SAFE ACT: REALTORS AND ATTORNEYS CANNOT NEGOTIATE SHORT SALES (who can?)

(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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Todd. Our Florida Association's legal opinion is that as Realtor's we are being compensated for listing and selling the property. We are NOT charging for our negotiation services. Therefore we are not in violation of the SAFE Act since it is specific to being compensated (The MARS ruling is not).

 

From reading the Arizona opinion it states the same thing. It states that:

  • (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.

I see no issue at all with agents negotiating short sales in Arizona. But what the hell do I know.

However, to be on the SAFE side :) I went out and got my mortgage broker's license last year.

Todd, I read this the same as Bryant does but I am also in Florida.  Would be interesting to hear from some of our AZ members out there.  We are not charging for negotiation services, we are charging our normal commissions for selling the property.

 

As another Florida broker, just re-emphasizing, Florida Association of Realtors legal department issued an opinion letter late last year, stating Florida Realtors are not practicing law nor violating the SAFE Act when working short sales.


That'swhat I'm doing also (getting my LO license).  I think our Az Department of Financial Institutions (DFI) is suddenly looking at the revenue for licensing and violations. 

For AZ, the interesting part is that the AZ State Bar is going to start pursuing the Attorneys with sanctions next month that are negotiating short sales.  The Bar is also applying the loan modification is a short sale analysis.  I swear, never a dull moment....

tjs

 


Bryant Tutas said:

Todd. Our Florida Association's legal opinion is that as Realtor's we are being compensated for listing and selling the property. We are NOT charging for our negotiation services. Therefore we are not in violation of the SAFE Act since it is specific to being compensated (The MARS ruling is not).

 

From reading the Arizona opinion it states the same thing. It states that:

  • (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.

I see no issue at all with agents negotiating short sales in Arizona. But what the hell do I know.

However, to be on the SAFE side :) I went out and got my mortgage broker's license last year.

Hi Wendy,

You don't happen to have that opinion letter? I'd love to send it to our ADRE.

Thanks,

tjs

Wendy Rulnick said:

As another Florida broker, just re-emphasizing, Florida Association of Realtors legal department issued an opinion letter late last year, stating Florida Realtors are not practicing law nor violating the SAFE Act when working short sales.

HI Jeff,

I'd like to hear from AZ realtors and attorneys on this also.  As soon as the AZ Dept. of Financial Institutions makes their ruling in a written form, I'll post it.  They have been verbally stating that az realtors can't do short sale negotiations without being licensed.  The fur's going to fly on this one...

tjs

Jeff Payne said:

Todd, I read this the same as Bryant does but I am also in Florida.  Would be interesting to hear from some of our AZ members out there.  We are not charging for negotiation services, we are charging our normal commissions for selling the property.

 

Todd - Here is the link.  I don't know if one must log into the site to read it....  http://www.floridarealtors.org/LegislativeCenter/TopInitiatives/upl...
Let's place this in the newsletter today and see what kind of responses we can get
The key is Realtors should not charge customers for mitigation.  Take the listing and be happy with the listing commission. 
what is the opinion of negotiators that are not Attorneys/LO that charge 25% of listing agents commission for services rendered. I was offered that on one of my listings. I kindly said no thanks.

In NC, we also have a NO-NO of agents doing negotiations...as being part of a partnership team doing primarilary Short Sales, I do the bank side...I dont call what I do NEGOTIATING, I am really a "deal maker"...I like to say, I put deals together for bank and borrower that otherwise would not be a deal...I may have to show the bank more research to meet requested terms of both parties if we are at different terms or pricing...but other than that...I have never had to do anything else but relay information...that is my story, and I am sticking to it...... 

NOW, when it comes to how it may or may not show up on credit, and credit related items, we cover that quickly...UPFRONT and PRIOR to listing..."check and ask ACCOUNTANT or CPA and please seek counsel...for any items pertaining to how this may negatively affect you"...and the borrower signs off on that and only after to we take that listing...

 

CHEERS

Todd, I applaud you getting this out there too. For the last three years I have been distributing our legal opinions on this topic to the Realtor community here in AZ as well as to DRE and DFI. Just for Note, I head up the Mortgage Mediation Group at Thomson Law, PLC here in AZ. 

 

Here is the issue that most Real Estate Agents need to understand. Yes, if you are in fact the listing agent and in fact are negotiating the short sale as a service to the seller for no fee, then the majority of jurisdictions would say that there is no violation. But, in AZ's law, you have to go back to Title 4. If that Real Estate Agent is a third party, i.e. the only income they earn is a share of the real estate commission for negotiating the short sale then they too are in violation of Title 6 and in addition to that S.A.F.E Act. Why?, because they are doing no other activity other than the negotiation itself. 

 

Now, to attorneys. You have the quotes from DFI statutes correct but, the issue at hand is that DFI does not have authority over a licensed attorney. The rules that Attorneys operate from are derived from the Arizona State Supreme Court. The Bar does have authority to bring sanctions against an Attorney though. So, you have to look to the AZ Supreme Court Rules for any violations. This is where it gets hairy. What exactly is a short sale or a loan modification? It is the settlement of a defaulted pre existing debt obligation. Not only is that authorized by AZ state rules but it has additional Federal guidance under the Federal Bankruptcy Code. That preemption is going to prevent any conflicting lower regulatory body from having any impact. 

 

That said, I am not bringing it up as a way to justify Attorneys who advertise for and do only Negotiation and no other service. In fact, there is a basic tenant we follow out there that is summarized as "Prescription without Diagnosis is Malpractice" That means, in line with the exemption language from DFI, if any activity by an attorney does not involve a greater relationship would be in fact, Malpractice. It is our opinion that an Attorney must be providing the services as laid out by the AZ Supreme Court and assist the Real Estate Agent per the AZ DRE advisory that requires that the Real Estate Agent refer them to legal counsel prior to listing. The Attorney should be giving an actual consultation on the legal rights and obligations of the homeowner. What will happen if the home goes to foreclosure? What are their deficiency risks? When do they have to be out of the home after foreclosure, etc etc. All things that neither a Real Estate Agent or Loan Officer can offer as they are not licensed to give that kind of legal advice. Next, the Attorney should put that opinion and analysis in writing. What good is a legal opinion if it is not in writing? Then and only then, might a determination be made by the Attorney and the Seller that a Loan Modification or Short Sale makes sense and if appropriate, the Seller retains the Attorney to then represent them during that negotiation. So, instead of an Attorney out there picking the pocket of the Real Estate agent for  a share of the commission, or advertising Short Sale or Loan Modifications as a service, which in our opinion is NOT a legal service, you would actually have an Attorney who is providing actual legal services.

Lastly, I would argue that it is NOT the loan that creates the problem in the first place. So, your statement about this heading back to those that put them in these loans in the first place, is misplaced. Our observation is based upon over 10,000 phone calls into our firm in the last three years, over 2000 face to face consultations and retainers by homeowners that face a point today where they can no longer afford their home or it no longer makes sense to pay the mortgage and owe more than it is worth. Bottom line. Out of these thousands of clients, maybe a dozen clients are facing a credit decision and default based upon the loan terms. The rest are victims of this economy. They earn less or none at all, there has been a death or sickness in the family. We are still waiting to see that flood of ARM resets or irresponsible homeowners that had no business buying the home with stated income etc. It is just not true. If there was any REAL issue, it was one of value of the home that became the key to the prison cell that the home has become.

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