We've all been warned before about being careful not to practice law without having your law license. Now we have to be careful about doing things that might be construed as being something a mortgage loan originator would do. If you do it without a license, you could be committing a felony.
Have you heard about S.A.F.E. (Secure and Fair Enforcement for Mortgage Licensing Act)?
It was part of the Housing and Economic Recovery Act of 2008 and it required states to license mortgage loan originators. In Georgia, that led to the Georgia Residential Mortgage Act being passed last summer.
It makes it a felony, if you don't have a mortgage loan originator license, to do the things that a mortgage loan officer does.
Our broker sent us an email today from a real estate attorney in Atlanta. He cautions real estate agents who get involved with short sales to be very careful about getting involved in negotiating the terms of a loan if you are not a licensed mortgage loan originator.
I'm sure every state now has their own law covering the details. The definitions can be the tricky part. There hasn't been any case law yet in order to guide us so there is a lot of uncharted territory to be concerned with.
'Mortgage broker' means any person who directly or indirectly solicits, processes, places, or negotiates mortgage loans for others, or offers to solicit, process, place, or negotiate mortgage loans for others
'Mortgage loan originator' means an individual who for compensation or gain or in the expectation of compensation or gain takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan.
'Mortgage loan' means a loan...including the renewal or refinancing of any such loan.
...a real estate broker or real estate salesperson who directly or indirectly negotiates, places, or finds a mortgage for others shall not be exempt from the provisions of this article;
So I guess it comes down to what it means by negotiating terms of a mortgage directly or indirectly. That covers a pretty broad area.
The email we received goes on about a typical short sale scenario. It would be OK to do what a real estate agent normally does and to give that information to the lender, but it probably wouldn't be OK to negotiate with the lender on behalf of the seller. You basically can only be a supplier of information and maybe give your opinion about the offer you have on the table with the buyer. You can't try to shape the terms of a settlement between the bank and the seller.
You might even be deemed to be negotiating the overall terms of the short sale approval if you try to get a full commission after the bank comes up with terms that includes cutting your commission.
I don't do short sale listings yet but I've read many posts talking about agents negotiating the terms of the mortgage with the seller's lender. It's what I thought a good short sale specialist did. But now it might get you in trouble if you don't have a license.
It should be interesting to see how the Act plays out. It would be nice to have more precise guidance for the most common real estate agent short sale situations. Unfortunately, sometimes it takes a court case to clarify things.
Tim - this article raises some excellent points. As is true with so many regulations there is lots of interpretive license here it seems.
But it also sounds as if many actions we hear about being taken by agent in the supposed best interest of the coient could be getting them in trouble. Will be interesting to see if this gets tested in court.
Jeff
This is a really interesting twist and one that many of us are going to need to consider very carefully.
In Florida real estate agents are allowed to negotiate in behalf of sellers in short sales. Of course we bring the offer the short sale lender has to our sellers but those sellers want to know based on our experience if there is any further negotiating that can be done. This is not the same as negotiating a mortgage loan. We are not refinancing houses, we are selling houses. We are not helping in loan mods, we are selling houses. In the process of selling a house as a short sale you are not originating any mortgage loan. You are entertaining a short net to the lender. When promissory notes become involved they are not tied to real estate, they are not mortgages. They are promissory notes not tied to real estate, thus this is not a mortgage origination. I think that there are too many people trying to scare short sale agents out of business.
Tim - Thank you for the post. You made some great points.
Matt
Tim - This is very interesting indeed. many things are changing daily
Thanks so much Tim for this post! I had a conversation yesterday with a "third party" negotiator for the second who was definitely attempting to bring me into the negotiations for that second. I was confused by his direct proposal to ME, and after reading your post I realize my confusion was well founded and I'm going to resist! thanks again!
Tim: Interesting scenarios but since you confess to not being a short sale listing agent, I would have to defer to the opinions of Nestor and Katerina who do tons of them.
As if I need more reasons to love the financing aspect of engaging in real estate sales. I have a guy who handles my short sales. I have refused to participate beyond having my colleague handle the "negotiations" and the details. It's amazing that we are doing real estate transactions these days.
When reading your post my thoughts were in a short sale you are not negotiating a mortgage you are selling a property at a reduced rate on the note. Will this be challenged in court. I am sure it will....isn't everything? But it sure makes you think.
The Video Guy logo caught my eye. What products are you using and do you have any tips?
Real estate agents absolutely CANNOT negotiate the terms of a loan modification in the state of Maryland. A special license is required.
The Attorney General of Maryland's office is diligent in enforcement of this law. Agents who engage in LOSS MITIGATION CONSULTING, FORECLOSURE PREVENTION, MORTGAGE LOAN MODIFICATION. . . . . .
are in violation of the law.
Interesting stuff. I had not heard of all this. Thanks for sharing.
This is one example of why I have an attorney negotiate my short sales. Not worth the trouble down the road!
Great post, you really do have to be careful not to practice law. I guess the best approach is to be safe, supply the homeowner with good, well researched information and let them do the negotiating on their loan and be there to provide information, encouragement and support but if (when) it get's legal then bring in an attorney. I think that every realtor should have a GREAT attorney relationship, someone that they can pull into these transactions cost effectively and legally. Also remember not all attorneys and experienced at short sale negotiations so do your attorney homework too.
