Is It illegal for RE Agents to Negotiate Short Sales?

The MN DOC is investigating short sale agents

October 28, 2011

Nash Law Firm, PLLC
By:  Stephen J. Nash
nash@nash-law.com

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In 2009 I published an article “Short Sales and Loan Modifications: Are You Allowed to Do Them?” talking about what position the Minnesota Department of Commerce might take with respect to who could negotiate loan modifications and/or short sales.  At that time, the MN DOC took the position publicly that only residential mortgage originators (other than lawyers) could represent home owners seeking a loan modification.  They did not take a position on who could legally negotiate short sales.  In the article I speculated that the MN DOC could very well determine that only residential mortgage originators (other than lawyers) could negotiate short sales in that a short sale could be construed as a loan modification (you are modifying the payoff term).

Well, two years later there are strong indications that the MN DOC is going to take that position.  If that is the case, all real estate agents, brokers of those agents and others in the real estate industry who are negotiating short sales is at risk.

In the last couple of months a number of real estate agents have been brought down to St. Paul to be interviewed by the MN DOC regarding the agent’s short sale activities.  While the MN DOC has not taken a formal, public position, they are stating that they believe that Minn. Stat. 58A, the Residential Mortgage Origination statute, provides that residential loan officers are authorized to negotiate short sales and that Minn. Stat. 82, Real Estate Brokers and Salesperson statute, does not grant real estate agents the right to negotiate short sales.

In next month’s newsletter, I will go through Minn. Stat 58A in detail as it applies to short sales.  In this article I will look at the potential impact of this situation and the difficult choices that real estate agents and brokers are now facing.   

Uncertainty

Right now everyone is stuck in limbo.  While the DOC has clearly indicated that they believe that only residential mortgage originators and attorneys can negotiate short sales, they are not willing to officially take that position.  As a result, agents and brokers either continue to engage in an activity that will be determined to be unlawful or stop an activity that may not be determined to be unlawful. 

The uncertainty makes it impossible to predict what the MN DOC will finally do so it may come down to how much risk you are willing to take. 

Even if you believe that the law is clearly on your side, do you want to risk being the one that has to go through the expense and risk of litigation to find out the answer?  If you are wrong, your license to do business is at risk and you can face huge fines.  This issue was discussed in an article published earlier this year, "MN Dept of Commerce Violations: Now Is Not The Time To Risk Potential Violations".

If you think that the MN DOC will not aggressively pursue enforcement actions against brokers and agents, I would direct you to look at the title affiliate enforcement actions that the MN DOC took against hundreds of agents, brokers and title companies which resulted in fines exceeding $1 million dollars.  Huge, national lenders ended up deciding it was better to settle than to fight the MN DOC to the end. 

The potential numbers of agents, brokers and others that would be subject to potential enforcement actions regarding short sales would far exceed the title affiliate cases.  Just think of all of the agents and brokers who have negotiated short sales or directed homeowners to non-attorneys and non-residential loan officers to do the short sale negotiations!  If you sent them to a real estate agent, a title company or a non-licensed person to do the short sale, you may be facing a huge problem.

What Do You Need a License to Do in a Short Sale?

Clearly, a real estate agent has the right to list a short sale.  Under the MN DOC’s potential position, clearly a real estate agent cannot negotiate the short sale agreement but what about the processing of the short sale documentation?  Do you need a license to gather the necessary documents to submit the short sale package?  Can you submit the short sale package?  Can you move the file through the process and then turn it over to an attorney or residential loan officer to do the actual negotiation?

We don’t have an answer to any of these questions.

Who is Going to Do the Short Sale Negotiations if Real Estate Agents Can’t?

It is safe to say that most short sales are presently negotiated by real estate agents.  Some are being negotiated by attorneys, such as our office, and a few are being negotiated by other professionals such as title companies.  I am not aware of any residential loan originators who negotiate short sales.

I don’t believe there is anybody that believes that title companies legally can negotiate short sales so they will continue to do so at their own risk.  If real estate agents are knocked out of the short sale negotiation business, that leaves attorneys and residential loan officers. 

While a few law offices negotiate short sales, most do not and, probably are not positioned to successfully do so.  If you can’t find a law office that can do short sale for your clients in a manner that works for your client you are left with seeking the services of a residential loan officer.  The problem here is that, as a group, they have no knowledge or experience is negotiating short sales.  In addition, do their brokers want them negotiating against lenders?  Remember, their main business is originating loans, not re-negotiating loans.  What happens if the loan in question was a loan that the residential loan officer originated or that someone in his/her company originated?  Is this a conflict of interest? 

Sometimes You Regret Getting What You Ask For

The worst case scenario is that the MN DOC officially takes the position that only attorneys and residential mortgage originators can negotiate short sales, they begin an enforcement action against thousands of agents who have negotiated short sales, they begin an enforcement action against hundreds of brokers who had agents who negotiated short sales and hundreds of starving residential mortgage originators flood the market doing short sale negotiations that they have no training or experience to do.  Will this really result in a better service or result for the homeowner?

Just When You Thought It Couldn’t Get Worse….

There is one more troubling aspect of this situation.  If the MN DOC does officially take this position, will this encourage a wave of lawsuits by homeowners who had their short sale negotiated by a real estate agent?  If so, will E & O cover it, especially if it is arguably an unlawful activity?

Surviving in real estate has been a struggle ever since the market imploded, it looks like it might get that much tougher.

NOTICE The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract is, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation. Copyright 2011 Nash Law Firm