Minnesota Department of Commerce Lowers the Hammer on Real Estate Agents For Negotiating Short Sales.
Monday, November 28, 2011 at 9:03AM Everyone who is involved with short sales must make legal/business decisions on how to go forward
November 18, 2011
Nash Law Firm, PLLC
By: Stephen J. Nash
nash@nash-law.com
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On November 14, 2011, the Minnesota Department of Commerce, Asset Redemption Services, Inc, Carlos Diego Macial Montes and Sophia E. Acosta entered into a Consent Order imposing a $1,850.00 penalty on each and the revocation of each of their real estate licenses. The importance of this enforcement action for real estate agents in Minnesota is that the underlying basis of the action was these individuals were “engaged in the business of negotiating residential mortgage loans for others and for fees in the form of providing short sale negotiations without having a valid residential mortgage originator license in violation of Minn. Stat. 58.04.” In addition, the DOC took the position that they were acting as foreclosure consultants as defined by Minn. Stat. 325N.01 (9) and violating said statute by collecting fees in advance (Minn. Stat. 325N.04 (1) (2010).
To my knowledge this is the first time that the Minnesota Department of Commerce has reported an enforcement action result where the DOC took the position that a real estate agent license does not permit real estate agents from negotiating short sales, that the real estate agents could not do so without a residential mortgage origination license (or, presumably a license to practice law). The impact of this case will be significant on two fronts – first, thousands of real estate agents have negotiated and continue to negotiate short sales, and second, thousands of residential loan officers may decide to start negotiating short sales.
Just as important, the DOC has taken the position that a real estate agent who negotiates a short sale is a “foreclosure consultant” under Minn. Stat. 325N. While Minn. Stat. 325N.01(b)(3) excludes real estate agents from this definition, I am assuming that the DOC is taking the position that this exclusion only applies if the real estate agent is performing duties whose performance requires a real estate license and since they determined that negotiating a short sale is not permitted under a real estate license, the exclusion does not apply. If a violation of the foreclosure consultant statute is found the remedies can be severe, including a court award for exemplary damages up to 1-1/2 times the compensation charged by the foreclosure consultant if a violation of Minn. Stat’s 325N.04, clause (1), (2) or (4) and the foreclosure consultant acted in bad faith. The Minnesota Attorney General can enforce this statute and a private cause of action exists that allows recovery of all damages, costs and disbursements, including the costs of investigation, reasonable attorney fees and any other equitable relief awarded by the court.
If a real estate agent becomes a foreclosure consultant statute when negotiating a short sale, all of the requirements and penalties of the foreclosure consultant statute would apply including the contractual requirements of Minn. Stat. 325N.03 (3 day right of recession, specific notice provisions, etc.)
Since consent orders do not set forth details of the enforcement action or the legal basis of the action, many questions are left unanswered.
What if You Don’t Charge Fees?
The consent specifically stated “negotiating residential mortgage loans for others and for fees”. Does this mean that if fees were not charged that a real estate agent would be able to negotiate short sales? Did the real estate agents in this case charge separate fees for negotiating short sales or did they receive commissions which the DOC determined compensated the agents for the sale and the short sale negotiations?
What Constitutes “Negotiating” a Short Sale?
The enforcement action did not describe the activity of the real estate agents that were asserted to be “negotiations” of short sales. Clearly, negotiating the short sale amount and future liability to the lender would fall under this category but what about all of the paperwork and phone calling leading up to the negotiation of the short sale price and liability issues? Anyone who has done a short knows that a tremendous amount of time is spent getting the documentation to the lenders negotiator and cutting through the lenders bureaucracy. There is not actual negotiation going on in this phase of the short sale so it could easily be argued that this activity does not need a license to practice law or a residential mortgage origination license; however, the opinion that counts is the DOC’s and we don’t know how they will define what constitutes negotiating short sales.
Are Brokers Vulnerable?
