going back to 2008. What separates us and a handful of other firms in AZ is that we don't advertise for short sales or loan modifications and we cannot be hired to do them without the legal review and legal analysis done up front.
Yes, I would love lunch. Call me, 602-774-3757 or email me your number and I will call you.
P.S. I am not teaching English and do not concern myself with spelling. :-)
Todd J Sullivan J.D. said:
Donna, we already did a legal review of Commissioner Lowe's update. See link here.
http://mortgagemediationgroup.com/2011/04/mars-az-dre-update-on-lo-...
Hi Kevin,
I truly appreciate your well reasoned and articulated statements. We live in interesting and challenging times and I have learned through trial and error (education by fire) that there is the law, leverage and reality. While I don't disagree with your statements and in my personal opinion only (not being licensed to practice law in the state or arizona), I might point out that A.R.S. 6-991.01 "Exemptions," which narrowly defines an attorney's role under the MLO statutes, has been interperted by the Department of Financial Institutions to require licensing for attorneys where such representation is the short sale negotiations and/or who receives fees from the lender and/or lender's agent (or worse, attorneys that are receiving additional fees from realtors who are not their clients and where such fees are derived from their commissions). However, statutes may be interpreted in many ways and legal arguements and fees fuel the legal profession.
Having said that, The AZ state bar has seemingly taken the side of the AZDFI and is starting to police arizona attorneys who are negotiating short sales. Accrding to their lead ethics counsel, they plan on notifying AZ attorneys of possible licensure violations which carry civil and criminal liability. You might want to put a call into the bar for clarification.
The next wrinkle will be AZDFI's interpretation and enforcement of the MLO licensing requirements to realtors. According to AZDFI and under A.R.S. 6-991(17), they are interpreting "normal real estate brokerage activity" as traditional buy, sale and negotiation of real estate and not short sale negotiations with lenders. There is an interesting history to this definition which may be found in the FTC MARS ACT under footnote 126 and current interpretation as applying the Act to the Real Estate communities. However, we currently have $2.2 billion in short sale homes being listed or pending in the Arizona MLS alone.
In conclusion, I find it hard to believe that attorneys cannot negotiate short sales on behalf of their clients while realtors may do so. As soon as AZDFI posts their pending legal opinion letter from their counsel, I'll post it here.
In this state of confusion, I made certain that my company was MARS compliant and we have our MLO license. We additionally have outsourced our legal opinion letters to an independent attorney to review the lender(s) settlement agreements. By being fully licensed and using an independent attorney, I feel that we have minimized our possible conflicts of interest and can provide our clients first in class short sale negotiations along with financial planning and tax advice with our team of independent CPA's.
I'm located in North Scottsdale. If you ever want to further the discussion, I'll buy lunch!
Take care,
tjs
PS: Where's spell correct?
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