Short Sale Negotiation

1. KEVIN W. HARDIN CMB, CMC, CMPS
KHardin@ThomsonLawPLC.com
UPDATED February 21st 2011
What is the difference between a Realtor doing Short Sales or a Short Sale Negotiator?
On February 1st 2011 Arizona Department of Real Estate released its Broker/Manager Risk
Management Update; Special Edition January 2011. In this Update, DRE addressed the topic of
Short Sale Negotiator Regulations. On February 15th 2011 Commissioner Judy Lowe updated
that letter. Here is the link to that Update:
http://www.azre.gov/PublicInfo/Documents/Short_Sale_Negotiator_Regulations.pdf
The first issue in the Update was:
What licenses are required to negotiate a short sale?
A real estate license and/or or a loan originator license may be required for
individuals who assist homeowners in negotiating with lenders to accept less than
the full amount of the mortgage loan, as part of a short sale transaction.1 The
particular license that is needed depends on the nature of the transaction, what
licenses the person or entity holds already, the scope of services offered and
whether or not a fee is charged for the service, as explained more below.
Essentially the commissioner is putting on notice all parties that exemption from licensing is not
universal and exemption from licensing is based upon very specific circumstances and services
offered.
The commissioner moved directly into the question of the scope of licensure for a licensed Real
Estate Agent.
Is a real estate broker/salesperson acting outside the scope of their real estate
license by assisting a seller in negotiations with the lender to facilitate a short
sale?
No. The scope of a real estate license encompasses assisting in the “negotiation
of any transaction calculated or intended to result in the sale . . . of real estate.”
A.R.S. § 32-2101(48)(j).
Now, at first read this would seem to address everyone’s question as to whether Real Estate
Agents can negotiate a Short Sale. The problem is, however, what is the definition of
“assisting”? Does that mean that you can advise and guide the homeowner in speaking with their
lender? It seems safe to say that “assist” might mean that. But what if you are collecting all
documents from the homeowner to submit to their lenders? What if you are directly negotiating
with the homeowner’s lenders to securing a release of the liens and perhaps a release of the
1
Arizona law defines “short sales” as “real estate transactions in which the sales price is insufficient to pay the
loan encumbering the property in addition to the costs of sale and the seller is unable to pay the difference.”
A.R.S. § 32-2130 (A).
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remaining deficiency balance on the loans? When does working with a homeowner leave
“assisting” and move to “negotiation”? And, at what point does assistance become legal
representation?
The next issue addressed was compensation:
May a real estate broker/salesperson receive additional compensation for
negotiating a short sale in addition to receiving a commission on the sale?
Yes, if the real estate licensee is also licensed by the Arizona Department of
Financial Institutions (“DFI”) under Title 6, Chapter 9 (covering loan
originators2, mortgage brokers and mortgage bankers) and other requirements
are met. 3 The general rule is that additional compensation requires an
additional license. If a real estate broker/salesperson assists the seller in
negotiating with the lender or servicer to accept the short sale price as a
customer service and does not charge or expect additional compensation
(including an increased commission), the real estate broker/salesperson does not
need a separate license from DFI
Now, this seems pretty clear on it’s face. But, exactly what does “additional compensation”
mean. If you are an individual real estate agent and secure a listing for the sale of residential
home and with no expectation of further compensation for “assisting” the homeowner in that
short sale, it would seem that a real estate agent would need no further licensure. But, what if
you are not the listing agent? What if you are a licensed real estate agent who is engaged by the
actual listing agent to negotiate on behalf of the homeowner? The only service you are providing
is the actual negotiation of the short sale with the expectation of compensation by way of real
estate commission for that service. While it is normal and customary for a co-listing agent of a
property to receive some form of referral commission, would the sharing of the commission for
the “negotiation” of the short sale be considered as “(an increased commission)”? Since the
Third Party Negotiator is performing none of the responsibilities ordinarily relating to the listing
and sale of the property, the third party negotiator falls outside of that exemption.
2
“Loan originator" is defined as “a natural person who for compensation or gain or in the expectation of
compensation or gain… (i) Takes a residential mortgage loan application; (ii) Offers or negotiates terms of a
residential mortgage loan; and (iii) On behalf of a borrower, negotiates with a lender or note holder to obtain a
temporary or permanent modification in an existing residential mortgage loan agreement. A.R.S. § 6–991(12).
Also, a loan originator must be employed by a mortgage broker. A.R.S. § 6-991.02(13) and § 6-991-04.
3
A real estate broker/salesperson cannot collect compensation for negotiating loans unless: (1) they are licensed
pursuant to Title 6, Chapter 9 (A.R.S. § 6-901, et. seq); 2) they have disclosed to the person from whom the
compensation is collected that they are receiving compensation for both real estate and mortgage services; and 3) the
compensation does not violate any other state or federal law. A.R.S. § 32-2155(C).
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Should a broker/salesperson negotiating a short sale with a lender or servicer
on behalf of the seller comply with the Federal Trade Commission’s Mortgage
Assistance Relief Services (“MARS”) Rule?
Yes. The MARS Rule applies to any person that provides, offers to provide, or
arranges for others to provide any “mortgage assistance relief service.” Title 16,
Code of Federal Regulations (CFR), Part 322. A “mortgage assistance relief
service” includes any service, plan, or program, offered or provided to the
consumer in exchange for consideration to assist or attempt to assist the
consumer with negotiating, obtaining or arranging a short sale. 16 CFR
322.2(i).To review the MARS Rule in its entirety, including disclosure and other
requirements, go to www.ftc.gov/opa/2010/11/mars.shtm.