Since real estate brokers are responsible for supervising the activities of their real estate agents, does the DOC intend to start enforcement actions against brokers for this activity? Brokers are always vulnerable under this broad liability standard but, in this case, the activity in question – real estate agents negotiating short sales – is not hidden.
Will the DOC Go After Real Estate Agents and Brokers Who Negotiated Short Sales in the Past?
Thousands of short sale transactions have taken place over the last 5 years and most were negotiated by real estate agents. Is the DOC going to go after all of these agents and brokers and seek monetary penalties and revocation of licenses? If not, where will they draw the line? How will they determine the amount of the fine?
How Should You Respond?
The million dollar question is what should you do going forward?
Unfortunately, we can’t undo what has been done so there is nothing to do with respect to past short sale negotiations.
Going forward, Brokers need to determine who is negotiating the short sales for their agents sellers and whether they are going to take a conservative or more liberal approach to this dilemma. The conservative approach is to say that agents cannot do anything in a short sale other than marketing the home and make sure that a residential mortgage originator or attorney does the actual short sale negotiations (or let the owner do them on their own). A more liberal approach would be to allow agents to be restricted from the negotiation of the short sale approval but allow them to do everything up to that point. The most liberal position would be to allow the agents to negotiate short sales (no matter how you define “negotiating” short sales) as long as they don’t get paid anything extra to do so.
The more liberal the position, the more risk that is taken by the broker and agent. I would expect that brokers and agents are going to be scrambling to find a way to keep these files yet avoid the risk of having to deal with the Minnesota Department of Commerce down the road.
Some agents may decide to obtain a residential mortgage originators license so that they can continue to negotiate short sales. Brokers would then have to determine whether they will allow agents to hold two different licenses with two different companies (their real estate company and a mortgage company).
Residential loan originators may decide to get into the short sale negotiation business. Originating loans in the post real estate implosion world has been tough; this could be an avenue to increase their income. On the other hand, there is a steep learning curve for residential loan originators to jump into this market. Do they want to learn how to negotiate short sales? Do they want the added liability? Does their E&O coverage cover this type of activity? Do the owners of mortgage companies want their loan officers doing short sale negotiations? Will this affect their relationships with lenders they sell mortgages to?
No matter how you respond, you should have a thorough analysis of what your involvement is in short sales and/or determine what you want it to be before you go forward. You have to determine how much risk you are willing to take and create a business plan around your legal/business analysis. No two people will necessarily arrive at the same conclusions, be willing to accept the same amount of risk which means everyone has to create a plan that fits their own view of the situation and is in-line with their risk tolerance.
Since there are no black and white answers to the many questions that have arisen, you must make sure that you plan is very well thought out and specific, looking at the law and what the DOC may or may not do or decide and must be strictly followed so that if you do get caught up in a future enforcement action, that you have a legally justifiable position.
Making a Muddy Situation More Uncertain
To make a muddy situation even more confusing, what if the Minnesota Attorney General or the courts take a different position? Court cases tend to arise out of the most outrageous situations. When home owners start getting sued on mortgage loans after they went through short sales, law suits are sure to follow. We have been fortunate that the lenders have moved through the process so slowly that the collection lawsuits have not yet hit stride.
Don't, however, mistake their slowness for an indication that they don't intend on suing on outstanding notes. First, it takes lenders a long time to do anything. Second, there is no great rush to sue people who today do not have money but when the economy final starts to rebound those same people will look like much more enticing targets. Three, many of the lawsuits will not start until all of the insurance claims are paid off and then the insurer will bring the lawsuits or will sell them to third parties who will bring the lawsuits. Finally, some lenders like TCF and Wells Fargo have recently become much more aggressive in the bringing of lawsuits against debtors on mortgage notes.
Does this sound like a lot to figure out? Will this take a good deal of time and effort to create a plan that you are comfortable with? It is; however, remember that the consent order was not just the payment of a fine but included REVOCATION of the agents/company real estate licenses. How much time and effort is your license worth? What are you willing to do to avoid a possible DOC enforcement action or a lawsuit?
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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 |