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)
Replies to This Discussion
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Permalink Reply by Jaime Kosofsky on
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In NC the NC. Commission issued a bulletin a month ago indicating that there are two transactions in a SS. The communication or deal making between buyer and seller is the Provence of the licensed real estate broker. The other negotiating or deal making between the bank and seller concerns the legal rights of the seller and is considered by the commission to be the unauthorized practice of law. This statement was made at a NC commission educators conference and is not in writing. In NC the safe act does not prohibit attorneys from negotiating ... the state unauthorized practice statute is clear negotiating on behalf of a third party is considered the practice law. House bill 690 passed the NC house last week which will tighten this down. So.. in NC its questionable whether a broker can do a SS.. but its clear a third party who is not a broker the lender or an attorney is committing unauthorized practice of law the second they call on behalf of a seller in distress...
I am not a proponent of these rules... I think brokers do a great job and should be able to for this
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Permalink Reply by Donna McClelland on
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Kevin, very good explanation and summary. I would like to get on your mailing list of legal opinions - I'll call your office. I think the key is, again, for agents and/or third party negotiators to not take any additional compensation from the seller or lender.
As a real estate broker in Arizona, I know there is still a lot of confusion in the real estate community about what is required to negotiate short sales "legally" either as an agent or a third party negotiator. In February, the DRE came out with this big warning that scared everyone into thinking they couldn't even negotiate their own short sales without an NMLS # and then they backpedaled on it a couple months later. Like Brian, to be safe (no pun intended), I got my loan officer training. The biggest thing I do to protect myself is disclose, disclose, disclose. Every potential seller has to sign a prelisting advisory before listing their property us that fulfills the M.A.R.S. requirements. In addition, if they ever have a "legal" or "tax" question, we suggest they talk to an attorney or financial advisor. As a certificated paralegal trained in short sale negotiations while working for a law firm, I know I cannot give legal advice and would not want that responsibility anyway.
I also agree with Todd that it is completely ironic that the F.T.C. is trying to give the power to negotiate short sales back to the loan officers who created this problem in the first place!
Kevin Hardin said: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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With all due respect, Jonathan, have you ever negotiated a short sale? A third party negotiator getting 25% of your split on a sale on a $100K property only gets $750. If you look at the hours and aggravation they have to go through to earn that $750 and the risk they take of working for free (when the buyer walks or they can't get approval or cooperation from the homeowner), it's worse wages than the Avon lady! I think for agents, 25% is the deal of the century! That frees them up to go get more of these listings and sit back and let the negotitator do all the work and collect their $2250 on every listing. This is why it burns me up that the DRE and DFI want to fine anyone who does short sale negotiations. As third party negotiators, we don't make much money at all. And as listing agents doing our own negotiations, we are working 10 times as hard in a normal market for 1/2 or less of the commission when the market was at its high point, due to reduced home values. Jeez, we have to get so much education, pay for so many things (MLS, Realtor associations, etc, etc), take tons of risk and make half as much money as we used to make, and the people who run the show still want more from us!
Jonathan D Rexford said: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.
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Permalink Reply by John A Brassner on
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In Nevada we can negotiate the short sale as part of a listing contract. We can not charge for the short-sale negotiation. As long as it is part of the listing services, it's okay.
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Permalink Reply by Jonathan D Rexford on
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Actually Donna, I have done several as an investor and as an agent. I also had a Loss Mit firm that was doing Loan Modifications up to 19 months ago when we shut it down as we were seeing changes in the law. Sending to a 3rd party is not the issue, that I am relating to. I mean as far as licensing. We have a few title companies that are owned by law firms that are doing this for the TITLE or 25%. But as a result it is more just gather paperwork, fill out HUD and fax back. Either waiting form a TASK or call from the bank. Some want up front fees to set it up and that in some states needs to be looked at. Just as in Florida.
I must have not been real clear with my post and if so I do apologize. The last thing I want to do is hand over a file to someone who is very experience and have our state regulators stop in and pick up the files, because of non licensure and then that becomes another set of worms.
Donna McClelland said:With all due respect, Jonathan, have you ever negotiated a short sale? A third party negotiator getting 25% of your split on a sale on a $100K property only gets $750. If you look at the hours and aggravation they have to go through to earn that $750 and the risk they take of working for free (when the buyer walks or they can't get approval or cooperation from the homeowner), it's worse wages than the Avon lady! I think for agents, 25% is the deal of the century! That frees them up to go get more of these listings and sit back and let the negotitator do all the work and collect their $2250 on every listing. This is why it burns me up that the DRE and DFI want to fine anyone who does short sale negotiations. As third party negotiators, we don't make much money at all. And as listing agents doing our own negotiations, we are working 10 times as hard in a normal market for 1/2 or less of the commission when the market was at its high point, due to reduced home values. Jeez, we have to get so much education, pay for so many things (MLS, Realtor associations, etc, etc), take tons of risk and make half as much money as we used to make, and the people who run the show still want more from us!
Jonathan D Rexford said: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.
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Permalink Reply by Paula Cotton on
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Maybe Kevin Hardin can answer this one. On the attached document, referring to footnote 2 at the bottom of page 1, I have always been in disagreement with the requirement of the "negotiator" needing a LO license because it states that the provider of the service 1. Takes residential mortgage loan applications, 2. Offers or negotiates terms of a residential loan AND (this is the key word) 3. On behalf of homeowner, negotiates with the lender . . . I have always been thrown off by the AND part, because as short sale negotiators, we do NOT take residential mortgage loan applications. I have always felt that the AZDRE misinterpreted this, but, as I said before, to CMA, I filled the requirements just to be S.A.F.E. What do you'all think?
Paula, I have to add that I went to a seminar in put on by the AZDRE where the commissioner was on a panel answering questions in response to this directive. During that seminar we were all told to immediately stop negotiating short sales, even where we were the listing agents, until we got our LO licenses.
Paula Cotton said:
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Permalink Reply by Todd J Sullivan J.D. on
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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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Permalink Reply by Bryant Tutas on
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Great discussion guys. You have to love it when we get this much information related to a topic from Short Sale Superstars. This is exactly why Wendy and I started this site. Please invite others to join. Thanks
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Permalink Reply by Sandra Koutsopoulos on
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Seems to me that when our clients sign an authorization for us to negotiate a payoff with the lender, we are not negotiating mortgage terms in any way, not ongoing payment amounts nor interest rate nor term...we're negotiating a settlement payoff.
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Permalink Reply by Kevin Hardin on
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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-...
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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: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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