April 15, 2010
Stephen J. Nash
Nash Law Firm, PLLC
Who can do loan modifications? How about short sales? A real estate broker/agent? A loan officer? Do you even need a license? Many real estate broker/agents, lenders and others are negotiating loan modifications and short sales with no thought as to whether they are allowed to do so under the existing laws and regulations. Are you possibly violating the law? Find out what the Department of Commerce has to say....
Short Sale Uncertainty Loan Modification Curve Ball
While the Minnesota Department of Commerce has not yet weighed in on short sales, they have stated that in their opinion you need a residential mortgage originator license in order to negotiate a loan modification. That means all of the real estate broker/agents and others who are provided such services without such a license are violating the law in the eyes of the DOC!
We did not anticipate that the DOC would take such a position and, frankly, we do not read the statute the way they are reading it. Even if the DOC is ultimately proved to be wrong, as of right now, their opinion is what matters the most unless you are willing to risk your license and/or are prepared to wage the fight to prove their reading of the statute wrong. In other words, if you do not have a residential mortgage originators license you cannot provide loan modification services even if you do them free of charge.
Do an internet search and you will see many people and companies that are advertising to do loan modifications even though they do not have a residential mortgage originators license. All of them are at risk of facing sanctions from the DOC. Even if you have a the license required by the DOC you are not safe. In the DOC press release the DOC stated,”In addition to licensing requirements, all individuals who directly or indirectly negotiate loan modifications for consumers are required to comply with certain standards of conduct outlined in state law.” This, of course, begs the question – what standards of conduct must you follow?
A reading of the statute clearly sets forth that you have a fiduciary relationship with your client and you must work for their best interests, not yours. If you process loan modifications and charge a non-refundable fee without determining that the client has a reasonable chance of getting a loan modification, we believe you will run into trouble if challenged. If you negotiate a loan modification that does not improve the clients likelihood of not going into trouble, you may run into trouble. This is especially troublesome when you look at the statistics that say that sixty percent of all loan modifications result in a default within nine months. You also have to be careful as to what you are promising – can you back your promises up with facts. Many websites make many claims that are either untrue or are severely stretching the truth. This may come back to haunt many people who are making these promises.
The main problem with knowing what you can and cannot is that the mortgage statute applies to services relating to the creation of a new mortgage, not the negotiation of terms of an existing mortgage. The statute was not drafted with loan modifications in mind. The potential problems stemming from originating a mortgage and negotiating new terms in an existing mortgage are no the same. The process is not the same. In the end, we are left to try to fit a square peg in a round hole or gamble that the statute really doesn't apply.
Neither the DOC nor the Attorney General's Office, to our knowledge has officially taken a position on who can negotiate short sales. Like loan modifications, real estate broker/agents, lenders and others are all doing them. Like loan modifications we don't believe that either the real estate broker/agent or mortgage statutes were drafted with short sales in mind and, therefore, do not appear to apply. However, like in the case of loan modifications that has not stopped the DOC from taking the position that you do need a certain license in order to legally be involved in this activity and, if they do, we will still be left in the uncomfortable position of trying to apply one of these ill-fitting statutes to the activity.
The DOC may take the position that a short sale is ancillary to a sale and that the activity falls within a real estate license or they make take the position that it really is just another form of a loan modification and you need a mortgage license. Until the DOC takes a position we can't be sure who has the right to negotiate a short sale. This leaves everyone in the uncomfortable position of doing something that latter may be deemed to be illegal or to avoid doing something that latter was deemed to be perfectly fine.
One More Consideration to Make Your Head Spin
In the end, the DOC may decide that neither a real estate nor a mortgage license allows someone to negotiate a short sale or a loan modification since neither statute really applies. It could be determined that both activities constitute the practice of law since they are dealing with contract rights and creditor/debtor rights.
Most likely, the problems that rise up are going to determine what regulation the government is going to try to enforce. The more problems that arise, the more likely the government will act aggressively. If problems are seen to be coming from the activities of lenders, they are more likely to say you need a real estate license. If the problems are seen to be coming from real estate agents, they are more likely to say that you need a mortgage license. If the problems are seen to be coming from lenders and real estate agent/brokers, they are more likely to say that this is the practice of law and neither license allows you to engage in this activity. For anyone else engaging in either activity we think it is unlikely the DOC is going to say that you have the right to negotiate and short sale or a loan modification.
What To Do When Facing Uncertainty?
Given the uncertainty you can take one of two courses of action: one, avoid these activities; or, two, try to determine which license you need to engage in these activities and go forward. If you chose the latter, you still must consider the fact that what you do will be subject to review down the road.
In order to protect yourself you should understand the statute that you are operating under and apply it to your activities. While you will be trying to put a square peg in a round hole, you need to understand exactly what the interpretation of the statute is that you are operating under so that it can be later defended and you must make sure that you follow your interpretation of the statute when engaged in these activities. The argument that “everyone else is doing it” will not get you far. Everyone who works for you or under you must understand what they are to do or not to do based on the interpretation that you are proceeding by. You must document your files so that you can provide proof down the road as to how you conducted your business. Finally, you must make sure that you do not over sell your services. Don't make claims that you cannot prove. Do not repeat facts that you don't independently know to be true. Don't charge fees for a service that you are not prepared to defend down the road.
Remember, what you do today will be judged with 20/20 hindsight tomorrow. If you need help navigating through this confusing and uncertain territory don't hesitate to contact one of the attorneys at Nash Law Firm.
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