The document discusses regulations around realtors and short sale negotiators in Arizona. It clarifies that realtors can assist sellers with negotiating short sales as part of their license, but cannot receive additional compensation unless also licensed as a loan originator. Third-party negotiators and those receiving compensation must be separately licensed. Regulations also prevent loan originators from being employed in real estate to handle FHA loans. All compensation received must be through the employing broker.

1. KEVIN W. HARDIN CMB, CMC, CMPS
KHardin@ThomsonLawPLC.com
What is the difference between a Realtor doing Short Sales or a Short Sale Negotiator?
On February 1st 2011 Arizona Department of Financial Institutions released its Broker/Manager
Risk Management Update; Special Edition January 2011. In this Update, DRE addressed the
topic of Short Sale Negotiator Regulations.
The first issue in the Update was:
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
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?
No. The Arizona Attorney General’s office (“AG”) has opined that a real estate
licensee may not receive additional compensation from any source (seller, buyer,
lender or otherwise) for negotiating a short sale, unless the real estate licensee is
also licensed as a loan originator by the Arizona Department of Financial
Institutions (“DFI”) and the requirements of A.R.S. § 32-2155(C) are met .[1] The
AG indicates that 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 to accept the short sale price as a customer service and
does not charge or expect additional compensation (including an increased
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commission), the real estate broker/salesperson does not need a separate loan
originator license from the 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)” as prohibited by
the AG? 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. On this issue, AZ DRE went on to clarify.
May a real estate broker/salesperson without a loan originator license be
compensated as a third-party short sale negotiator in a transaction?
No. A real estate licensee may not receive compensation for negotiating a short
sale, unless the real estate licensee is also licensed as a loan originator by the DFI.
Given the foregoing answer, it would seem clear that AZ DRE has answered the previous
question with clarity. Namely, a real estate broker/sales person who is negotiating a short sale as
a third party (and not as a customer service) would in fact have to be licensed under AZ
Department of Financial Institutions.
In addition, DRE stated:
Must a third-party short sale negotiator be licensed in Arizona to negotiate a
short sale for compensation on behalf of an Arizona seller?
Yes, a loan originator license issued by the DFI is required to be compensated as a
short sale negotiator.
Now, at first read it might seem that this has nothing to do with the real estate agent as
previously explained. But, what if the real estate agent is part of a team? What if that agent on
that team hires an unlicensed individual to make those negotiation phone calls for compensation
on behalf of the licensee? This type of activity would clearly take that individual outside of the
safe harbor for a real estate agent and would necessitate a DFI loan originator license for that
employee. Even if it was determined that the licensee agent was in fact working within his
license this would not confer onto the activities of the employee the same exemption.
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After reading this 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 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 (“FHA mortgagee”) 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.
Last but not least:
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.
So, how does this affect compensation to employees of licensed agents who might “assist” the
seller in the negotiation of a short sale? How might this affect those licensed real estate agents
“working” for attorneys and who might receive compensation for negotiating short sales under
the façade of a law firm? How might this affect a corporate entity created by a licensed real
estate agent to market for and negotiate short sales? The answer to these questions would seem
obvious from DRE’s position statement that these forms of compensations are prohibited by
A.R.S. §32-2101(16).
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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
from DFI. 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).
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602.774.3757 | 602.840.3290 Fax | 2701 East Camelback Road | Suite 150 | Phoenix, Arizona 85016 | www.ThomsonLawPLC.com