This seems to be very straight forward and not open to much interpretation. If you are a real
estate agent and are advertising for Short Sales you are a Mortgage Assistant Relief Service
Provider and must comply. This does not mean that you cannot do Short Sales. MARS has very
specific disclosures that are required of a provider before working with the client as well as at
critical points in the short sale process. In addition, there are prohibitions related to advertising
and marketing of your services that must be complied with. This firm can assist you in reviewing
your current business model and assisting you in drafting the legal disclosures necessary.
Part of MARS describes a prohibition to accepting an upfront fee as part of the short sale
process. The Commissioner goes on to explain.
May a listing broker/salesperson charge the seller a non-refundable retainer fee
in a short sale transaction?
No. Any fee, refundable or non-refundable, that a broker/salesperson requests or
receives from a consumer to negotiate, obtain or arrange a short sale, in advance
of an executed agreement between the consumer and his or her lender or servicer
that incorporates the final terms that the lender or servicer will agree to, violates
the advance fee ban described in section 322.5 of the Federal Trade Commission’s
MARS Rule.
Of course the question of what to do with out of state companies always comes up in the
conversation.
Must an out-of-state short sale negotiator be licensed in Arizona to negotiate a
short sale for compensation on behalf of an Arizona seller?
Yes, they should generally follow the same licensing regulations as Arizona–
based short sale negotiators.
Now, there have been numerous stories of other entities including Law Firms that have
employed licensed real estate agents in an effort to circumvent licensing under an
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exemption that goes to the Attorney and still share in the real estate commission. The
next statement by the Commissioner seems to clarify that attempt as a failure and is in
violation of this rule unless the Attorney is also a licensed real estate broker.
If a salesperson receives any fee in connection with a short sale, regardless
of how the fee is described on the HUD-1 must the fee be paid through the
employing broker?
Yes. A.R.S. §32-2155(A) requires that a salesperson “accept employment and
compensation as a licensee only from the legally licensed broker to whom the
licensee is licensed.” Compensation is defined as “any fee, commission, salary,
money or other valuable consideration for services rendered or to be rendered as
well as the promise of consideration whether contingent or not.” A.R.S. §32-
2101(16). Thus, a salesperson may not receive compensation as a licensee from
any person or through any entity, including a licensee’s LLC, other than the
employing broker to which the salesperson is licensed.
After reading the following statement, a real estate agent might determine that licensure is
required and apply for licensure under Title 6 Chapter 9 as a loan originator. For a real estate
agent to be a properly licensed loan originator it would then require that a real estate agent
become an employee of a mortgage broker or banker? The next question and answer by DRE
becomes increasingly problematic.
Are there any additional licensing restrictions that apply to FHA loans
regulated by the U.S. Department of Housing (HUD)?
Yes. Loan originators must be employed by a licensed mortgage broker who is
responsible for the supervision of the loan originator. Under HUD rules, a
mortgage broker who handles FHA loans is prohibited from employing staff who
are also employed in the real estate field. For further information about HUD's
requirements, visit www.hud.gov.
So, under the HUD rules, a HUD approved mortgagee is prohibited from employing staff who
are also employed in the real estate field. This leaves only those mortgage brokers / bankers in
AZ who do not offer FHA loans. In today’s real estate market and in view of current lending
constraints, this leaves very few options.
Conclusion
The DRE Update has provided clarity to many of the issues and questions facing Real Estate
Agents in the area of Short Sales. What is now clear is that those agents who are engaged by
another real estate agent, broker or even a homeowner to negotiate short sale and who receive
compensation are in violation of ARS Section 32-2155 (C ) and are required to obtain a license
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from DFI. 4 It is now equally clear that those third party negotiators that operate under the
umbrella of an LLC or a brokerage also are in violation of ARS Section 32-2101(16). Finally, it
is now clear that those Real Estate Agents that list and market a property and who only “assists”
the seller as an accommodation with the negotiation with the lenders for no additional
compensation is acting lawfully.
What remains unclear is the definition of “assist” in the context of negotiating a short sale. Based
upon the positions taken by DRE, DFI and the AG’s office, it seems reasonably clear that
“assisting” a homeowner with the negotiation of a short sale would not include the direct and
exclusive handling of the direct negotiations with the lenders. Certainly, as it pertains to the
specific negotiations with a lender to obtain the release or extinguishment of deficiency balances,
such negotiations would go well beyond mere “assistance” of a homeowner and would consist of
representing a borrower on a disputed debt obligation.
While some bright lines in the area of authority for Real Estate Agents in Short Sale transaction
have now been established, there remain several areas of uncertainty that remain to be decided.
What can be said is that Real Estate Agents should act prudently in determining the limits of
their roles for a homeowner and eliminate potential violations of the statutory and regulatory
requirements by avoiding the seeking of legal guidance.
Kevin W. Hardin CMB, CMC, CMPS
Neil W. Thomson, Esq.
Thomson Law, PLC
www.ThomsonLawPLC.com
www.MortgageMediationGroup.com
2701 E. Camelback Rd. Suite 150
Phoenix, AZ 85016
602-774-3757
If you have any questions please call our firm at the number above. The Mortgage Mediation
Group is a practice group of the Law Firm of Thomson Law, PLC. This group is focused on
assisting homeowners facing a point today or in the future when they can no longer afford their
mortgage or it no longer is feasible to pay AND owe more than their home is worth. Solutions
can range from Mortgage Liability Review, Short Sale Review and Negotiation, Loan
Modification, Lien Settlement, Foreclosure Defense, Deficiency Defense, Deed in Lieu and
Bankruptcy (Chapter 7, 13, Lien Strip and Mortgage Cramdown).
4
Information on obtaining a loan originator and other licenses is available on the DFI website at
www.dfi.gov
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602.774.3757 | 602.840.3290 Fax | 2701 East Camelback Road | Suite 150 | Phoenix, Arizona 85016 | www.ThomsonLawPLC.com