This leave me wondering about Bank of America's process (and some others) where they openly publish a process where the realtor can get authorization from the homeowner to act on behalf of the homeowner? According to the Georgia Residential Mortgage Act this seems to be illegal?
Thanks for the comments.
My first impression was that of Katerina. We aren't "originating". We are negotiating a modification. I'm not a lawyer but my information came from an email report that a lawyer from a big time real estate law firm in Atlanta put out. It was by Ned Blumenthal, a partner of Weissman, Nowack, Curry and Wilson. He and Seth Weissman wrote the book The Red Book on Real Estate Contracts in Georgia which is kind of the Bible for real estate contract law in Georgia. So the warnings come from a pretty reputable and knowledgable source.
Like most things in real estate law, the courts will ultimately decide what the words actually mean. In the mean time, it's probably worth while to be aware of the potential danger.
I don't think it is a problem in NY. However, I have an attorney spearhead the negotiations. We are authorized 3rd parties with the lender also in case we're needed but I prefer to focus my efforts on brokering, not waiting on hold and faxing into the ozone.
Tim,
Great information. I haven't done any short sales in Atlanta and would be inclined to refer them to someone who had good experience and knowledge.
Having said that, I am thinking that doing what is best for the client could put the Realtor in jail from what you shared. Not easy to figure out where that legal line is.
Thanks for sharing. Michelle
We don't have that problem in California, either, because real estate brokers are licensed to originate mortgages. However, as Katerina pointed out, there is a distinction between originating a mortgage and selling a home. Negotiating a short sale adds another layer, but the problem isn't so much whether the short sale agent is tipping her toes into the mortgage business as it is she could be guilty of practicing law without a license.
I tell my clients if they want legal representation, they need to hire a lawyer. When a short sale bank makes a proposal, I bring that proposal to the seller. I may share similar experiences I've been through with other sellers, but I don't tell my sellers what to do. They make a decision and I bring that proposal back to the bank. I can only do so much. Sometimes, lawyers are a better option.
This topic was brought up in the GA licensing course that I took last fall. Unless you are licensed as a Mortgage Loan Originator, be careful.
I think it is better to be safe than sorry. We should all stick to the areas where we are licensed. I see the most important part of the definiton as being "with the expectation of compensation". To me, this means that if you intend to be compensated in anyway for your role in the negotiation of a mortgage loan, you need to be licensed.
Excellent post & congrats on the feature. After attending the SFR class about 2 weeks ago, I had these same thoughts. And for that reason I do not do short sales.
There is far too much liability and no way to project how these situations will play out in court in the years to come.
What recourse will a realtor have when the lenders start tracking down all these "short sellers" for their deficiencies 2, 3, or 10 years from now?
This post reinforces for those that list Short Sales the need to know what you are doing. We listed and closed dozens last year, with a 100% success rate, and we learned something from every one of them. Always encourage IN WRITING your Seller to seek legal counsel and tax advice from a CPA regarding their specific circumstances.
Excellent and timely information. Thanks for sharing.
I am hoping that Virginia has a version of this. I am checking now!
In California, a licensed real estate broker could also orginate and sell mortgage loans (trust deeds secured by real property). But now with the SAFE licensing law, most sales brokers will NOT be doing loans. So your blog is very timely, as it applies to ALL states!
Regina Brown
I always recommend talking to a lawyer and a tax professional - I cannot advise appropriately on these matters. But I can present the seller's info when it comes to a promissory note request from a bank...just told the seller's info, and had one reduced from $22,000 to $0 today. I'll have to check into this more. I would never want to put my client's or myself in harm's way.
Nestor's comment covers the short sale aspect which is what we are doing. We are just bringing in the offer and the lender accepts it or not.
This addresses loan modifications and foreclosure help by unlicensed people if each state decides that it needs to be handled by loan originators. Considering that loan originators had a hand in having people get those loans it seems ironic to have them now do the loan modifications but I am sure the government know much more than we do on this case.
I also heard that their is a bill bein considered that no one including lawyers can take up front fees for doing a modification. I personally believe that the banks are behind this. With consumers being forced to negotiate their own loan modifications the lenders will have free rein to do whatever they want and that is force a short sale or allow it to go into foreclosure. Especially now that the government is going to give them incentives to do the short sale.
We are one of the few professions that do work without pay until a transaction is closed. Knowing how much work is invovled doing a loan modification few to no one will be doing them including attorneys so consumers will be at the mercy of the banks which is exactly what they want.
Evelyn Santiago
Hi Tim, Very interesting and informative post. My broker is working on a short where the lender wants the seller to bring $20k to the table. I wonder if her efforts to get the deal together might be crossing the line you speak of.
Tim:
Very interesting article! I especially appreciated Nestor's answer and explanation.
Wow and the plot thickens! I have to wonder how many Florida agents have been considered crossing the line?
Tim
Good post.
In order to protect it's members. The NAR should address this issue sooner or later. Brokers need to keep the heat on this one so that they remain compliant.
Thanks again.
Katerina (#3) explained it best, in that we are selling the property, not refinancing it.
And, do not get involved in anything related to loan modification.
I think a lot of listings agents have stepped over the line and they need to know what the boundaries are. A few know what they are doing, but they are far and few between.
In my opinion a Realtor is taking a big risk when they are doing the negotiating directly with the lender. This is almost as bad as letting a short sale investor negotiate with the lender. I have an attorney that does all the negotiating all the legal aspects of the deal.